by Jonathan Todd
George Osborne’s exhausted economic strategy will undercut his political strategy. Nothing in his speech on Monday changes this.
He knows that political narratives need pasts, presents and futures. His past is of Labour “overspending” producing economic failure; his present is about tough Tory “medicine”; and in his rosy future “together we will move into the calmer, brighter seas beyond”.
This “medicine” seeks to close the deficit this parliament, which is intended to secure market confidence and create space for “fiscal conservatism” (cuts and tax rises) to be offset by “monetary activism” (rock bottom interest rates and quantitative easing, of which we may see more soon). “In a debt crisis”, these interest rates are, “the most powerful stimulus that exists”.
However, this “stimulus” hasn’t stopped breakdown in Osborne’s economic strategy threatening his political strategy.
First, interest on government debt may be low, but Osborne can’t claim all the credit for this. Expectation of more QE pushes yields downwards, as does the “worldwide bond bubble”.
Second, if low interest on government debt was a sufficient condition for growth, Japan wouldn’t have suffered a lost decade and UK growth wouldn’t have been so anaemic as to see falling tax revenues create fiscal holes for Osborne. He either needs to accept that he’s been too aggressive and the deficit cannot be closed this parliament or be more aggressive still and impose further cuts and tax increases this parliament to fill the fiscal holes.
Neither the former nor the latter comes without political cost. The former is to admit, as Labour warned, that he’s cut too far and too fast. The latter is to impose more austerity on a people already hurting. It’s a choice between Osborne losing political face and unnecessary pain for more people. It isn’t, for Osborne, really a choice.
He will, however, short of conceding that he got it wrong, desperately grab any wiggle room. For example, the structural component of the deficit depends on how the economic cycle is defined and so is amenable to massage, which the OBR must resist if it is to be properly independent. As Alastair Darling wrote over the weekend, Osborne “won’t admit it, or call it Plan B (but he) will change course”.
Labour should monitor any wiggling and expose it. And Osborne’s credit-easing is nothing if not both an acceptance that his attempts to get banks lending have failed and a picking-winners fudge on the deficit.
Third, Osborne would rather blame the euro crisis and the global economy for our lack of growth than concede fault. “The resolution of the eurozone debt crisis is the single biggest boost to confidence that could happen to the British economy”. Yet this is to plead “the Lamont defence” and shift the key frame in his political strategy, which is that our economic predicament is a consequence of Labour “overspending”. The low interest rates that Osborne is so proud of are not independent of global conditions either.
Fourth, even if one supports the government’s deficit reduction strategy, as the leading Conservative Andrew Tyrie does, and even given global conditions, it is still possible to think, as Tyrie does, that the government’s growth strategy is “inconsistent, even incoherent”.
By the time of the last general election, targeted interventions like the future jobs fund and the car scrappage scheme helped return the economy to growth, keep unemployment, business failures and home repossessions down to half the levels of the 1990s recession, and contribute towards falling public borrowing. Global conditions were as inclement prior to the general election as they are now, which suggests that Osborne’s policies – both cutting too far and too quickly and failing to make effective targeted interventions – created the contrast in our growth and borrowing performance between then and now.
Let’s return to Osborne’s political narrative in light of these failures in his economic strategy.
The past: it’s all about Labour’s “overspending” and nothing to do with a global financial crisis, right? This seems less convincing when Osborne is explaining his failings in terms of global conditions.
The present: Osborne’s “medicine” is meant to be reducing the deficit. But, at £15.9bn, as Chuka Umunna noted, the Tory-led government recorded the highest ever borrowing for a government in the month of August.
The future: It’s hard to buy in to Osborne’s optimistic vision when his growth strategy is attacked by the likes of Tyrie and his painful deficit reduction isn’t on course.
The only political oxygen available to him is the perception of profligacy that continues to attach to Labour. It reinforces Osborne’s story and might make him seem the least bad option. If we redouble our efforts to remove this perception, Osborne’s political strategy will become as broken as his economic strategy already is.
Jonathan Todd is Labour Uncut’s economic columnist.
Tags: deficit, George Osborne, Growth, Jonathan Todd, Tory Conference 2011
This is a very good article. But I do worry about the last paragraph.
The school of thought that we should negate the deficit as an issue by acknowledging that the deficit was our fault. That we should do a mea culpa then agree with the Tories on cuts would not only have seen us with nothing to say that is different from the Tories.
But we would also have been wrong.
We should be very very glad that we have Ed Balls. Triangulation in place of knowledge, principle would have seen us with an open goal but facing the wrong way.
The former is to admit, as Labour warned, that he’s cut too far and too fast.
Nope. The problem is that he hasn’t cut fast enough.
Only an idiot hasn’t worked out that not cutting fast, means that there will not be tax cuts but huge tax increases. After all, how are you going to repay the imprudent borrowing? How are you going to reduce borrowing to a prudent 40% from 100+%?
The only solution you have is taxation.
Growth doesn’t solve it. It’s easy to see why.
Lets say that the growth in tax revenues comes from getting people back to work, and nothing is spent getting them back to work. ie. The government gets more income from new taxpayers, rather than existing ones. 12.5K a year on benefit, + 2.5K taxation for a low paid job. Total 15K a year for each person. Get a million working and that is 15bn out of a deficit of 150 bn. Growth in the number working cannot solve the deficit.
So the money has to come from current taxpayers. They have to pay more tax. They aren’t stupid like the people who think growth solves it, but won’t admit it really means growth in taxation. So they are behaving rationally and saving. However, they aren’t investing because it doesn’t stack up. Invest and the government takes 50% of the profits, but none of the losses? (unless you’re in the club like the banks or nationalised industries)
Structural deficit doesn’t matter, its total deficit that need to be zero. You’re just acting like a third world dictator who knows they can spend and leave the debts to the children to pay off.
Third, Osborne would rather blame the euro crisis and the global economy for our lack of growth than concede fault.
Yep, and no doubt labour would be doing the same. Use the ‘stupid’ logic that if the Eurozone is in a mess the UK must be hunkey dorey. Logic, innit?
Well, with all parties refusing to acknowledge the fraud at the heart of government, namely that borrowing debts, it perpetuates the Maddoff accounting in government. Very simply you owe us the little you give back for the money we give you for pensions. You refuse to acknowledge this is a debt and put it on the books. The reason, you know you are going to default on it.
The present: Osborne’s “medicine” is meant to be reducing the deficit. But, at £15.9bn, as Chuka Umunna noted, the Tory-led government recorded the highest ever borrowing for a government in the month of August.
And what does that tell you? It tells you that spending more and more in government doesn’t produce growth. You should know that from the example of Japan.
What is needed is
a) Large immediate cuts to balance the government spending.
b) Large defaults by governments on its debts. i.e. Pension promises.
c) Increases in interest rates.
ie. The opposite of what is being done.
Stagnation?
But we want growth now! Growth means people, businesses have to spend, and if they haven’t the money then they have to borrow it.
Thank Heavens Nick is nowhere near tillers of power.
Economic illiterate from beginning to end.