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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Sadiq Khan likely to be most popular Labour leader, YouGov finds

The Mayor of London was unusual in being both well-known, and not hated. 

Sadiq Khan is the Labour politician most likely to be popular as a party leader, a YouGov survey has suggested.

The pollsters looked at prominent Labour politicians and asked the public about two factors - their awareness of the individual, and how much they liked them. 

For most Labour politicians, being well-known also correlated with being disliked. A full 94 per cent of respondents had heard of Jeremy Corbyn, the current Labour leader. But when those who liked him were balanced out against those who did, his net likeability rating was -40, the lowest of any of the Labour cohort. 

By contast, the Labour backbencher and former army man Dan Jarvis was the most popular, with a net likeability rating of -1. But he also was one of the least well-known.

Just four politicians managed to straddle the sweet spot of being less disliked and more well-known. These included former Labour leadership contestants Yvette Cooper, Andy Burnham, and Hilary Benn. 

But the man who beat them all was Sadiq Khan, the Mayor of Lodon. 

YouGov's Chris Curtis said that in terms of likeability Khan "outstrips almost everyone else". But since Khan only took up his post last year, he is unlikely to be able to run in an imminent Labour contest.

For this reason, Curtis suggested that party members unhappy with the status quo would be better rallying around one of the lesser known MPs, such as Lisa Nandy, Jarvis or the shadow Brexit minister Keir Starmer. 

He said: "Being largely unknown may also give them the opportunity to shape their own image and give them more space to rejuvenate the Labour brand."

Another lesser-known MP hovering just behind this cohort in the likeability scores is Clive Lewis, a former journalist and army reservist, who served in Afghanistan. 

Lewis, along with Nandy, has supported the idea of a progressive alliance between Labour and other opposition parties, but alienated Labour's more Eurosceptic wing when he quit the frontbench over the Article 50 vote.

There is nevertheless space for a wildcard. The YouGov rating system rewards those who manage to achieve the greatest support and least antagonism, rather than divisive politicians who might nevertheless command deep support.

Chuku Umunna, for example, is liked by a larger share of respondents than Jarvis, but is also disliked by a significant group of respondents. 

However, any aspiring Labour leader should heed this warning - after Corbyn, the most unpopular Labour politician was the former leader, Ed Miliband. 

Who are YouGov's future Labour leaders?

Dan Jarvis

Jarvis, a former paratrooper who lost his wife to cancer, is a Westminster favourite but less known to the wider world. As MP for Barnsley Central he has been warning about the threat of Ukip for some time, and called Labour's ambiguous immigration policy "toxic". 

Lisa Nandy

Nandy, the MP for Wigan, has been whispered as a possible successor, but did not stand in the 2015 Labour leadership election. (She did joke to the New Statesman "see if I pull out a secret plan in a few years' time"). Like Lewis, Nandy has written in favour of a progressive alliance. On immigration, she has stressed the solidarity between different groups on low wages, a position that might placate the pro-immigration membership. 

Keir Starmer

As shadow Brexit minister and a former director of public prosecutions, Starmer is a widely-respected policy heavyweight. He joined the mass resignation after Brexit, but rejoined the shadow cabinet and has been praised for his clarity of thought. As the MP for Holborn and St Pancras, though, he must fight charges of being a "metropolitan elite". 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.