The verdict is in – the Chancellor’s austerity measures have failed
George Osborne has been hoisted by his own petard.
George Osborne has been hoisted by his own petard.
The jury has returned its verdict on appropriate macroeconomic policies for the worst downturn in 100 years. It comes as no surprise to me that austerity in the UK has failed miserably, especially because the US in the 1930s was always the main precedent.
The US and the UK had quite different responses to the global downturn; one is doing fine, the other isn't. Both have their own currency and central banks and have slashed interest rates to the lower bound; both have conducted huge amounts of quantitative easing. The UK tightened, the US didn't - and from there, two roads diverged.
The recent publication of a slew of economic data finally closed the case. US GDP growth for the fourth quarter of 2011 was +0.7 per cent, compared to -0.2 per cent for the UK. The unemployment situation is improving in the US and getting worse in the UK, as is consumer and business confidence and consumer spending. Manufacturing employment is growing in the US and as President Obama made clear in his State of the Union address, the car industry in Detroit is growing again. Manufacturing employment in the UK is down 25,000 on the year. The CBI industrial trends fell, as did the distributive trades surveys, which painted a less-than-rosy picture of where the retail sector is heading in 2012.
The UK GDP data is set out in the table (below) for each quarter from the beginning of 2008. Because estimates are revised regularly, I also include the initial estimate produced by the Office for National Statistics, alongside the most up-to-date estimates. Bear in mind that, on average, the estimates have been revised downwards over the recession. It is clear that the recession was deeper than first thought, with output falling by 7.4 per cent, and it started earlier and finished sooner.
Over the next five quarters, under Alistair Darling and Gordon Brown, UK output rose sharply by 3.1 per cent. Then over the subsequent five quarters the economy flatlined, growing by a pathetic 0.3 per cent. The final column of the table includes the Office for Budget Responsibility (OBR) estimates of growth, based on the state of the economy that it inherited. In contrast to the growth of 3.2 per cent over the period between the fourth quarter of 2010 and the fourth quarter of 2011 that the OBR predicted, the outcome was less than a tenth of that (0.3 per cent).
Output is still 4 per cent below its level at the start of the recession. George Osborne is now responsible for the longest-lasting slump in more than a century.
As ever, there were plenty of excuses for the awful GDP performance. The Tory cheerleader David Smith in the Sunday Times said that:
a) the number would be revised up later; b) it was low because the good weather was "making it hard for retailers to sell winter woollies and overcoats" (wasn't it the bad weather that caused the poor data a few months ago?); and, finally, a one-day strike by public-sector workers was another culprit. This was the same esteemed commentator who on 30 January 2011 claimed that "the recovery is on track" and who on 18 July 2010 predicted that "the private sector can more than compensate for direct public-sector job losses but also for losses in private firms with public-sector contracts". Feeble. It isn't as if Osborne wasn't warned. On 24 June 2010, I wrote in this column: "This Budget will stifle the British recovery in its infancy."
In all likelihood, there is worse to come. I fully expect us to enter double-dip recession with negative growth in the next quarter. In golfing parlance, Osborne lost every hole on the front nine and the match is dormy.
Apart from the Nobel Prize-winner Christopher Pissarides, who has called for further stimulus, the 20 academic economists who signed a letter to the Sunday Times on 14 February 2010 supporting the austerity programme have gone remarkably silent. To be fair to them, they did argue that the "exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery". That hasn't happened and there is still no Plan B.
In an op-ed in the Financial Times on 27 January, the Chancellor claimed: "What we are witnessing in the west is a crisis of confidence." In the UK that is true, but it is largely a self-inflicted injury caused by Osborne, backed up by the economic amateurs Nick Clegg and David Cameron. They talked the economy down shamelessly for political reasons and now it is theirs to own. I have to concur with my old friend William Keegan, who in his Observer column on 29 January called Osborne "the most dangerous chancellor I have known".
This was always political for Osborne, as was his supposed opposition to bankers' bonuses before he was in government, and now he has been found out. I recall asking him about his opposition to bankers' bonuses then, one day in Westminster, as I had always thought the Tories were opposed to incomes policies because they didn't work. His response was that he was not against bonuses; he conceded that he had opposed them for political reasons. Looks like he has been hoisted by his own petard. We never were all in this together.
Tags: George Osborne