The view from the European Central Bank. Photo: Getty
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Robert Skidelsky: The welfare state did not cause the crash. So why is Osborne cutting it?

If a government has to cut its spending, it is much better to tax the rich than starve the poor.

The Institute for Fiscal Studies (IFS) has warned that there will need to be “colossal” cuts in public spending to balance the books by 2018-19 – at least £55bn extra. On 4 December, the day after the Chancellor’s Autumn Statement, the director of the IFS, Paul Johnson, said that it wasn’t for lack of effort that the deficit hasn’t fallen. Rather, it was “because the economy performed so poorly in the first half of the parliament, hitting revenues very hard”.

Very true – but what Johnson omitted to say was that the main reason the economy performed so poorly in the first half of the parliament was because George Osborne was busy cutting the deficit. He should have been expanding it!

This is something that expert commen­tators lack the guts to say because that would brand them as Keynesians. They may admit that fiscal consolidation has made eco­nomic recovery “more challenging”. But they don’t tell us why. This theoretical gap leaves them without a reputable story of why the economy behaved so poorly. They are in familiar “blown-off-course” territory.

Every possible event that might affect growth, however fleetingly, has been summoned in aid of explaining the failure of the economy to grow: the Greek crisis, the rising price of oil, the extra bank holiday on the Queen’s Diamond ­Jubilee and the closure of shops during the London Olympics, snow and floods – everything except the real reason, which is that a deficiency of ­private ­demand was not being offset by public-­sector investment.

The latest explanation of why the Chancellor has failed to meet his deficit targets concentrates on the nature of the labour market recovery. The government has congratulated itself on the fall in unemployment. We would expect falling unemployment to increase tax revenues and reduce public spending. However, this will not happen if government policy has created lots of new, mostly low-wage jobs whose holders pay no direct taxes and that must be propped up with benefits.

The catastrophic fall in productivity that we are now seeing was planted in the two and a half years of stagnation that followed the creation of the coalition in 2010. In October 2012, the Office for Budget Responsibility found that the economy had grown by only 0.9 per cent between Q1 of 2010 and Q2 of 2012, while its June 2010 forecast was 5.7 per cent growth over the same period. Subsequent upward revision has made these figures less dire but there is no doubt that Osborne and his advisers seriously underestimated the adverse effects of austerity on investment.

As is now increasingly recognised, this extended period of stagnation reduced the long-term growth rate of the economy through the destruction of both human skills and physical capital.

Despite his warning about the size of the cuts to come, Paul Johnson said that they could be achieved. He added, however, that they would require a “reimagining” (or, put another way, shrinking) of the state. Two questions arise. First, what effect will shrinking the state have on the economy? Second, what effect will it have on the polity?

On the first, Johnson seems to assume that the economy will go on growing at about 2.5 per cent a year, even as the deficit is being cut to zero. This is highly optimistic because the cutting is simultaneously reducing private incomes. It may be possible, by sufficiently heroic austerity, for a government to keep revenues for a time running ahead of cuts but at what level of GDP will the budget eventually be balanced? Certainly lower than it would have been without the cuts.

The cuts not only change the level of GDP but also its composition and, therefore, the relations between the state and its citizens. This point is recognised by Labour, which promises “fairer” cuts. If a government has to cut its spending, it is much better to tax the rich than starve the poor. However, this is alien to the spirit of cutting. The barely subliminal message of all austerity programmes is that the deficit has been caused by spiralling welfare payments to the poor, with the object of austerity ­being to “get them on their bikes” – like in the 1930s, when unemployment was consistently around or above 10 per cent.

We urgently need to have a proper debate about the role and size of the state. Prosperity does not demand that the state should spend 40 per cent-plus of national income as it does now, though justice may.

In the old days, people used to talk of a “trade-off” between efficiency and justice and some of those arguments may still be valid, though I am less and less persuaded that the private sector scores heavily over the public sector in efficiency. A financial system that allocates capital to itself and whose crash in 2008 left the population 15 per cent poorer than it would have been is hardly an advertisement for private-sector efficiency.

What is really indefensible is to cut the state for reasons of financial dogmatism, as though the size of the state – and especially the welfare state – were the cause of the slump. We need a cool discussion on the role of the state as owner and regulator in a market economy and in the light of the civic purposes that people set for themselves. It needs to be pointed out that these huge cuts imply serious losses to the quality of government services and the strength of the defence and police services.

I’m not sure which is worse: to bleed the economy with small cuts stretching many years ahead or to cut deeply now and hope for the best. What does seem clear is that politics will not allow the second and only a ­Labour government can avert the first.

This article first appeared in the 09 December 2014 issue of the New Statesman, How Isis hijacked the revolution

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue