My advice to Vince Cable: “It’s time to jump ship”

The near-stagnant UK economic growth figures prove that Chancellor George Osborne’s Thatcherite econ

If you had any confidence left in George Osborne's judgement, it must have taken a fatal hit over the past week. Not only was he compelled to express regret for having pushed David Cameron to hire Andy Coulson, the former News of the World editor, as his director of communications, but we also learned that he dined with Rupert Murdoch in New York last December, just as the media regulator Ofcom was considering News Corp's takeover bid for BSkyB. Then it was revealed that the Chancellor has in fact had 16 separate meetings with Murdoch executives since the general election in May 2010.

The biggest blow to Osborne's credibility, however, has to be the growth figures published by the Office for National Statistics on 26 July, which confirmed my view that his policies are becoming a long-drawn-out nightmare for Britain. Gross domestic product (GDP) grew by only 0.2 per cent in the second quarter of this year (between April and June), down from 0.5 per cent in the first quarter. In sum, there has been only 0.2 per cent growth over the last three quarters, compared to 2.1 per cent over the previous three quarters under Labour. Alistair Darling's policies were working; Osborne's are not.

There is every likelihood that growth for the third quarter of 2011 will be even worse and unemployment will start rising again. Moreover, the figure of 0.2 per cent for the second quarter is a flash estimate that will get revised over many months. Indeed, it has the feel of the first data release for the second quarter of 2008, which was also 0.2 per cent. By September 2008, that had been revised downwards to 0 per cent, and in June 2010 it was revised to -0.3 per cent, which is where it still stands. My suspicion is that this year's only slightly positive figures will get revised in the same way.

No safe haven

Osborne turned a blind eye to the stark evidence that he has caused the economy to flatline. The "positive news", he said, "is that the British economy is continuing to grow and is creating jobs. And it is positive news, too, that at a time of real international instability we are a safe haven in the storm." He went on: "Our economy is stable at this time because this government has taken the difficult decisions to get to grips with Britain's debts. Abandoning that now, as some argue we should, would only risk British jobs and growth."

Who is he kidding? The best that can be said is that the data could have been worse. Growth in the UK over the previous two quarters - the final of 2010 and the first of 2011 - put us fifth from the bottom among EU countries, beating only Ireland, Denmark, Portugal and Greece. The weak growth in the latest quarter will not lift us up these rankings.

When the economy first came out of recession, in January 2010, with growth of 0.1 per cent over three months, Osborne said: "If you're looking for the reason why the British economy couldn't have weaker growth at the moment - literally statistically, it's only 0.1 per cent - the reasons for that is that businesses are uncertain about the future, there's no government plan for the recovery, there's no government plan that is credible when it comes to dealing with the deficit and answering those things would help job creation." In his autumn statement on 29 November 2010, he claimed that the recovery was "on track". The slowing of the growth figure to 0.2 per cent shows it isn't.

I continue to hold Cameron, Osborne and Nick Clegg largely responsible. By talking the economy down, claiming it was bankrupt when it wasn't and by ludicrously suggesting Britain was like Greece, even though the two have never been comparable and the latter is now stuck in monetary union, they have precipitated a steady collapse in the kind of confidence that John Maynard Keynes called animal spirits, even before the austerity measures have hit. There comes a point when a government has to own the economic mess it has created; we have reached that point. The government's economic strategy, as with its plans for prisons and the National Health Service, is a shambles.

The shadow chancellor, Ed Balls, attacked Osborne's "breathtakingly complacent" response to the latest figures. The Chancellor had "ripped up the foundations of the house as the global economic hurricane was brewing", he said, "undermining our recovery well before the recent problems in the eurozone and America, and leaving us dangerously exposed if things now go wrong there".

Lightweights

The pitiful growth is causing business to turn against the coalition. On 18 July, the Federation of Small Businesses backed the shadow chancellor's call for cuts in VAT. Following the release of the growth figures, Ian McCafferty, the Confederation of British Industry's chief economic adviser, struggled to sound supportive of Osborne's strategy.

“This is the third consecutive quarter in which special factors, such as the winter weather, unseasonal North Sea maintenance, the Japanese tsunami and an extra bank holiday, have made interpretation of the data more difficult and have depressed economic activity over the short term," he said. "There is likely to be some bounce back over the autumn, but it's clear that the underlying economic recovery remains fragile and difficult." Fragile and difficult is an understatement.

None of this comes as a surprise to me. My warnings over many months that Osborne's policies are misconceived and reckless are proving all too true. I have a good deal of sympathy for the Business Secretary, Vince Cable, who now says he wants more quantitative easing, but that cannot compensate for an inept policy that has gone bad.

It's time to reverse course, and the first step should be to scrap the VAT increase that is doing so much harm. But more needs to be done, including an immediate cut in payroll taxes targeted at the young for two years. This would give the economy a much-needed stimulus and price youngsters into jobs. It would also make sense to invest more in improving infrastructure. My strategy would generate growth and create jobs. Osborne's only policy is to insist he is right and there is no other way. Vince, surely it's time for you to jump ship from this crew of economic lightweights?

David Blanchflower is the NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling