If policy wonks had their way, the publication date of the IFS Green Budget would be a national holiday.
We exaggerate — slightly — but for an arid testament to the prose potential of Excel spreadsheets, it’s a good read. Not least because across its twelve chapters it meticulously meanders through the high stakes game the UK economy is currently in.
As the FT and the Money Supply blog point out, the headline is decent news for the government: the public finances are, according to the IFS’s central forecast, broadly on track. It worries about the high reliance on external debt but notes that — at least until recently — gilts have not showed too much stress. Private purchases have stepped up to fill the QE gap.
And it looks like we have our troubled friends in the eurozone to thank for making the UK more of a relative safe haven:
But vulnerability is lurking beneath: there is a worrying number of ‘downside risk’ mentions. You should read the summary (pdf) for the full picture but chapter four’s discussion of the state of the UK labour market caught the eye of FT Alphaville.
Here is a quick run through using six charts from the chapter.
Real wages continue to be under strong pressure. UK households do not look in good shape going into 2011. Pay is not keeping up with earnings, and with inflation fears on the rise and credit still tight, consumption growth is likely to be marginal at best.
And according to the IFS, a further worsening of the labour market “is a major source of downside risk.” They argue this is because of the productivity “puzzle”. A reminder: the UK and US productivity paths diverged following the financial crisis:
Firms in the UK did not shed labour to the same extent as in the US. Under-employment prevented US-sized job losses, and this trend has continued during the recovery with part-time work making up the majority of employment growth during the middle of 2010.
Therefore expect (1) tepid employment growth in 2011, and (2) employment gains to give less of a boost to households than may be expected.
The IFS does not expect firms to engage in widespread labour shedding to regain lost productivity (though it is a risk). Instead, “a more likely scenario is that firms’ hiring intentions hold steady, with employers neither shedding workers at an accelerating rate, nor expanding their hiring dramatically.”
So, not terrible, but far from a strong counter to forthcoming public sector job losses.
Now, you may point out, the corporate sector is way more healthy — so why not an investment-led recovery? Don’t count on it, says the IFS:
The corporate sector is in much better shape than the household sector, enjoying strong profits growth and with healthy margins. Firms’ balance sheets are in good shape too – leaving many cash-rich. Availability of finance is unlikely to constrain firms’ investment plans. But we do not expect a strong investment-led recovery as many firms remain cautious about the demand outlook.
Similar caution is placed on an export-led recovery; macro models have repeatedly overestimated export growth, says the think tank.
So does all this require a rethink? Only a tiny one, apparently.
The IFS hints at a the need for back-up plans but these are more to compensate for any undershooting over the deficit target. An alternative plan A, rather than a plan B.
Indeed, there’s plenty in the report for both sides of the argument to feed on. (Not that this should come as a surprise.) Nothing to suggest the Chancellor will or must change course — but more for opponents to argue that he should.
Related links:
The Green Budget – IFS
Austerity: do more, more slowly – Money Supply
Ugly UK GDP figures – FT Alphaville