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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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.