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

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Debunking Boris Johnson's claim that energy bills will be lower if we leave the EU

Why the Brexiteers' energy policy is less power to the people and more electric shock.

Boris Johnson and Michael Gove have promised that they will end VAT on domestic energy bills if the country votes to leave in the EU referendum. This would save Britain £2bn, or "over £60" per household, they claimed in The Sun this morning.

They are right that this is not something that could be done without leaving the Union. But is such a promise responsible? Might Brexit in fact cost us much more in increased energy bills than an end to VAT could ever hope to save? Quite probably.

Let’s do the maths...

In 2014, the latest year for which figures are available, the UK imported 46 per cent of our total energy supply. Over 20 other countries helped us keep our lights on, from Russian coal to Norwegian gas. And according to Energy Secretary Amber Rudd, this trend is only set to continue (regardless of the potential for domestic fracking), thanks to our declining reserves of North Sea gas and oil.


Click to enlarge.

The reliance on imports makes the UK highly vulnerable to fluctuations in the value of the pound: the lower its value, the more we have to pay for anything we import. This is a situation that could spell disaster in the case of a Brexit, with the Treasury estimating that a vote to leave could cause the pound to fall by 12 per cent.

So what does this mean for our energy bills? According to December’s figures from the Office of National Statistics, the average UK household spends £25.80 a week on gas, electricity and other fuels, which adds up to £35.7bn a year across the UK. And if roughly 45 per cent (£16.4bn) of that amount is based on imports, then a devaluation of the pound could cause their cost to rise 12 per cent – to £18.4bn.

This would represent a 5.6 per cent increase in our total spending on domestic energy, bringing the annual cost up to £37.7bn, and resulting in a £75 a year rise per average household. That’s £11 more than the Brexiteers have promised removing VAT would reduce bills by. 

This is a rough estimate – and adjustments would have to be made to account for the varying exchange rates of the countries we trade with, as well as the proportion of the energy imports that are allocated to domestic use – but it makes a start at holding Johnson and Gove’s latest figures to account.

Here are five other ways in which leaving the EU could risk soaring energy prices:

We would have less control over EU energy policy

A new report from Chatham House argues that the deeply integrated nature of the UK’s energy system means that we couldn’t simply switch-off the  relationship with the EU. “It would be neither possible nor desirable to ‘unplug’ the UK from Europe’s energy networks,” they argue. “A degree of continued adherence to EU market, environmental and governance rules would be inevitable.”

Exclusion from Europe’s Internal Energy Market could have a long-term negative impact

Secretary of State for Energy and Climate Change Amber Rudd said that a Brexit was likely to produce an “electric shock” for UK energy customers – with costs spiralling upwards “by at least half a billion pounds a year”. This claim was based on Vivid Economic’s report for the National Grid, which warned that if Britain was excluded from the IEM, the potential impact “could be up to £500m per year by the early 2020s”.

Brexit could make our energy supply less secure

Rudd has also stressed  the risks to energy security that a vote to Leave could entail. In a speech made last Thursday, she pointed her finger particularly in the direction of Vladamir Putin and his ability to bloc gas supplies to the UK: “As a bloc of 500 million people we have the power to force Putin’s hand. We can coordinate our response to a crisis.”

It could also choke investment into British energy infrastructure

£45bn was invested in Britain’s energy system from elsewhere in the EU in 2014. But the German industrial conglomerate Siemens, who makes hundreds of the turbines used the UK’s offshore windfarms, has warned that Brexit “could make the UK a less attractive place to do business”.

Petrol costs would also rise

The AA has warned that leaving the EU could cause petrol prices to rise by as much 19p a litre. That’s an extra £10 every time you fill up the family car. More cautious estimates, such as that from the RAC, still see pump prices rising by £2 per tank.

The EU is an invaluable ally in the fight against Climate Change

At a speech at a solar farm in Lincolnshire last Friday, Jeremy Corbyn argued that the need for co-orinated energy policy is now greater than ever “Climate change is one of the greatest fights of our generation and, at a time when the Government has scrapped funding for green projects, it is vital that we remain in the EU so we can keep accessing valuable funding streams to protect our environment.”

Corbyn’s statement builds upon those made by Green Party MEP, Keith Taylor, whose consultations with research groups have stressed the importance of maintaining the EU’s energy efficiency directive: “Outside the EU, the government’s zeal for deregulation will put a kibosh on the progress made on energy efficiency in Britain.”

India Bourke is the New Statesman's editorial assistant.