Since You Asked

When the Christmas stocking shrank in the wash

In an act of last-minute desperation, the prime minister decides to replace his chancellor George Osborne with a figure judged to have broader political appeal: Santa Claus. (The decision was approved by a committee of Liberal Democrats.) The FT can now present a transcript of the conversation the night before the chancellor’s autumn statement:
David Cameron: OK, Santa. It’s time to start slipping some goodies under the Christmas tree for the great British public. What can you do for us?
Santa Claus: Well, young David, the trouble is that nobody put aside any funds for this kind of thing. A Christmas savings account is traditional, don’t you know?
DC: Nobody set aside any money. This was the position we inherited from the last government, Santa.
SC: I understand, David, but the blame game doesn’t get us very far in this season of goodwill to all mankind, does it? Try “Santa didn’t visit because Daddy lost his job at the UK Border Agency” and see how far that gets you on Christmas morning.
DC: Fine, fine. And that’s why we need to give people something. Anything cheap and cheerful? Any stocking fillers?
SC: Stocking fillers? It’s not as easy as that, young fellow. Have you seen the report from the Office for Budget Responsibility?
DC: I know, I know. Even if the eurozone gets its act together, our growth rate is way down.
SC: No, that’s not what I meant. Everybody knows that growth is in the toilet and you can easily blame that on the price of oil, the euro crisis and Gordon Brown. The problem is that the OBR thinks that the UK’s potential growth rate has fallen. The British economy isn’t a floppy oversized stocking begging to be stuffed full of Keynesian stimulus – it shrank in the wash and it’s now a tight constraint on future growth. There is a silver lining, though.
DC: A silver lining to the tight stocking?
SC: No, a silver lining to the OBR’s downgrade of the UK’s growth potential. If the OBR is basically right then the Labour attack on your economic policies is basically wrong. The Keynesian tax cut they want is predicated on the assumption that the economy has plenty of potential to supply but too little demand. The OBR thinks that supply has also been damaged by the credit crunch. It’s disastrous news, but you can console yourself that it would be equally disastrous if Ed Balls was in charge.
DC: This is awful. That’s why I hired you: you’re the man to put a smile on people’s faces. What can you offer me? George was planning to divert £5bn to infrastructure spending over the next few years. Should we keep that policy?
SC: It’s fine as far as it goes, but let’s not get our hopes up. Let’s say that this is £1.5bn a year for three years, and let’s say the spending multiplier is two, which is a Keynesian’s wet dream. And let’s also assume a multiplier of zero for whatever else was going to be done with the cash. If so, the private sector would actually grow by £1.5bn each year as a result of the infrastructure spending.
DC: Sounds great to me.
SC: But it would add only 0.1 per cent to the growth rate – granted our extremely generous assumptions.
DC: What about the £20bn of private sector infrastructure spending we’re planning to mobilise?
SC: That’s fine, too, but why not just borrow the money and spend it directly? Presumably these are basically government-funded projects and the private sector is being used to take it off the balance sheet in time-honoured fashion – and of course at greater expense to the taxpayer in the end.
DC: We’ll stick to our fiscal rules!
SC: International investors seem very impressed by your commitment, but I don’t think they’re going to be fooled by this sort of accounting. Not after Greece. I think it’s best to tell the truth in such matters.
DC: Says Father Christmas!
SC: Listen, sonny. You were the one who sacked your chancellor in favour of a deus ex chimney. George has been dismissing “something for nothing” economics and I’m afraid he has a point.
DC: Santa, thanks for your time. But at least George is willing to pretend he’s going to do something. I think I’ll ask him to present the autumn statement after all. I don’t think Plan B has really worked out.