With the IMF warning that the global economy is heading for the ditch again, the last thing Britain needs is another complacent Chancellor who thinks he’s got everything right.
One of the guilty pleasures of writing a Jeremiad about the British economy is that, like the 6th century BC prophet himself, you usually get to be right. There are always warning lights flashing on the dashboard of the British economy, even if David Cameron and George Osborne — like so many of their predecessors — pretend not to notice them.
Aided by a compliant media, Osborne has been crowing about the economy a lot recently. He wants you to look at the modest growth in GDP (which is a dubious measure, at best, of our economic wellbeing) and some welcome signs that average wages are at last rising a bit faster than prices. He’d prefer you ignored the signs of deflation, his missed deficit targets, spiralling consumer debt, the eye-watering trade deficit, rubbish productivity, weak manufacturing data, and the housing crisis that he’s been busy making worse. Not to mention the IMF’s grim warning last weekend that we are staring down the barrel of another global crisis.
To continue that dreadful motoring metaphor, Osborne seems to be fiddling with the stereo rather than keeping his eye on the road ahead or the red lights flashing all over the fascia. I would say the wheels are coming off his long-term economic plan, except there never was a plan to begin with, let alone any wheels.
Start with what is Osborne’s only real economic “policy” — austerity. Like Mrs Thatcher, an inflation obsessive who left office with inflation only a fraction below the level she inherited, George Osborne is in danger of becoming the deficit obsessive who failed even to fix the deficit. In August 2015, the Treasury borrowed £12.1bn in August, up from £10.7bn in August last year, after another “surprise” fall in tax receipts. You can’t read too much into one month’s figures, but Osborne has plenty of form: he’s missed every single one of his deficit reduction targets and now looks set to miss his latest one too. Watch out for some serious jiggery-pokery with the numbers in next month’s autumn statement.
Austerity — the deliberate policy of cutting government spending and investment, supposedly to reduce government debt — is such as miserable failure it can’t even succeed on its own terms. Osborne said it was necessary because the national debt (the total amount the government owes) he inherited from Alistair Darling, at 71.5% of GDP, would turn Britain into the next Greece. But government borrowing has fallen by far less than Osborne insisted was necessary. In 2010, he promised his austerity programme would reduce the budget deficit (the amount the government borrows each year) from £153bn to £20bn in 2015-16. But even on his own forecasts (highly optimistic according to his own independent forecasters), Osborne will be borrowing £70bn this year, almost the same as Darling planned (£74bn). Meanwhile, the national debt has risen to 88.5% of GDP. We should all be speaking fluent Greek by now.
Austerity damages the economy by reducing investment, driving down wages and trashing the services and support on which most households and businesses rely. Five and half years of it have made no progress at all in reducing Britain’s debts. All that pain and virtually no gain.
Take productivity, probably the key factor in long-term economic prosperity. Last month, the Office for National Statistics released the worst ever productivity figures for the UK compared with the rest of the G7. Britain is now the second least productive economy, behind only Japan, whose economy has been stagnating for more than 20 years. America, France and Germany now produce a third more than we do for each hour of work. Osborne suddenly woke up to this after the election, promising another “plan” to tackle Britain’s productivity crisis in May, July, and again last month. Have you noticed anything? Me neither.
Meanwhile, Britain’s trade deficit keeps hitting new records, as the recovery — such as it is — sucks in more and more goods we no longer have the capacity to produce for ourselves. There has been no “march of the makers” — another of Osborne’s throwaway slogans masquerading as policy: the UK’s manufacturing sector is still 5% smaller than before the crash, while exports are at their lowest level for five years.
Government apologists sometimes imply that the trade deficit doesn’t matter, pointing out that we’ve run continuous deficits since 1983. But trade deficits have to be financed by borrowing abroad or selling assets (think of all those London properties being bought up by foreign investors). They also subtract from growth. If growth in jobs and wages doesn’t come from selling more stuff abroad, it has to come from somewhere else. With weak wage growth for almost a decade, investment doing nothing much and government spending being cut, it can only come from one source: households spending more money they haven’t got — i.e. more debt.
For about five minutes earlier this year, Osborne was able to boast that the UK was the fastest growing “major advanced” economy (a piece of statistical chicanery which conveniently excluded faster-growing developing economies like China and India, and smaller developed countries, which were also growing faster than Britain). But it didn’t last, and the latest figures show we’ve already slipped behind Spain and the US. Even Osborne admits there are signs of a slowdown, and the OBR has revised its forecast for 2015 down to 2.4%.
Still healthy enough, if you think one year’s figures mean anything, or that having more people constitutes “economic growth”. Strip out the effects of a higher population, and our growth performance under Osborne is, frankly, crap: 1.1% in 2011, 0.5% in 2012 and 1.5% in 2013. Only in 2014, with 2.2%, did the economy manage anything like a “normal” rate of growth. As the Oxford economics professor Simon Wren-Lewis points out, “This is still an absolutely terrible performance for a recovery.”
But don’t take my word (or even Simon’s) for how weak the economy really is. Take the Bank of England’s. Actually — don’t look at what they say, look at what they do. That promised (or threatened) rise in interest rates from 0.5% is continually being postponed. Six years into the economic recovery, and the Bank still won’t raise rates from a 300-year low because it doesn’t think the economy can stand it.
Of course, the signs of a new slowdown are everywhere, not just in China, but in the US too. But when the we hit the buffers again — and we will — the UK will hit them harder and faster than most other countries, and our recovery will be slower and weaker. Osborne has done nothing at all about the long-term problems with the British economy: poor productivity, low wages, lack of investment in infrastructure and skills, a weak manufacturing base, massive levels of household debt, a dysfunctional housing market, and a dominant (but equally dysfunctional) financial sector, which prefers gaming to investing. In fact, his policies have made most of these things worse in the name of nugatory gains in reducing government debt, which — as Osborne is implicitly admitting by accepting debt levels higher than Darling’s — wasn’t that much of a problem in the first place.
Osborne isn’t the first chancellor to ignore these long-term problems. In my lifetime, the only time serious attempt to the use public policy to tackle some of these problems was between 1999 and 2007, when there was a significant increase in public investment in infrastructure, skills, health and education. But that is now derided as “over-spending” and has been thrown into reverse.
Osborne may be a masterful political operator, but his economic stewardship is hopeless — short-termist, gimmicky, and wilfully ignorant of looming problems. He’s dug a hole and is ignoring the advice of his predecessor, the late Denis Healey, to stop digging. Probably sooner rather than later, Osborne and the British economy will fall into it, and he will need all his considerable political skills to get out of it alive.