Autumn Forecast

Lord Eatwell Excerpts

Monday 29th November 2010 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for repeating the Statement made by the Chancellor of the Exchequer in another place. I agree entirely with him that there is a refreshingly independent tone to the OBR report. However, the Chancellor’s Statement is old-fashioned spin and I shall try to untwist it a little.

The Autumn Statement embodies a wide range of forecasts on aspects of the UK economy, on fiscal performance and on sustainability—a matter to which I will return later. However, as the Statement makes clear, once we attempt to forecast performance beyond two or three years, considerable uncertainty intrudes. For example, while the OBR suggests that there is a 50 per cent probability of the growth rate in 2014 being 2.8 per cent—the figure that the noble Lord quoted with certainty—it is also noted that there is a 10 per cent probability of growth being zero in that year and a 20 per cent probability of growth being zero or less.

This might be regarded as a little worrying, but it is, after all, four years on. Far more worrying is the fact that the OBR finds that there is a 20 per cent probability of growth being zero or less next year. So, to be reasonably safe, leaving aside these longer-term forecasts, let us focus on the current year and next year. Or, to put the matter in political terms, the year of Labour policies and the year of coalition policies, for the obvious reason that coalition policies can have had no significant effect on 2010, but will certainly start to have an effect on 2011.

So what does the OBR say about 2010, the year of Labour policies? Two factors stand out. First, in every forecast made by the OBR since the pre-Budget forecast of early June, the outturn in the economy has been significantly better than was forecast by my right honourable friend Alistair Darling in his March Budget. Growth has been steadily revised upwards and the deficit downwards—down now by a full one percentage point of GDP. These OBR results give the lie to the Minister’s persistent mantra that the situation that the Government found on taking office was worse than expected. In fact, month after month it has been consistently better than was expected in March. Let us hear no more of that fiction, and let us hear no more sneering from the Chancellor about my right honourable friend’s political forecasts. As the OBR itself made clear in its press release in June, Mr Darling was in fact overly cautious, a truth that has been borne out by subsequent data.

Now let us turn to what the OBR has to say about coalition policies. In June the OBR forecast what the impact would have been if we had just left Labour’s Budget in place for the next five years. Today we have the OBR forecast for the impact of coalition policies, and what do we find? In 2011, growth is down. In 2012, growth is down. By 2014, the coalition has at last caught up with the Labour growth rates—but then, four years hence, who knows what extra follies it will have committed?

Before turning to some wider economic issues in the Autumn Statement, I want to ask the Minister a couple of more technical points about the document. First, in paragraph 3.5 on page 27, and indeed elsewhere, the OBR makes it clear that the fan charts that the Minister referred to, which express the probability of particular outcomes, do,

“not represent our subjective assessment of the specific upside and downside risks that we see to this forecast”.

Why not? Why are we presented, in this long and important document, with an assessment of risks to the economy that the OBR does not actually believe? Is the hidden assessment of downside risk greater than that set out in the Autumn Statement? Surely we have a right to know.

Secondly, the OBR notes in paragraph 4.124 on page 119 that the estimates of the Government’s fiscal position do not include the likely impact of the sale of shares in the Royal Bank of Scotland and Lloyds Banking Group. Why not? Surely, given the enthusiasm with which the OBR has graphed analyses of uncertainty, some probability could be assigned to a central estimate of receipts from such sales. Perhaps the Minister will give us his estimate of such receipts and the impact on the overall deficit programme.

Thirdly, and most importantly, since it is an important part of the mandate of the OBR, is its consideration of long-term fiscal sustainability. In this consideration, starting at paragraph 5.27 on page 140, the OBR concludes that government policies imply a long-term budget surplus year after year of 2.1 per cent of GDP. This simply cannot be right. If the balance of payments is roughly zero or, as over the past decade, shows a deficit of about 1 per cent of GDP, then a long-term budget surplus of 2.1 per cent means that private sector debt is being accumulated at over 3 per cent of GDP a year—just the sort of private sector debt accumulation that brought about the recent crisis. Is this what the Government define as sustainability? This is truly an economy built on debt.

I am particularly worried about that point, as it echoes the Government’s fundamental misunderstanding of what has happened to fiscal balances over the past three years. That should be corrected by the OBR analysis in box 3.3, which shows that the fiscal deficit growth was directly linked to a sharp increase in savings in the corporate and household sectors. If government spending had not offset that increase in savings, the fall in output would have been truly calamitous.

A key element in the estimates in the Autumn Statement is the Government’s shift of spending cuts, as the Minister noted, from departmental spending to the welfare budget; this is clearly spelt out in table 4.16. Does the Minister agree that there is to be a cumulative reduction in DWP benefit payments of £9.1 billion over the next five years and a reduction in child benefit of a cumulative £7.9 billion over the next five years? This Government are attempting to balance the budget by squeezing the poor and by squeezing children.

We will await with interest the Government’s review of corporation tax. If I may be given the indulgence of making a forecast, the Government will find it far more difficult to simplify rules on controlled foreign companies than they might expect. But when do the Government expect the results of the review to be announced?

We on this side are delighted that the Government have announced a cross-cutting government growth review—about time too. Perhaps it will involve somewhat smaller cuts in investment—in public investment—than the Government currently plan. But what has actually been announced today? The only substantial announcement in this document is the investment programme by GlaxoSmithKline, which everybody welcomes. Everything else consists of rhetorical promises. When will we have a concrete growth strategy to replace this wishful thinking? When will the Government publish their long-awaited growth White Paper?

We on this side of the House welcome the financial assistance to the Republic of Ireland. It is certainly late; let us hope that it is sufficient. I was, however, a little puzzled by when the Chancellor said:

“In principle our bilateral loan is for £3.25 billion…”

What does “in principle” mean in this context?

What is made clear by this Autumn Statement is that there is as yet no sign whatever that the Government’s gamble of cutting living standards for the next three years is going to pay off. The policies that underpinned a solid recovery this year are being put into reverse. It is the poor who are paying the price.

--- Later in debate ---

[Lord Sassoon]

My Lords, forgive me but which of the questions of the noble Lord, Lord Eatwell, are we talking about?

[Lord Eatwell]

It was the point about assistance to Ireland—I believe that the relevant figure is £3.25 billion—being preceded by the words “in principle”; that it would be that sum in principle.

[Lord Sassoon]

My Lords, forgive me, I should have pointed out that the details of the package are still subject to final negotiation. I guess that the lawyers have to trawl over the press release, as it were, and my right honourable friend’s statement that the loan is not the loan until it is absolutely bolted down in the formal documentation. The terms of the loan are still subject to final negotiation alongside the IMF and eurozone packages.