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.
