Geroge Irvin looks at the OECD's 'Economic Survey of the UK 2011' - and asks if it's a whitewash for the coalition government and Mr Osborne.
George Irvin is a retired professor of economics and is currently (honorary) Professorial Research Fellow in Development Studies at the University of London, SOAS; he is author of “Super Rich: the rise of inequality in Britain and the US”
The OECD has just released its ‘Economic Survey of the UK 2011’, saying that the coalition government has struck:
“…the right balance between fiscal sustainability… on the one hand, and preserving short term growth on the other.”
A view which, coming just before the budget next Wednesday, must have delighted George Osborne. But it’s not all roses for George; the Mirror reports him as “running scared“. Why?
The report predicts growth of 1.5% this year and 2% in 2012, well below the OBR’s figures. The OECD’s predictions, made before either the Middle East turmoil or the Japanese crisis, are qualified by the phrase:
“…monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery.”
But, as generally agreed, renewed upward pressure on oil prices is likely to strengthen the hand of the hawks on the MPC.
Even in the unlikely case of interest rates remaining unchanged during the rest of 2011, as the reduction in aggregate demand begins to bite, it is likely that growth will be a full point lower than the OECD predicts. Loose monetary policy alone cannot revive a stagnant economy, particularly when the economic climate is deteriorating.
Notable too is that the OECD optimistically projects (pdf, table 1) gross fixed capital formation in the business sector more than doubling this year and next as well as the trade gap tuning positive, in part because of rapid export growth but mainly because imports will fall by half – all highly questionable to say the least.
Like Osborne, the OECD’s report concentrates on the size of the budget deficit ‘inherited from Labour’ rather than pointing to the fact that Britain’s debt-to-GDP was low, that its public debt was long-term and largely domestic and that by 2010 Labour’s fiscal stimulus was reviving the economy.
In fairness, the report does recognise (page 4) that:
“…the broad based recovery that started in end-2009 slowed in the second half of 2010.”
But the next sentence argues that that fiscal consolidation was necessary “to reassure investors”. In the words of the Daily Mail:
“Mr Gurria [OECD general secretary] launched a thinly veiled attack on the previous Labour government for its borrowing and spending binge before the financial crisis struck.”
As for unemployment, the OECD admits (pdf, page 4) that:
“The labour market recovery is expected to be slow, reflecting a subdued recovery, spare capacity among firms and shrinking public employment. Unemployment is expected to fall gradually.”
Although the most recent data on jobs shows public sector job losses offset by private gains (coming largely from the financial services sector), unemployment is rising far more quickly than the OBR had forecast.
Ed Balls made almost all these points in an excellent short interview on the BBC’s Newsnight last night. Most telling, perhaps, is the Telegraph’s Jeremy Warner who headlines his piece on the OECD report:
“An OECD love-in, but where’s the growth?”
For the record, The OECD general secretary, José Angel Gurría T., who shared the platform with Mr Osborne, was Mexican Secretary of Finance in the late 1990s where he developed a reputation as a ruthless budget-cutter. He was appointed to his present post under the recent administration of President Vincente Fox of the right-wing PAN party.
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