George Osborne will have my sympathy when he sets out his response to the latest projections in his Autumn Statement. Like his predecessors, he will be painfully aware of the inherent unreliability of these forecasts. A year ago there was talk of a triple dip recession, but now we have had a few quarters of decent growth. Yet, despite the recent positive statistics, there remains a huge gulf in perception between the optimists, who see the emergence of a robust recovery, and the pessimists who see a lack of firm foundations for anything beyond a short lived pick up.
With such fundamentally different views, the chancellor should resist the temptation to base his actions on just one outlook. Instead, he should consider what actions would still make sense, whatever the future holds.
What if things go well and recovery is sustained?
If the economic optimists are right, then the recovery, initially led by increased activity in the housing market, may start to broaden. If the confidence of large businesses improves sufficiently, they may finally start to increase investment. Maybe, just maybe, we are entering one of those phases where the strength of the recovery is consistently underestimated, leading to positive economic surprises that swell the government coffers. If this does happen it is vital that the chancellor uses this breathing space to promote sensible long term economic and environmental policy, rather than indulge in short sighted spending and tax give aways.
While some of the windfall could be well spent paying down the national debt, he should also use his new found freedom to promote investment in sustainable infrastructure to secure long term economic and environmental benefits. Politicians often tend to focus on headline grabbing big projects, such as HS2, but there are many useful smaller scale projects that are also worthy of support. These include smart, interconnected local public transport and affordable low carbon housing projects. Measures to promote energy efficiency in existing houses are another good example and rising concerns over higher energy bills should be seen as a reason to enhance, rather than dilute, such schemes. Increasing efficiency is the best way to protect the hard-pressed bill payer from rising energy prices, and can also reduce the need for more power stations.
Even if recovery is short lived, we should invest in infrastructure
But, what if the gloomier economists are right and the economy is just experiencing a short lived pick up? The pessimists would argue that the recovery is only driven by the housing market, a ‘last hurrah’ for the debt financed consumer boom. It will not be sustainable because there is little recovery in our pitifully low levels of investment and exports. Growth will not last and the pressure on public finances will remain acute.
If the pessimists are right, this should not dissuade the chancellor from making sensible long term investments in our infrastructure. Indeed, the case for doing so becomes even stronger. In addition to the long term benefits, such measures can provide a short term boost and help rebalance the economy towards investment rather than consumption. Even when public finances are tight, well targeted support for investment can form a key part of a credible growth strategy that aims to reassure the markets.
Mixed policy messages will stall infrastructure projects
Moreover, some infrastructure, such as that in renewable energy, can be delivered by the private sector. But for this to happen, investors need to have sufficient confidence in government policies. Mixed messages from politicians across the political spectrum may unnerve investors and provide a reason to delay or abandon major infrastructure projects. Indeed, the latest release of the Treasury’s infrastructure pipeline shows a dramatic downward revision in private sector investment plans for offshore wind energy. This is a missed opportunity, which will be particularly significant if growth falters, as the pessimists expect.
Modern economic policy making is about risk management. The chancellor should opt for policies that are not dependent on one set of forecasts being right. If he takes steps to promote public infrastructure investment, particularly in integrated local transport, housing and energy efficiency projects, and accompanies this with clear signals to investors in renewable energy, he will be on safe ground.
As well as offering clear environmental benefits, these policies should help to rebalance growth towards investment and away from consumption. Even if he expects an economic spring, the chancellor should use his Autumn Statement to announce policy that’s fit for all seasons.