Monday, 5 July 2010

Deception and Distortion at the Treasury

by Michael Burke

The Guardian has done a great service in exposing secret Treasury data on the Budget’s impact on employment. The unpublished estimates show that between 500,000 and 600,000 jobs will go in the public sector as a result of the cuts and that there will be 600,000 to 700,000 job losses in the private sector from the cuts to public spending.

In a previous post, SEB examined the negative impact of cutting output in the public sector on the output of the private sector through the multiplier effect. The Treasury estimates highlighted by the Guardian confirm that analysis and extend it into the area of employment.

In response to the furore caused by the leak of the Treasury presentation, the ‘independent’ Office for Budget Responsibility (OBR) rushed out its own forecasts of unfeasibly strong jobs growth in elsewhere in the private sector so that total growth in employment rises from 28.8 million jobs his year to 30.1 million in 2015. The OBR forecasts were helpfully in time for David Cameron to use at Prime Minister’s Questions in Parliament. As ‘Danny’ Blanchflower remarked ‘So much for independence’.

Professor Blanchflower, who is a former member of the Bank of England’s Monetary Policy Committee whose research centres on employment, has also done a great service in exposing those claims as false. It would require the private sector creating up to an additional 2.6 million jobs over 5 years beginning in a period in which, according to the Bank of England’s latest regional survey , businesses have a great deal of spare capacity and could meet any upturn in demand without employing new capital or new labour. The Financial Times reports its own survey of large companies’ hiring intentions, under the title ‘Private sector unlikely to fill the void’ created by the Budget job losses. In the 8 years of boom which ended in early 2008, the private sector created just 1.6 million jobs, and this was at a time when the public sector was aiding that growth by increasing its own spending and employment. The OBR’s forecasts imply much stronger jobs growth against a much worse domestic backdrop, as their own forecasts also show domestic demand averaging less than 2% growth over the entire period to 2015.

Similarly, exports are forecast to rise by 39% over the next 5 years, having risen by 41% in the 8 year boom to 2008. But the most outlandish forecasts are for the growth in business investment, which is expected to surge by 58% over the next 5 years, having risen by just 26.7% during 8 years of the boom. This at a time when the Budget has cut tax allowances for business investment.

These forecasts seem designed to provide favourable outcomes for the government and take little account of actual trends in the economy, which are actually deteriorating once more. In the first chart below, reproduced from the Bank of England’s recent Credit Conditions Survey the availability of credit to households is shown, along with banks’ expectations of their lending for the next 3 months, which is the starred red line.

Figure 1

10 07 05 Chart 1

Likewise, the availability of credit to companies is also deteriorating, as shown in the chart below. This is despite the fact that the government directly owns some major financial institutions and all the High St. banks exist only because the government has provided state guarantees.

Figure 2

10 07 05 Figure 2

Far from the rosy economic picture painted by the OBR for the benefit of the government, there is a growing likelihood of a second, European credit-crunch induced by a combination of taxpayer-funded bank bailouts and the huge cuts to public spending.

But, if the economy and the government finances do deteriorate once more, don’t expect logic to prevail. The response of his fellow Thatcherites in the Dublin government was repeat the dose, prompting this verdict from the influential Lex column in the Financial Times , ‘But the process of fiscal adjustment across the eurozone is so arbitrary, so uncoordinated, and – in countries like Ireland and Greece – so savage that the cure is as likely as is the disease to kill the poor patient’

No comments: