Why Slasher Osborne scares me

The shadow chancellor still has no credible plan to raise growth or lower unemployment.

If you thought the world was merrily pulling out of recession, think again. In the US last month, jobless claims increased by 22,000 to 496,000, the highest level in three months.

In January, orders of durable goods fell 0.6 per cent, the biggest drop since August, and sales of existing homes fell by 7.2 per cent. A Reuters/
University of Michigan consumer survey indicated a drop in confidence since January.

In Europe, France's headline jobless total rose by 19,500 in January, up 0.7 per cent from December. German unemployment increased by 7,000 last month. A survey by Germany's Institute of Economic Research indicated that the business climate worsened in February. And the latest EU consumer confidence measure also showed a decline.

There has been bad economic news for the UK, too. According to the latest Nationwide survey, house prices fell by 1 per cent in February. Business investment dropped by a record 24.1 per cent year-on-year in the last three months of 2009, a worse outcome than economists had forecast. Manufacturing investment was down 35.3 per cent.

The Office for National Statistics (ONS) announced that gross domestic product (GDP) rose by 0.3 per cent in the fourth quarter of 2009, an upward revision from the earlier estimate of 0.1 per cent. However, contrary to the prediction made at the Inflation Report press conference the previous week by the supremely underqualified chief economist of the Bank of England, Spencer Dale (who has no doctorate), GDP for the third quarter of 2009 was revised down rather than up, to a fall of 0.3 per cent.

Office for Recklessness

As a result of these revisions, and despite the upward estimate, GDP for the fourth quarter of last year is £133m less than the ONS previously estimated. It is likely that GDP growth will weaken further in the first quarter of 2010, following the rise of VAT and the end of the car scrappage scheme, as well as the bad weather.

Against this worsening backdrop, out strode George "Slasher" Osborne, foot in mouth, to deliver the annual Mais Lecture, in which he set out the Conservative Party's economic strategy. There was no mention of how his policies would depend on events in the UK and world economies. But what if the US and the eurozone both fall back into recession this year, which is a distinct possibility? And what if unemployment begins to rise rapidly in the UK? It would be reckless to slash on regardless. As the conservative commentator Irwin Stelzer said in his Sunday Times column, "austerity is for later".

Slasher Osborne argued: "There is no choice between going for growth today and dealing with our debts tomorrow." Actually, there is. The International Monetary Fund makes that crystal clear in a new study, Exiting from Crisis Intervention Policies. It contradicts Slasher, concluding that delaying cuts in order to establish growth is the best way to go.

“Unwinding public intervention too early," the IMF argues, "could jeopardise progress in securing a sustained economic recovery, while maintaining intervention for too long could distort private incentives and pose risks to price, financial and fiscal stability.

“One of the key lessons from experiences of similar crises is that a premature withdrawal of policy stimulus can be very costly, particularly if the financial system is weak. Thus, in the current context, the potential risks associated with an early withdrawal of policy stimulus seem to outweigh the risks of maintaining it for longer than possibly needed." Exactly.

In his lecture, Slasher asked, "Are you better off than you were five years ago?" He had already claimed: "Gordon Brown is the first prime minister in modern British history who has to answer 'No'." This is rather disingenuous, given that we have just experienced the greatest global financial crisis in at least a century. The director general of the World Trade Organisation, Pascal Lamy, said late last month that global trade contracted by about 12 per cent in 2009. Output across member countries of the Organisation for Economic Co-operation and Development fell by 4.8 per cent between the second quarter of 2008 and the first quarter of 2009. Slasher knows very well the Labour government didn't cause the global recession.

Slasher also said he would create an "independent" Office for Budget Responsibility that would publish fiscal forecasts at least twice a year, around the time of the Budget and pre-Budget report. The devil will be in the detail, so who gets on the committee will matter. Would he appoint anyone likely to be critical of spending cuts - such as me or any of the other signatories to the recent letters to the Financial Times in which we warned of the consequences?

Offices of this kind apparently exist in Sweden, Denmark and the Netherlands, but those countries have a tradition of social partners working together to establish a consensus. Would trade unions and employers' associations get a seat at Slasher's fiscal table? I suspect not. In my view, this Office for Budget Recklessness is an irrelevant sideshow.

Fragile times

I was struck by Slasher's claim that there would be "discussions with the independent Bank of England about the scope for monetary policy to remain supportive". Under the existing legislation, the Monetary Policy Committee is independent and wouldn't take kindly to being told how to vote. The Bank of England Act 1998 provides for the Treasury, after consultation with the governor of the Bank, to direct the Bank with respect to monetary policy - "if they are satisfied that the directions are required in the public interest and by extreme economic circumstances". There is no provision to discuss monetary policy with the MPC. I'd just scrap this lot entirely, but that's another matter.

As the IMF has made clear, the Tories' economic plans have the potential to harm the British economy in these fragile times. There was nothing in Slasher's speech to suggest he had any credible plans to raise growth, lower unemployment or increase the incomes of ordinary working people. I want a chancellor who has well-thought-out ideas. We need him or her to be smart, and to have gravitas, experience and credibility with the markets. It is clear to me from the Mais Lecture that George Osborne is not that person. He scares me.

 

David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and the University of Stirling.