Looks a lot like Plan B to me

As expected, given all the pre-announced measures and semi-official hints, there were few surprises in the Autumn Statement delivered by UK Chancellor George Osborne today. The Statement itself can be found herein pdf format. Interesting that it shows a price of £45 for the paper version on the second page. Maybe that's how they plan to pay for some of the Chancellor's giveaways.

Unsurprisingly, Osborne and his "independent" advisers at the Office of Budget Responsibility (OBR) have had to mark their growth forecasts sharply lower. Real GDP is now forecast to grow by less than 1% both this year and next, with modest acceleration after that. Unlike the OECD, the OBR is not forecasting a return to recession -- the dreaded double dip -- but with such anaemic growth in prospect, this may prove difficult to avoid. Slower growth in turn means that previous fiscal projections have had to be ditched. Borrowing for the current fiscal year is now forecast at £127 billion, £5 billion more than before, with a decline only to £120 billion in the year that starts next April; and then, guess what, a more rapid decline thereafter. Experience strongly suggests such forecasts of fiscal improvement in the "out years" should be treated with extreme cynicism.

The price of this fiscal shortfall will fall heavily on public sector employees. Public sector wages, frozen until the end of next year, are to be limited to rises of 1% in each of the two following years. In addition, the shrinkage in public sector employment is now forecast to be more severe and more long-lasting than before. The OBR now expects over 700,000 jobs to go by 2017, 50% more than its earlier estimate. That should put public servants in a good frame of mind as they prepare for their pensions walkout tomorrow.

As expected there are a few giveaways, including deferral of the fuel tax hike scheduled for January and a cap on train fares. In an echo of Thatcherism, council-owned homes will be made available for sale to their tenants at a 50% discount to market value, though in a very unThatcher-like touch, councils will be required to invest the proceeds in new social housing. Against expectations, the government is not watering down the annual inflation adjustment of social benefits, with the rather perverse exception of the working tax credit that is supposed to encourage the lower paid to stay off benefits.

Probably the most interesting aspects of the Statement are the Chancellor's attempts to answer criticisms that he has no Plan B, by putting in place a series of measures to promote economic growth. One element of this is the £40 billion "credit easing" scheme, whereby the Treasury will underwrite bank lending to small and medium sized businesses. The hope is that the Treasury backstop will allow the banks to raise funds more cheaply, with that lower funding cost passed on to the borrowers. As always with such a scheme, it is likely to prove impossible to tell whether any truly new lending actually takes place, or whether banks will simply reclassify loans they would have made anyway.

Even more intriguingly, the government is planning a big infrastructure investment programme, with a long list of road, rail, broadband and other projects announced. About £5 billion towards this programme will come from public funds. Supposedly there will be no addition to government borrowing; the funds will be provided from interest savings resulting from lower-than-expected borrowing costs. (Thanks for the quantitative easing, Sir Mervyn King!)

The government is also expecting two pension fund groups to invest up to £20 billion into UK infrastructure. If it works, this could turn out to be one of the long-term benefits of the current (not-so-) short-term pain. Pension funds have long been important players in North America -- think of CALPERS in California, or the two big public sector pension funds in Ontario (Teachers and OMERS). In fact, the Ontario Teachers fund has already become a major investor in UK infrastructure, with a stake in HS1, the Channel Tunnel rail link. It's past time for UK funds to expand their horizons in the same way, so big up to Osborne, and potentially a big boost to the economy, if he can make it happen.

Just one thing, though: a few years ago, when the Canadian pension funds started to flex their muscle like this, the term "pension fund socialism" was coined. Don't tell Osborne -- we don't want to put him off!