Duncan’s Economic Blog

Vince Cable: Both right and wrong

Posted in Uncategorized by duncanseconomicblog on July 25, 2011

In less than 24 hours we’ll know what the first estimate of GDP growth in the second quarter of 2011 is.

It looks set to be a poor number – showing either very weak growth or even an outright contraction.

To judge from the government’s reaction – they are worried. Whilst Osborne is once again talking of tax cuts – this time the 50p rate, Vince Cable has broken cover and plainly stated that demand is weak and that:

Clearly we haven’t got a strong recovery – that’s abundantly clear.

This has been ‘abundantly’ clear for some time.

But perhaps more worrying than Cable’s admission is the fact he doesn’t seem to grasp how Osborne’s fiscal targets work. Later in his FT interview :

he stresses the “flexibility” of the fiscal plan, which targets the underlying structural deficit. This means the chancellor does not have to cut even deeper – or raise taxes – if economic growth is more sluggish than expected and the deficit is falling less quickly than planned, he says.

Well – yes and no. Yes Osborne does target the structural deficit so in the event of a new downturn the automatic stabilisers (of more welfare spending and less tax revenues) could operate. But Osborne set himself a dual mandate.

As well as the target of eliminating the structural deficit by the end of the Parliament he is also targeting that debt should be falling (as a percentage of GDP) by 2015-16. As he reaffirmed in the Budget statement in March:

Our fiscal mandate is to achieve a cyclically-adjusted current balance by the end of the rolling five year forecast period – which is currently 2015-16.

We have supplemented that with a fixed target for debt: so that debt should be falling as a proportion of GDP by the year 2015-16 as well.

The latest (and now out of date) OBR forecasts show debt/GDP peaking at 70.9% in 2013/14 and falling to 70.5% in 2014/15 and 69.1% in 2015/16. In other words Osborne (on the OBR numbers) will hit his second fiscal target a year early but with very little room for error.

The OBR’s forecast of 1.7% growth in 2011 now looks like a potential error. It’s 2012 forecast of 2.5% is above the independent consensus of 2.1% for that year.

If growth misses the OBR forecast in both 2011 and 2012 then the second half of Osborne’s mandate would be under threat – he would have to either abandon it or push through more spending cuts and tax rises.

Vince Cable may well be right on his central point – that the recovery is very weak – but wrong on his more reassuring point that Osborne’s plans have the flexibility to deal with this.

4 Responses

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  1. @iamalrightjack said, on July 25, 2011 at 4:55 pm

    The economic sitution is the result of the Tories firstly talking down the economy since 2008 -2011 resulting the economy diving into a liquidity trap coupled with stagflation.The Inflation part of this mix has been imported into the economy by high oil prices- I fear this will remain untill we find iether large amount of oil to push prices down or we discover a new energy source. So there is no getting around the inflation question.

    As for the liquidity trap & stagnation (minus the inflation problem) well economic theory would suggest we need a Keynesian growth plan-which we are lacking. Now all things remaining equal (forget about the lack available credit & the sqeezed middle effect on the economy) I will argue :

    1) A growth plan may not work because the Tory deficit myth has change consumer & business phyche into believing that dooms day is around the corner becuase we have the biggest deficit in the world & we must reduce it within four years or else we shall suffer a fate far worse than this country has ever seen-deficit exerceration lie The result we see is the resulting in loss of consumer & business confidence. How do they reverse it when they have been pushing this fabricated execerated deficit lie for three years. Its hard now that every pleb and his dog actually believe it because it has been forced on us by the help of the Murdoch Press & TV. The Tory party could expose them selves as the mother of all liars but this isn’t going to happen. So they have corned them selves in position entirely of their own making.

    2) If we have a growth plan now (assuming for a moment it does increase GDP) it would only further stock up inflation in the short and medium term- resulting in a very tightly sqeezed or even rinsed out middle & resulting in GDP falling back. Nothing new really if we examin economic history of the 1960-1979.

    3) Finally if we go back to the problem of the present liquidity trap and stagnation due to lack of confidence (resulting from the global credit crunch which results from the asset bubble & then excerbated by the Tories talking down the economy 24/7 for the last 3 years & promoting deficit exaggeration & false dooms day scenario) in consumers and business investment. It will take a miracle to reverse even if the Tories owned up to their propaganda in promoting the deficit myth.(Fabricated to scare the electorate to achieve victory in the election & to justify their far right idiological cuts-achieved by misrepresenting the IMF & OECD.)

    Yes, we can’t disregard low consumer spending because consumers are being sqeezed or the lack of credit availabilty.Also, we have to reduce the deficit. So we should do what the IMF & OECD recommended.Reduce it with in a 10 year period so growth is not effected. As they noted that if growth is effected it will reduce the UK’s ability to reduce deficit & increase our debt level. When the IMF say that Osborne’s cuts are ambitious they are saying its highly unlikely he will achieve is objective because of the above reason noted by IMF & OECD. @Iamalrightjack

  2. Gareth said, on July 26, 2011 at 3:15 pm

    “If growth misses the OBR forecast in both 2011 and 2012 then the second half of Osborne’s mandate would be under threat – he would have to either abandon it or push through more spending cuts and tax rises.”

    Why? You are wrongly concentrating on real GDP growth still. We had strong nominal GDP growth in Q1; with strong growth in tax revenues through the rest of the year, indicating continued strong nominal spending growth. Strong NGDP growth will result in falling debt/GDP, even if we get 0% real GDP growth.


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