The Office of Budgetary Responsibility (OBR) makes a point in its Fiscal Risk Report today that ought to be obvious and yet which hardly ever seems to feature in debate over the public finances and ‘austerity’. It is virtually certain that sooner or later the UK economy will suffer another recession which will cause tax receipts to sink, welfare payments to grow and so quickly reverse any progress that has been made in closing the deficit.
In fact, you can pencil in that recession for sooner rather than later. The risk of a recession in any five year period, calculates the OBR, is as high as one in two. And when recession strikes, it will have a rapid and very severe effect on the public finances. Three out of the four last recessions, it says, have resulted in a deficit equivalent to 6 per cent of GDP.
Predictably enough, the Guardian’s coverage of the OBR report worked in the word ‘Brexit’. The report does mention Brexit as an additional risk to the economy, but there is nothing in the above statistic that relates to Brexit. The 50 per cent risk of a recession in any one five year period stands regardless of Brexit. It is a probability based on observation of the economic past. Like it or not, recessions are endemic to the economic system and no government – least of all Gordon Brown with his ‘end to boom and bust’ – has ever found a way of averting that risk.
Yet the risk of recessions never seems to feature in the Treasury’s fantasy predictions trotted out by the Chancellor every Budget time – just a picture of an ever-expanding economy galloping up to and over the five year horizon. No wonder every recession seems to catch the government by surprise.
The skill of a Chancellor lies not in dreaming up some excuse why the economic cycle is dead but to put the public finances in such a position that they will be able to cope with the inevitable. This requires pretty thorough discipline. It is sobering to think that the Conservative government went into the 1990 recession with a significant budget surplus of 1.7 per cent of GDP – yet still ended up, by 1994, with a deficit of 5.1 per cent of GDP which took the rest of the decade to close. Gordon Brown, who was already running a deficit of 0.54 per cent of GDP in 2007, had no chance of averting a severe budgetary crisis – by 2010 the deficit was 6.5 per cent of GDP.
It is now eight years since the end of the last recession. We have survived one 5 year period without a recession and are well into the second 5 year period. It is hard to come to any other conclusion than that the government should by now be running a healthy surplus. Instead we have a deficit of 2.6 per cent. As things stand, come a recession and the public finances are likely to be plunged into an even deeper hole than they were in 2010 – and with a far bigger national debt to boot.
And yet debate seems to revolve around how best the government can loosen the purse strings a little in order to satisfy a public which is ‘weary of austerity’. To adapt the old wisdom, the Chancellor is not only failing to fix the roof while the sun shines – he actually contemplating taking off some more tiles.