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Budget 2011: First thoughts

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Paul Mason | 13:40 UK time, Wednesday, 23 March 2011

The growth forecast is down: for this year and next. They had thought the economy would grow 2.1% - now the OBR thinks 1.7%.

If we dig deeper into this prediction there is also a softening of the OBR's rebalancing prediction.

In June last year the OBR prediction for 2011 got 2.3% as follows: 0.8 from consumption and 0.8 from investment; 0.2 from housing; 0.4 from stockbuilding by businesses. Then subtract 0.7% because of spending cuts and add 0.9% for a rebound of net trade.

By November this had been scaled back to 2.1% - and the negative impact of government cuts scaled back to minus 0.4.

Now, according to the OBR, the negative impact of the cuts is only 0.2%.

While all these micropercentages sound arcane, they matter because in them is contained the story of rebalancing the UK economy, which is what Mr Osborne's growth strategy aims to do. I will now try and find an answer to why the negative impact of government spending cuts on the economy is much lower than thought.

It's academic, but had the government stuck with Sir Alan Budd's understanding of the impact of fiscal tightening, we would be looking at a growth prediction of 1.2% - which is still what some economists think we will get.

Now the impact of government cuts has been scaled back to just 0.2% in 2011. But this is offset by the halving of the contribution of private consumption, the reduction of predicted investment by a quarter; and the halving of predicted stockbuilding.

OK so what does this mean? We need to hear from the OBR of course, but it means the macro-economic impact of government spending cuts and investment cuts

Comments

  • Comment number 1.

    STILL NO OFFICE FOR POLITICAL RESPONSIBILITY THEN (OPR)

    I have requested NewsyNighty to investigate the Conservative Party election lie: "THE CONSERVATIVES MUST WIN HERE TO STOP ANOTHER 5 YEARS OF GORDON BROWN".

    As the Conservative Party broke the Rule of Law, to gain an election win in 2010, then Dave is holding office improperly, and should be deposed - if NECESSARY (as in 'necessary, legal and right') BY FORCE. Anyone got Gaddafi's phone number?

  • Comment number 2.

    There is general transatlantic feeling that things may not be quite as they should be:

    Krugman blog, March 19, 2011, 'Disagreement Among Economists':

    "Henry Farrell has an interesting 鈥渕odel鈥 鈥 as he says, more of a sketch than a fully-worked-out thesis, but provocative all the same 鈥 of disagreement among economists. The core of it is that when there are powerful political interests that want certain economic conclusions, and which believe that voters will be influenced by what economists say, economists who are politically aligned with one faction or another get suborned into providing analysis that backs that position.
    It鈥檚 a good story, which I鈥檓 sure contains a good deal of truth. So I鈥檝e been trying to think about how it applies to the debate over macroeconomic policy.
    What makes the story a bit tricky, I鈥檇 say, is that until 2008 there was a slightly peculiar situation in macroeconomic theory and practice 鈥 namely, there was sharp division over theory, but broad consensus over practice...What Henry Farrell鈥檚 model would suggest is that faced with a conflict between their economic views and their political orientation 鈥 which would happen if a liberal Democratic administration was trying to use saltwater-type theory to support its policies 鈥 many of these conservative saltwater types would find ways to reject the implications of their own previous analysis.
    And my sense is that this is indeed what happened. Brad DeLong often suggests that if a President McCain had proposed the very same fiscal policies President Obama did, in fact, propose, he would have received support from many of the Republican economists who found all sorts of reasons to find fault with the Obama plan. And I鈥檇 add that quantitative easing has been received with far more skepticism than it would have if Bernanke were operating under a GOP administration. All in all, this has not been the profession鈥檚 finest hour 鈥"

  • Comment number 3.

    Things are worse than I thought if the effects of cutting public sector budgets is only .2% except that such cuts take some time to have an effect on disposable income. Next month's 2nd quarter 'growth' will give a good indication of where we are going and of the quality of forecasts. A significant part of the private sector depends on public revenue spending and capital investment. More data needed.

  • Comment number 4.

    Judging by how quiet the motorways are (up north anyway) nowadays, every day is like Sunday on the M1 north of Watford at the moment then 1.2% looks pretty optimistic to me.

    Unless of course it is one of those famous government dept typos and it should read -1.2%....doh.

    I am more intrigued nowadays by bluesberry's post on the last thread

    Apparently the primary reason for our woes is 'NAKED DERIVATIVE TRADING'

    Does the news of the World know about this?


  • Comment number 5.

    OH WHAT A BEAUTIFUL SUBORNING (#2)

    It is happening across all disciplines. The universities, Big Pharma, climate 'science', cosmology, GM, etc. Money is power. Dishonour and shame, once powerful moderators of behaviour, HAVE ALSO BEEN SUBORNED. Oh look - I forgot politics!

  • Comment number 6.

    sundays look positively busy compared with Friday afternoons....up in't north

  • Comment number 7.

    EXPENSIVE GAMES PLAYED BY RICH KIDS

    On the odd occasion that I play Snooker, there is no side bet - the outcome is of no account - so I go for the 'impossible' shots. If the result impinged on my life, I would play more carefully.

    If there was any chance of Gaddafi turning up at Dave's house in the middle of the night, seeking revenge, he would not be so cavalier.

    And George is OK, whether his schemes work or not. If the price of failure was a spell in the Tower followed by a grisly death, he might not be so bold.

    Politics is a bizarre occupation. No previous experience - success scores less than high profile initiative - efficiency is not measured - errors are repeated.

    If we build a new tranche of nukes, let's stipulate that the company directors and facilitating politicians live 'on campus'. The Herald of Free Enterprise would still be afloat if the CEO had lived on her.

  • Comment number 8.

    could be worse...you could be a Portugese Greek....

  • Comment number 9.

    The Americans are still faffing around 2% when the deficit is firmly in two digits % annually, so they are plugging some of the holes on the still sinking ship and standing around expecting medals for their efforts. If this sounds a bit like the Titanic's last hours then you would be right and the "unsinkable" US economy is heading for the same fate. I'm American and I use the to manage my personal finances, now it's all automated and online. For Cameron's reductions are plugging the holes a bit more efficiently so we at least, if all goes to plan, wont be taking on any more water in 2015... but if we hit a storm the ship will still be holding a lot of water and be easy to capsize. The extra cost of propelling all of this water inside that should really be outside will badly knobble the UKs performance for decades to come. The first economy to get all the water out will be the one that wins all the races soonest. My bet is the Irish will finally have an outbreak of common sense and default first...and will lead the rest for decades to come.

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