Budget preview: Osborne plays politics with Britain’s economy

by Jonathan Todd

Literally no one alive today has experienced a period as economically bleak as we face today.

There could be hope. The chancellor retains a capacity to improve our situation through bold policy and a display of leadership. Instead we can expect a Budget of ruses, a rearranging of the pieces on the political chessboard with little or no thought for the wider reality in which the rest of us reside.

Osborne’s capacity to frame political debate should not be underestimated. He has the bully pulpit of office, a sympathetic media, and the public have bought into his central narrative: there is no alternative to his tough deficit-reduction medicine and anyone who suggests otherwise, particularly on behalf of Labour, who he paints as wholly culpable for our economic predicament, represents an unaffordable risk.

It is a powerful argument, a train rumbling down the track straight for Labour, threatening to smash us into another parliament in opposition. Some think the train will change direction, almost irrespective of what Labour does. They hope and believe that exasperation with Osborne will build such that his prescription is rejected.

Some contend that the train is immutable and that Labour had better adjust – deficit reduction will remain the key issue and Labour must do more to demonstrate how we would deliver this.

Patrick Diamond insisted at the Progress Political Weekend 2012 this past weekend that Labour must avoid the danger of seeming hawkish in principle and dovish in practice on the deficit. Tough talk needs to be backed up with tough decisions. Ed Balls took such a decision by supporting a continued pay freeze for public sector workers. More such decisions are needed.

But simply re-positioning ourselves on the deficit, while necessary, is not sufficient. We also need to shift the benchmarks against which Osborne’s performance is evaluated.

His can only be a claim to relative competence, not absolute competence. As Ben Jackson and Gregg McClymont have written, the Conservatives won elections in the 1930s and 1980s by claiming relative rather than absolute governing competence. Under Labour, they argued, things would be much worse.

It seems inevitable that this will remain fundamental to Osborne’s strategy. This is largely because this line of attack, according to Jackson and McClymont, need not depend on objective economic success – as the 1992 election showed – an alluring prospect for our current, objectively unsuccessful chancellor.

From 2008 we suffered a loss of GDP as sharp as the early 1930s. Recovery has been slower coming and shallower than in that notoriously grim decade. Will Hutton thinks we now have to look to the 1870s to find a comparable growth contraction. Mervyn King says median incomes are experiencing their biggest squeeze since the 1920s. Youth unemployment is at an all time high.

We have entered our fourth year of Bank of England interest rates at 0.5%, the lowest since the Bank was founded in 1694. But any stimulation we might have hoped for from this unprecedented period of rock bottom rates has been negated by the government’s too far, too fast fiscal stance.

The lack of economic recovery, according Jonathan Portes, is reflected in one of the few “successes” that Osborne can boast: the low cost of government borrowing. Portes notes a strong, significant and positive correlation between changes in long term interest rates (ten year gilts) and changes in the FTSE 100 index.

The low cost of government borrowing does not reflect market confidence in the government’s deficit reduction strategy, as Osborne claims, but in fact reveals a lack of optimism in the economy.

Nevertheless, this low cost is reported to have motivated an “Osborne bond” – a 100-year debt issue – to lock in Britain’s low borrowing costs.

What is this bond for? Tim Harford speculates that it is nothing more than a PR stunt. He suggests that Osborne is thinking, “what might provoke every newspaper to mention that the UK Treasury, unlike, say, Spain’s or Italy’s, is able to borrow from investors very cheaply?”

This is a shame, as another FT economist, Martin Wolf, advises, “When the government can borrow at real interest rates of below zero, good, time-limited investment projects must make sense.”

Rather than exploiting these interest rates to float a headline-grabbing gimmick, the Chancellor could be using these rates to invest for the nation at low cost. Such activity could drive short-term recovery and increase productivity, contributing to the longer-term growth we need to see us through the mire.

But he isn’t. Osborne prefers the chimera of political symbolism when he should be giving us economic substance. This is precisely the failing identified by the business secretary when he says the government lacks a compelling vision of where the country is heading.

The government, with their shrivelled horizons and failed strategy, cannot deliver this vision. This offers an opportunity for the opposition. The next election will not be a referendum on the Conservatives, but a choice between managers.

What Labour must offer is a better choice. We must offer a combination of hawkishness in practice on the deficit and a compelling vision for the country’s future, sketched in part by an account of the investment opportunities that the government should now be seizing.

This amounts to a governmental strategy that isn’t about big or small government, focusing exclusively on growth or the deficit, but smart government and economic stewardship, not only taking the tough but necessary short-term decisions on the deficit but taking them in a way that maximises our growth potential in the short and the long run.

Jonathan Todd is Labour Uncut’s economic columnist

Tags: , , ,

2 Responses to “Budget preview: Osborne plays politics with Britain’s economy”

  1. swatantra says:

    The ‘Osborne Bond’ is a non starter. Nobody in ther right minds lends money to the Govt for free.

  2. It’s hard to say that these times are just great for the British economy. All the world is in a financial crisis and it’s hard to find a place where there are no problems at all. But I think that in Britain the situation is relatively stable, yes, there are some problems with the government, but everything is not so bad. There are counties facing difficult financial crisis. So I think that in nearest time Britains should expect for the economic grows, things will definitely get better.

Leave a Reply