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This Budget was Osborne's last hurrah – and now he can only hope for the good times

The coalition’s Plan B is now in full operation – crossing fingers and toes and hoping something will turn up.

In his Mais Lecture, given on 24 February 2010, George Osborne argued that there was a series of benchmarks for policy for the next parliament, “against which you will be able to judge whether a Conservative government is delivering on this new economic model”. He added: “I have set out the benchmarks against which we can be held accountable . . . We will maintain Britain’s triple-A credit rating . . . We have to deal with our debts.” Well, that didn’t work out.

Our downgraded Chancellor lost the UK’s triple-A credit rating because he has delivered neither on growth nor on the deficit. In June 2010, the Office for Budget Responsibility (OBR) forecast that growth in the UK would be 2.3 per cent in 2011 and 2.8 per cent in 2012. What we got was 0.9 per cent and -0.1 per cent. Most commentators, including yours truly, think that there is a better-than-even chance that we are already in a triple-dip recession. The problem wasn’t caused by Labour profligacy, the wretched weather, Cypriot banks or the number of bank holidays. This remains a slump made in 11 Downing Street and it did not need to happen.

The government hasn’t dealt with the country’s debts – far from it. The coalition has boasted so many times that it has reduced the deficit by a quarter but the reality is that this was done primarily by slashing capital spending, which has had a devastating impact on the construction industry. And the deficit is now rising, as was confirmed in the 20 March Budget. Construction-industry output in January 2013 was 7.9 per cent lower than in January 2012. To get an idea of the scale of these cuts, compare these figures: net investment in the public sector was £30.8bn in 2011 but only £384m in 2012, according to the Office for National Statistics (ONS).

When the National Infrastructure Plan was published in November 2011, the government claimed that it would target up to £20bn of investment from pension funds. However, barely £1bn has reportedly been raised. Analysis of the government-funded “construction pipeline” shows that, as of November 2012, only 1.2 per cent of the 851 projects listed are “in construction”.

Lack of growth has resulted in more – not less – borrowing to pay for the costs of economic failure. Indeed, borrowing is forecast to be over £200bn more than planned at the time of the Spending Review. The government will not “balance the books” by 2015, as David Cameron once promised. National debt as a percentage of GDP is now forecast not to start falling until 2017/2018. The latest ONS figures show that public-sector net borrowing, excluding the Royal Mail and asset purchase facility transfers, is over £5bn higher so far this year than it was in the same period last year. So our part-time Chancellor has his own deficit-expansion programme. Nice work, if you can get it.

This was all so predictable – or, at least, it should have been. One learned commentator argued in response to Osborne’s illconsidered Mais Lecture: “Slashing spending now could push the economy back into recession and inflict further structural damage on the UK that will make it harder to sustain our credit rating. He . . . fails to appreciate that what the markets are looking for is a credible plan to reduce the deficit, not a willingness to slash regardless of economic conditions. In the current climate, it is essential that decisions about the speed and timing of tackling the deficit are based on the state of the economy, not political dogma.”

That commentator was none other than Vince Cable, the Business Secretary, who in a recent New Statesman essay called for greatly expanded capital spending. My concern now is that this was just political posturing, because there has been no change in policy. Osborne’s extra £3bn for infrastructure was derisory. Don’t just talk: do something, Vince, for the sake of the country.

All along, Osborne seems to have believed that, despite the terrible dress rehearsals, everything would work out perfectly well on the night. He has too willingly believed the forecasts of the OBR and the Bank of England’s Monetary Policy Committee (MPC). These have been consistently wrong.

In May 2010, the central projection from the MPC was for growth of around 3 per cent, with some chance of nearly 6 per cent by 2013 and little or no chance of negative growth. It’s clear now that the forecast was wildly over-optimistic, with growth closer to zero. What is astonishing is that the MPC is still forecasting that growth could be as high as 5 per cent by 2015. It has learned nothing from its past failures. Each time the MPC makes a forecast, it has to downgrade it in the next iteration, which is exactly what the OBR did in its Budget forecast: it said that growth this year would be 0.6 per cent – half its earlier forecast of 1.2 per cent.

This brings us to what the Chancellor should do – let’s call it a “reverse Osborne”. First, we need an immediate fiscal boost. He should cut VAT by 5 per cent and a cut in the basic rate of income tax would help. A cut in National Insurance to zero for two years for anyone under 25 would help lower youth unemployment. I would invest an additional £20bn into a housebuilding programme and spend £10bn on fast-acting, shovel-ready projects. Osborne announced a review of the MPC’s remit but there’s no need to make big changes: it is sufficiently flexible. But it would not hurt to provide an explicit dual mandate, following the model of the US Federal Reserve, of targeting both inflation and growth.

Anything that sends the inflation nutters into paroxysms is fine by me. An increase in capital spending of just £3bn, funded by current spending cuts, is both pitiful and inadequate and will change nothing. The coalition’s Plan B is now in full operation – crossing fingers and toes and wishing for good times. LOL.

David Blanchflower is the economics editor of the New Statesman

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 25 March 2013 issue of the New Statesman, After God

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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.