An economic mid-term review

  • 7 January 2013
  • From the section Business
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One message that David Cameron and Nick Clegg supposedly want to get across with their mid-term review is that the coalition is about more than the economy.

Cutting the deficit and promoting growth are crucial, but, we're told, the two parties in government are united in their desire to make progress on other fronts as well.

"And a good thing too", many economists would add. Because a simple economic stock-take of the coalition's first two-and-a-half years in office would not look very impressive at all. No-one knows what would have happened under alternative management. But we can say that - on borrowing, growth, and the rebalancing of the economy - the coalition has fallen far short of its hopes.

This is hardly a revelation: we and the coalition have been learning to live with economic disappointments almost since day one. But amid all the rhetoric today about the coalition's achievements, I thought readers might find it useful to have a few key statistics. There are plenty to choose from: here I'm highlighting a magnificent - or not-so-magnificent - seven.

The first is government borrowing. As Mr Cameron and other senior government members keep reminding us, the coalition has cut its target measure of borrowing by 25%. But their original plan was to cut it by 60%. And even the 25% figure depends on which measure of borrowing you use.

Overall, net government borrowing is on course to be about a third lower as a share of GDP than when the coalition came in: it's forecast to be 6.9% of GDP in 2012-13 (excluding the temporary effect of transferring the Royal Mail pension scheme), compared with 10.1% of GDP in 2010-11.

But, that was not the measure that the coalition came into government to eliminate over the course of the parliament.

The target measure was structural borrowing for current spending (the "cyclically adjusted current budget balance"). This has fallen from 4.8% of GDP in 2010-11 to a forecast 3.6% of GDP in 2012-13 - which is indeed a fall of 25%.

But that is only thanks to the decision to transfer back to the Treasury the interest that the Bank of England is paying on government debt purchases as part of quantitative easing. Without those transfers, the target measure of borrowing would be 4.3% of GDP in 2012-13 - or just 10% lower than in 2010, despite two years of austerity.

What about debt - that is, the stock of all the debt that has been run up in the past? In this context, Mr Clegg did once (unforgivably) talk about "wiping the slate clean". That was never on the cards, or in the coalition's forecasts, but you might still be disappointed to hear that the government's net debt has risen by 27% in cash terms in the past two years, from £932bn to £1.186tn - or from just under 62% of GDP in 2010-11 to nearly 75% of GDP now.

Of course, a lot of this disappointment has a single cause: the poor performance of the economy, and the OBR's judgment that a lot of the economic ground we had lost since 2007 we were not going to get back - meaning the books were in a worse state in 2010 than the coalition realised at the time.

The mid-term picture on growth is that the UK economy has expanded by just 0.8% since the middle of 2010. When the coalition came in it was hoping for growth of nearly 6% in this period.

As we know, jobs have been the great and often debated bright spot in all this. There were 29.1m people in work in the UK when the coalition came to power. The latest count shows there are now roughly 480,000 more - with a 1 million increase in the number employed in the private sector easily offsetting the fall in public sector employment since the middle of 2010.

The unemployment rate is more or less where it was in 2010, at around 8% in 2012. The OBR expects it to creep up slightly in 2013 and stay at or above 8% through to the election. In other words, it is expecting unemployment to be the same at the end of the parliament as it was at the start. In normal times, that would sound hugely disappointing. But given what has happened to the other economic statistics, it could be a lot worse.

George Osborne would say that UK in general would have done worse, if he had not restored confidence in the UK's budget position (ignoring, for the moment, the fear that the UK will lose its top AAA credit rating this year, for all his efforts). But that is probably not how most households see it, looking at their pay packets.

Average weekly earnings have risen by just under 5% since May 2010, while the cost of living has risen by nearly 9%. In other words, real wages, on average, have fallen by around 4% since the election. And even that average figure does not take account of many tax and benefit changes which have cut disposable income even further.

Finally, what about that goal of re-balancing the economy - getting exports and investment to replace the demand that the government and consumers can no longer afford to provide?

Well, exports have been going up - volumes have risen about 9%, overall, since the coalition took office, helped, presumably, by the big fall in the value of sterling at the start of the financial crisis. That compares with just over 4% growth in imports.

That is encouraging. But arithmetically, it's nowhere near enough to re-balance the economy, especially when domestic investment is still weak, and the income we earn from our investments abroad has fallen off a cliff. You might be shocked to hear that the OBR expects Britain to run a current account deficit of 4% of GDP in 2012 - that's the worst figure this century and 60% higher than in 2010.

That's a lot of numbers, many of which government ministers were in a poor position to control. But, however the coalition might be doing in politically at this halfway point, it's fair to say that the economic side of the ledger is not looking healthy at all.