Osborne may gloat about recovery, but his “hard slog” will leave Britain worse off

The recovery of the British economy, which started under Labour, was aborted in 2010.

George Osborne is bound to crow at the Conservative party conference about the superior performance of the British economy under his stewardship. After three years of “hard slog”, there is at last some good news to report. In the second quarter of this year, the economy grew by 0.7 per cent after “flatlining” for the previous three years. The National Institute of Economic and Social Research has revised its annual growth forecast upwards twice in its latest forecasts. The British economy is now expected to grow by 1.2 per cent in 2013, 0.5 percentage points more than was forecast as late as in February, and in 2014 this will surge to 1.8 per cent. The tables, the media will gush, have been turned on Labour. George has pulled it off. And Osborne will claim a number of things that are either false or implausible.

First, he will say that his critics (people such as me) have “lost the battle”, because they can’t explain why the economy is improving. I haven’t yet met a critic of Osborne’s policy who claimed that the economy would not recover from the collapse of 2008-2009. Economies always recover from their low points, whatever the policies pursued, sooner or later. Things happen, in the country or in the world, to revive business’s “animal spirits”. The question is whether they happen sooner or later and how long the recoveries last. Here, policy does matter.

The critics’ charge against Osborne is not that he caused the slump but that his policy of fiscal austerity delayed the recovery, possibly by as much as three years. His failure was a failure to offset the decline in aggregate demand, or total spending, which followed the crash, by a policy of fiscal expansion. Instead, his policy, which aimed at cutting the Budget deficit and reducing the national debt, added to the depressive forces created by the financial collapse.

That is why the UK economy is still about 3 to 4 per cent smaller than it was in 2008, whereas in the US, where fiscal stimulus was sustained, the economy is now larger than before. The recovery of the British economy, which started under Labour, was aborted in 2010. A recent US study by the economists Alan Taylor and Òscar Jordà suggests that each year of Osborne knocked 1 per cent off the growth of the British economy; that is, £92bn all told, enough to restore Labour’s schoolbuilding plans and still have enough change to plug the funding gap in the NHS. For the average household, this amounts to a loss of £3,500 over three years – and, as Taylor and Jordà point out, this is a conservative estimate.

Osborne’s second claim will be that the “hard slog” was necessary to ensure sustainable recovery – one that didn’t lead to “boom and bust”, as allegedly Gordon Brown’s pre- 2008 boom did. A critical policy aim has been to shrink the size of the bloated state sector, which was supposedly sucking vitality out of the “wealth-producing” private sector. A more plausible view of the cause of the crisis is that the British economy had become dangerously dependent on an oversized banking sector pumping money into private housing.

In this view, a “sustainable” economy is a “balanced” economy, like the balanced portfolio prudent investors are advised to hold. Instead, government-backed schemes such as Funding for Lending and Help to Buy are quite likely to create a housing bubble.

Crucial to both the strength and durability of recovery is the level and distribution of expected demand. Unfortunately, the main effect of quantitative easing (QE) – the only kind of stimulus the government accepts – is to boost asset prices; that is, to make the rich richer. It does nothing for most wage and salary earners, the main source of effective demand. Moreover, this boost to the wealth of the rich comes on top of decades of rising income inequality.

And it is worse than this. In so far as it increases inflation, QE depresses the purchasing power of exactly those people on whom a strong recovery depends. With earnings lagging behind prices, the TUC estimates that average real pay has fallen by 7.5 per cent since 2008. Higher-paid public-sector jobs have been replaced by lower-paid privatesector jobs. In lauding the “flexibility” of the British labour market, the Chancellor has ignored the consequences of this flexibility for the level of demand. That’s leaving aside its effects on our long-term future as a highvalue- adding economy.

“Demand” is the one word that has never passed George Osborne’s lips. He doesn’t believe in it. He is a prisoner of Say’s law: that supply creates its own demand. Look after supply – especially the supply of credit – and demand will look after itself. Keynes taught the exact opposite – look after demand and supply will look after itself. This is not always true but it is valid in a slump.

Yet Osborne is the chancellor who, a few weeks after the collapse of the world’s financial system, declared that Keynesian measures aimed at maintaining the level of aggregate demand would be like a “cruise missile aimed at the heart of a recovery”. So we always knew where George was coming from.

Keynes believed that without a jolt, or stimulus, a depressed economy could remain in a state of “underemployment equilibrium” for decades. By this, he did not mean that nothing would change. There would still be booms and busts. What he meant was that the average level of activity over the cycle would be lower than it would be if the economy were fully employed. The average level of unemployment would be higher, the rate of economic growth lower; people would be employed in less rewarding jobs and below their skill level; discouraged workers would leave the labour force.

There would be less work to do, not because people needed less, but because most were too poor to buy what they needed. For all his talk of recovery, this is the future that Osborne offers.

Lord Skidelsky is a cross-bench peer and the pre-eminent biographer of Keynes
George Osborne. Photo: Getty

This article first appeared in the 30 September 2013 issue of the New Statesman, The Tory Game of Thrones

Photo: Getty
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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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