Chancellor George Osborne will stand up in the House of Commons today to make an Autumn Statement on the government's finances and the prospects for the economy.
The statement will be full of references to growth. The Chancellor's likely failure to meet his deficit and debt targets will be attributed to the weak underlying growth of the UK economy after the financial crisis. More austerity will be needed to meet his targets.
There will be no mention in his statement that his own policy has played a considerable part in the current weakness of the British economy.
It is true that the Chancellor can point to the views of the OBR, IFS, and others who believe that the supply capacity of the UK economy has been damaged by the financial crisis and Great Recession. In technical terms their view is that productivity growth is so slow and the recovery so weak because the crisis has led to productive capacity being lost forever in particular sectors and activities. The 'output gap' between supply and demand is small. Hence, to get more growth more capacity is needed. And that requires investment by both public and private sectors.
There is no doubt that there is some truth in this story. Labour productivity is clearly weak. But there is little other evidence that the economy is supply constrained.
A supply constrained economy would see wages and other factor prices rising quickly generally and specifically in those sectors that are most supply constrained.
There is no evidence of this.
Although advocates of the supply-constrained view suggest that wages and prices would be falling if the output gap was large. But this surely flies in the face of all the evidence that wages and prices are sticky downwards in most modern economies.
Moreover, with interest rates close to zero, at the zero lower bound, the economy is in a liquidity trap with nominal rates unable to fall far enough to equate the demand and supply of money, and savings and investment. The result is a deficiency of aggregate demand unless and until demand increases directly. And what we do see is clear evidence of a lack of demand. Household spending is weak, investment is weak, net export demand is weak and the government is engaging in an unprecedented programme of fiscal consolidation.
So what can we conclude?
First, estimates of the output gap are just that: estimates, difficult to realise and subject to error. Secondly, suppose, as Simon Wren Lewis argues that supply is following demand. Raise demand and supply increases as discouraged workers re-enter the labour market, as firms raise production from their existing workforce by staff beginning again to operate at more normal levels of input, and as idle plant and machinery - from bankrupt and closed firms as well as currently operating firms - is brought on stream. Thirdly, if supply also follows demand and then after a time is lost forever - what economists call hysteresis effects - then the costs of not seeking to stimulate demand are high.
Against this background Wren Lewis argues that
policy should lean towards being optimistic about supply, even if we are somewhat sceptical that it is really following demand - because the costs of self-fulfilling output gap pessimism could be so high.
But we won't get that in the Autumn Statement today.
Any spending changes the Chancellor introduces are likely to be at best fiscally neutral and at worst fiscally tightening. That is he will either seek to keep to his budget deficit targets or may tighten them.
Spending more on capital investment projects, schools and hospitals, will, if it comes at the cost of reduced spending elsewhere in departmental budget, have little if any stimulative effect on aggregate demand. Indeed, if the deficit target tightens it may have a depressive effect on the economy.
One way that the changes might stimulate demand is if the fiscal multipliers associated with the spending rises are higher than those associated with the areas where spending is being cut. We don't have relevant UK data. But I have my doubts. Increased spending on so-called 'shovel-ready' capital projects will boost supply in the medium to longer term. But will it boost demand in the short term if it is funded by civil service redundancies in other government departments?
It may do since the fiscal multiplier on infrastructure and particularly capital spending on roads and highways is, from US research, quite high. But it won't be that much higher than the negative spending effect of civil service job cuts and other spending cutbacks.
Moreover, even if the British economy is severely supply constrained this doesn't excuse the Chancellor's policy of extreme fiscal consolidation. There is clear evidence that his policy has taken demand out of the economy. Are the Chancellor and his supporters really seeking to argue that without fiscal consolidation there would have been excess demand and runaway inflation?
The evidence is that his policy has weakened the British and Scottish economies.
In what one might call a 'moderate' or middle-of-the-road assessment, Gavyn Davies and Juan Antolin-Diaz in a Fulcrum Research Paper estimate that "fiscal austerity" since 2010 has accounted for almost half of the shortfall in UK GDP relative to the US since 2007 - see chart below. The other main contender is the UK's weak export performance. And this latter has particular resonance for Scotland.
Davies and Antolin-Diaz assume a fiscal multiplier 0.5 in 2008-2009 and 0.7 in 2010-2012. This is below the range of 0.9 to 1.7 suggested by the IMF in its recent Economic Outlook and below the figure of 2 suggested in the recent US research noted earlier. On this basis the impact of fiscal austerity will be even greater than Davies and Antolin-Diaz's estimates.
But don't expect to see an acknowledgment of any of this amidst the smoke and mirrors of today's Autumn Statement.