David Blanchflower: Yet more nails in Osborne's economic coffin
Economic Outlook: The Coalition bet the 2015 election on their economic policy working... all else was secondary
Monday 02 July 2012
For economic commentators like me, sad to say, this is the crisis that keeps on giving. For most people it is the crisis that keeps on hurting. The last week or so suggests to me that we are now at a turning point.
The Government's economic strategy is in tatters and our blundering part-time Chancellor seems to have no idea what to do. Indeed, there is now talk that the much-hallowed AAA credit rating is now seriously in doubt because of his incompetence.
In a research note M&G's Jim Leaviss has argued that the rating looks "increasingly vulnerable ... because of deterioration, both in economic growth and on the fiscal side". This would be a further nail in Osborne's economic coffin.
U-turn follows U-turn – pasties, charity donations, church renovations, caravans and now fuel. Sending out the junior minister Chloe Smith, who had clearly been instructed not even to admit when the volte face had been decided, to be eaten up by Jeremy Paxman on Newsnight was an act of cowardice on the part of George Osborne, who increasingly seems to be hiding from the press.
Plus Slasher still hasn't explained how this tax cut of £500m is to be funded. It makes perfect sense to me to put a half-billion-pound stimulus into the UK economy, but makes no sense in the context of Osborne's loopy deficit reduction plan.
The inference that should be drawn from the fact that the stimulus seems to be unfunded is, of course, that the Coalition's fiscal Plan A is dead and buried. Good riddance. And postponing the 3p tax rise alongside rapidly falling oil and commodity prices further improves the near-term inflation outlook.
Data releases continue to come in thick and fast confirming that the economy is going nowhere. As is clear from the above chart, consumer confidence as well as respondents' views on their financial situation are showing no sign of recovery. Another poor set of figures on government borrowing in the first two months of the fiscal year showed they were 15 per cent higher than a year ago, reflecting both high spending growth (central government current spending rose by 7.9 per cent year on year) and weak tax receipts growth of 1.6 per cent.
The latest revisions to GDP out last week indicated that the 08-09 recession was not as deep as had initially been believed, which is what the Monetary Policy Committee had been saying, so power to them for that. This is illustrated in the other chart above. But recovery since then has been slower and more prolonged. The ONS confirmed that output in the first quarter fell by 0.3 per cent, but the extent of the decline in the final quarter of 2011 was revised down from -0.3 per cent to -0.4 per cent, confirming we are in an even deeper double-dip recession than was previously thought. The recession deniers have gone quiet again.
Not even half of the output lost since the last recession has been restored under the Coalition's disastrous and reckless economic policies. I fully expect output in the second quarter to also be negative.
The big question, as panic has gripped both Downing Street and Threadneedle Street, is: what now? Mervyn King last week made clear that the economic situation had worsened sharply over the last six weeks. The Coalition bet the 2015 election on their economic policy working; it was the centrepiece of their agreement. All else was in second place. It was entirely predictable that the economic strategy would end in tears. Once that happened the illusion of competence would inevitably crumble, as it has. Very quickly Osborne has turned from being economic guru to goat.
The problem is that it is likely too late for them to do anything to rescue the economy in time for the 2015 election, and the Liberal Democrats are already toast. It will take two years at least for any growth strategy to have any effect. Firms are still not getting enough credit and attempts to clamp down on the banks after the Barclays Libor debacle will only restrict lending further. Calls by David Laws and others for even deeper spending cuts are ridiculous.
Last week the Nobel laureate Paul Krugman and Lord Richard Layard launched a Manifesto for Economic Sense*. This sets out realistic and sensible alternatives to Osborne-style austerity. Within two days over 4,000 people, mainly economists, had signed up, including a number of distinguished names such as the Nobel laureate Chris Pissarides, John Van Reenen and Lord Skidelsky.
The argument is that Osborne, along with other European leaders, are relying on the same ideas that governed policy in the 1930s. These ideas, the manifesto argues, are "long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response". Amen to that. The usual response from right-wing academics and business folk to such calls in the past has not appeared. I wonder why not? It's time to get the economy moving again. And for that to happen, Osborne must go.
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