The chancellor’s Autumn Statement exactly marks the halfway point in the current UK parliament, and sets a course for the next election which will now be hard to change. When the coalition embarked on its economic strategy in 2010, it was fully expected that there would be a bleak electoral patch in mid-term, but the Treasury believed that the strategy would be seen to be successful by 2015. In point of fact, however, the mid term blues have been worse than predicted, and GDP forecasts for the remainder of the parliament have been sharply downgraded.
Mr Osborne has reacted to these developments by amending his budgetary strategy in two respects. First, he has allowed the fiscal stabilisers to operate in full, so the effects of the GDP downgrades have been reflected in extra public borrowing in 2011/12 and 2012/13. Sensibly, he has not been overly rigid and there has been no attempt stick to his original fiscal path. As a result, there has been almost no tightening in the underlying fiscal stance this year, and the planned tightening for next year is about 1 per cent of GDP, similar to the plans in other major economies.
Second, he has extended the time period over which the fiscal austerity will take effect, so that his formal fiscal objectives will be reached in 2016/17, instead of 2015/16. The fiscal stance will tighten by about 1 per cent of GDP in each of the next 5 years. The same amount of fiscal austerity, spread over a longer period, is the consequence of these changes. Read more