George Osborne: a Chancellor who will be judged harshly by history

He cut hard before the UK’s recovery from the Great Recession was assured, ignoring the great insight of Keynesian economics that to do so can make matters worse

Ben Chu
Economics Editor
Thursday 14 July 2016 15:52
He did not learn quickly enough from his many mistakes
He did not learn quickly enough from his many mistakes

There was something fitting about the way one of George Osborne’s last tweets as Chancellor left a great, pendulous, counterfactual swinging in the background.

“I hope I’ve left the economy in a better state than I found it” he wrote on the social media platform.

But of course one would certainly expect that after six years any economy would be in a “better state”, that GDP per capita would be higher, that jobs would have increased, that wages would have risen.

And they are.

But this is hardly the appropriate metric to reach for.

What matters when it comes to judging a Chancellor’s record is whether the economy is in as good a state as one might reasonably have hoped and expected before they took office.

Could things – should things - have been much better? What was the counterfactual?

And here, alas, history is not likely to judge Osborne kindly.

His tenure will be defined by “austerity” but the crime was less austerity than inflexibility.

In 2010 he embarked on a clumsy assault on the deficit, mainly by slashing state capital infrastructure spending.

He cut hard before the UK’s recovery from the Great Recession was assured, ignoring the great insight of Keynesian economics that to do so can make matters worse.

Hindered from without by the eurozone’s self-inflicted agonies, UK growth duly stalled, as Osborne’s was warned by many that it might.

The recovery from the 2008-09 downturn was already by far the longest from any recession in UK post-war history.

A major fiscal stimulus U-turn would have been wholly appropriate and would have boosted UK output – and living standards - with no credible risk of an investor run on UK debt (indeed UK Gilt yields plummeted rather than rose as the reviled deficit flatlined).

But the Chancellor’s hardline rhetoric on the national debt and the size of the deficit and his cocksure early rejection of the need for any “Plan B” had made that politically impossible.

In the end, aggressive monetary loosening from the Bank of England came to the economy’s rescue, along with one the Chancellor’s very worst policies, a "Help To Buy" scheme that stimulated consumer confidence in 2013 but only at the terrible price of perpetuating the country’s housing disaster.

On the supply side of the economy in general he was far too timid and ideologically hidebound.

He was allergic to any form of direct state funding for house building, sorely needed though it was and remains.

Nor would he countenance the foundation of a proper state bank to fund small firms or infrastructure.

For all his bold rhetoric on cleaning up finance in the wake of the crash, Osborne was never really interested in breaking up the giant banks and he has delivered a wholly unsatisfactory half-way house of “ringfencing”.

His proclaimed desire to take on abusive oligopolies in energy and other markets came only at the eleventh hour of his Chancellorship and nothing has been delivered.

When it came to tackling corporate tax evasion he spoke with a forked tongue, proclaiming his intolerance of multinational tax dodging while also seeking to turn the UK into a kind of semi-tax haven by slashing corporation tax to unnecessarily low levels.

Politics, far too often, got in the way of the economics for Osborne.

His obsession with creating lurid fiscal “dividing lines” with Labour was arguably his undoing.

It boxed him in when his initial austerity drive proved counter-productive.

And his economically illiterate surplus target in this Parliament, again primarily designed to embarrass Labour, forced him into the terrible blunder of trying to find savings by cutting working tax credits and disability benefits. His reputation has never recovered from those debacles.

In fairness, he did some good and brave things, mainly towards the end of his time in office.

The big rise in the minimum wage was a gamble, but one worth taking and it belied his image as a small state ideologue.

The apprenticeship levy on corporations was a fine policy and one that Labour should have implemented itself when in power.

His emphasis on the need for a “Northern Powerhouse”, though coming rather late in the day and hardly fleshed out as a policy, was a welcome recognition of the need for a regional economic rebalancing.

And of course he argued passionately and responsibly for Britain’s continued European Union membership, which he knew would do his career prospects no favours in a massively Europhobic Tory party.

Yet, in the end, he didn't learn fast enough from his many mistakes. And the youngest Chancellor in 120 years never quite managed to shed the whiff of the callow ideologue who was not as clever as he thought he was.

It could – and should – have been a lot better.

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