The man’s not for turning

Osborne’s lack of a plan B could prove his undoing. But it is the British people who will pay the pr

George Osborne grandly set out his economic vision in his Mais Lecture to City luminaries earlier this year. A smaller state coupled with higher exports and increased investment were his stated objectives. As Chancellor, he is now pursing these goals and keeping his fingers crossed that after he has hacked off chunks of the public sector, the private sector will step in to fill the gap.

If the unprecedented boom in exports and business investment needed to realise Osborne's plan doesn't show up, his approach, to borrow a phrase from Lady Thatcher, can be described thus: "You turn if you want to; the man's not for turning." Urged on by Tory backbenchers, the Chancellor refuses to countenance a plan B, while his Liberal Democrat coalition partners wonder what brake, if any, the Chief Secretary to the Treasury, Danny Alexander, is applying to this ideological adventure.

Alistair Darling, Osborne's predecessor, set out a plan to halve the deficit in four years starting in March 2011. This was controversial with many within Labour: the balance of tax rises to spending cuts was questioned, as was the need for such rapid fiscal consolidation. Despite this, the judgement of the new Office for Budget Responsibility was clear: the deficit would have been reduced from over 10 per cent of GDP in 2010/11 to 3.9 per cent by 2014/15 under Labour's plans.

Crucially Darling had a plan B. If the economy got worse and the prospects of high unemployment or a double-dip recession increased, the tempo of deficit reduction could be changed accordingly – the pace of fiscal tightening would be set by the pace of economic recovery (Vince Cable, too, argued for this during the election campaign).

Conversely, Osborne has decided to go further and faster. He is planning on tightening by an additional £40bn over Darling's plans by 2014/15, as set out in his June Budget and this month's Spending Review. He has rhetorically lashed himself to the mast of eliminating the structural deficit in one parliament, allowing very little flexibility if the outlook changes. He is also relying more on spending cuts, and less on tax rises, putting him at odds not only with Labour, but also with Ken Clarke.

The Justice Secretary, while chancellor under John Major in the 1990s, achieved a similar rebalancing of the economy and relied much more on tax rises and less on spending cuts to repair the public finances, in the wake of the last recession, than Osborne proposes now. Then exports and business investment grew strongly, although not as strongly as Osborne needs them to at present. And conditions then were very different from those in 2010: exports were helped by a booming world economy and investment increased by the need for business to respond to the revolution in information technology and communications. Neither seems likely over the next few years.

We should also remember the 1930s and the 1980s. In both cases, state spending was cut back as Tory governments, clinging to approaches variously referred to as "the Treasury view", "sound money" and "monetarism", waited for a private-sector recovery to take hold. Yet, when the problem is too little demand, who seriously advocates cutting back demand further? This is economics driven by ideology and lacking in common sense.

Today the Chancellor's rhetoric has made dealing with the deficit the sole aim of macroeconomic policy but, as the axe falls and jobs are lost from the public sector, there is a great danger that the private sector is not strong enough to absorb the newly unemployed workers. If this proves to be the case, unemployment will rise and, with it, the welfare bill as tax income falls. The deficit will worsen, forcing Osborne, who has left himself with no option, to cut spending further. It is self-defeating austerity that could well create an economic death spiral.

Moreover, in the 1930s and the 1980s the recovery did eventually come, but years later than it had to, and with a high social cost in unemployment, poverty and crime. In both cases the lack of an active regional policy, as now, left pockets of higher deprivation blighted by structural joblessness. And in both cases there was an alternative that could have been taken if the government had not been so blinkered.

One hopes that the private sector will be strong enough to counteract the effects of Osborne's measures, and that Britain will enjoy an exporting and investment renaissance and workers move near-seamlessly from the public payroll to newly created jobs in industry. However, history suggests that the odds of this occurring, especially at a time of continued global economic turmoil, are not high.

Osborne's lack of a plan B could prove his undoing. Unfortunately it is the British people, and not the likes of Osborne, who ultimately will pay the price.

Chuka Umunna is the Labour MP for Streatham and a member of the House of Commons Treasury select committee. Duncan Weldon is an economist and former adviser to the opposition Treasury team.

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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.