There is a broad consensus among economists that Osbornomics has failed. In all likelihood it is too late now to do anything to turn the economy around in time for the 2015 election. Much is expected of Mark Carney, who takes over soon as the Governor of the Bank of England, but he may well inherit a poisoned chalice; monetary policy works with long and variable time lags.
Any move he makes will take around two years to have any real impact. There is little or no sign of growth. The latest business surveys and mortgage approval figures were weak, and the Bank of England’s Credit Conditions Survey suggested that small and medium-sized enterprises (SMEs) are still not getting financing. Triple-dip remains a real prospect, as are further downgrades to the UK’s credit rating. The UK economy has only restored half the 6 per cent drop in output compared with the start of the recession in 2008. This has been the slowest recovery in more than a hundred years. Osborne insisted he had no Plan B and now it is obvious he really didn’t. But he should have.
It isn’t as if he wasn’t warned. On 18 February 2010, 58 distinguished economists wrote a letter to the Financial Times where they argued that the “timing of measures should depend on the strength of recovery... with most of the consolidation taking place when recovery is firmly established... the first priority must be to restore robust economic growth.”
Osbornomics has been nothing more than a visitation of evil spirits on the British economy. Even the IMF has withdrawn its support, arguing that in all likelihood Osbornomics is responsible for the poor growth performance. So this is a recession made in 11 Downing Street. Plus, blaming what has happened in the eurozone doesn’t wash. Its problems were obvious in 2010; it was no time to weaken the UK economy when our main export market was in trouble.
On 24 February 2010, in his Mais lecture, George Osborne set out what he called “a new approach to macroeconomic policy and financial policy” – his plan to slash and burn the British economy. The basis for his claims were that “economic theory and evidence both suggest that the macroeconomic policy combination most likely to encourage [recovery] is tight fiscal policy”. That was a total mischaracterisation of the mainstream view in the profession. Tight fiscal policy in a recession, as the master Maynard Keynes taught us from his experiences of the 1930s, inevitably destroys growth. If the Government stops building schools, architects don’t suddenly move to building factories. They lose their jobs. No public-sector build, no private-sector build. Osborne believed in a world of fantasy economics that had no foundation in fact and was bound to fail, with devastating and cruel consequences for ordinary people.
The intellectual basis for the idea that there was such a thing as “expansionary fiscal contractions” – which means that cutting public spending would boost the private sector – was an unconvincing paper by Osborne’s inexperienced, Eton-educated adviser Rupert Harrison, which purported to show that this occurred in the UK, but in fact showed nothing of the sort. There were no examples anywhere in the world that slashing public spending and raising taxes in the depths of a recession worked. Canada was an example often quoted but Canada was able to loosen monetary policy, plus it benefited from a huge boom going on in the US under Bill Clinton.
In the Mais speech, the then shadow Chancellor set out a series of benchmarks “against which I expect to be judged”. These included maintaining Britain’s Triple-A rating, increasing investment and exports, reducing youth unemployment and the number of children in workless households, as well as reducing poverty and inequality. Didn’t happen. So judge we must. He didn’t pass his economics exam.
When a patient is ill, the last thing you should do is remove treatment that is working. In the lecture, Osborne claimed that there was “no choice between going for growth today and dealing with our debts tomorrow”. Actually there is, because when an economy grows, tax revenues rise and out-of-work benefits fall, which lowers the deficit. Borrowing more in the depths of recession helps to get the economy growing, so, in the long-run, borrowing will be less and growth takes care of the deficit. You actually can and should borrow your way out of a recession when the Government can borrow so cheaply. The economy Osborne inherited was growing nicely. Indeed, it grew 2.6 per cent in the third quarter of 2009 through to the third quarter of 2010; but since then, the total growth is 0.8 per cent – and that growth is entirely down to the 2012 Olympic Games. Four of the past five quarters have been negative. It is quite clear that trying to deal with the deficit hasn’t taken care of growth.
The Mais lecture was where Osborne coined the phrase “deficit deniers” – for folks like me who for several years had warned that there was no basis whatever for his so-called new economic model, which was nothing more than a return to the failed policies of the 1930s. As Osborne told me, in his offices in Westminster before the 2010 election, this was all about politics. I had challenged him on why he had claimed that he was against bankers’ bonuses, given that we knew incomes policies didn’t work. He told me in actuality that he wasn’t, but that this was just good politics. I recall telling him that eventually people would eat the data and then he would be in trouble, which he clearly is.
This week, Iain Duncan Smith claimed that he could live on £53 a week – the same amount as one benefit claimant had said he was surviving on after rent and bills. Within 48 hours, more than 350,000 people had signed a petition saying that IDS should do so, for a year. The concern for the Government is that such opposition gathers pace as people realise that they are not all in this together. If you promise something, you had better deliver or face the consequences.
In June 2010, I wrote: “This Budget kills recovery at birth. I am now convinced that as a result of this reckless Budget the UK will suffer a double-dip recession or worse... I believe this Budget will stifle the British recovery in its infancy.” And so it did. The cruel fantasy that was Osbornomics is dead. Now it just needs to be buried.
David Blanchflower is a former member of the Bank of England’s Monetary Policy Committee