George Osborne cannot possibly know how long austerity will last

The Chancellor's strategy is based on faulty rules and unproven assumptions about the deficit.

Next week George Osborne will hold forth on the size of the underlying deficit and reveal whether austerity will now extend until at least 2018. When he does, he won’t know what he’s talking about – and he’ll be in good company.  Neither will Ed Balls when he responds, nor will the phalanx of city economists who rush to comment, nor indeed will establishment economic institutions such as the IMF and the OECD.

This isn’t because our current crop of politicians and economists are unusually uninformed. Rather it reflects the fact the debate on fiscal policy is being driven in no small part by an economic concept – the structural deficit - that is very close to being unmeasurable. It’s an example of how what sounds like a sensible idea in theory can go wrong in practice.  

The structural deficit is that bit of the deficit that would still exist even if the economy was running at full capacity: the part that can’t be explained away by the fact that the economy is under-performing.  Giving it consideration is sensible and important. Few would disagree that running a deficit when the economy is stuttering along far below its peak capacity is a very different matter to running one when the economy is booming. The trouble arises, however, when we pretend we can decipher exactly how much of a deficit is cyclical and how much is structural.

Estimating the size of the structural deficit is, to put it mildly, something that sensible people can come to sharply different views on. Last week the Social Market Foundation  think-tank (led by former Treasury official Ian Mulheirn who is no fiscal virgin) published a neat bit of work replicating the methodology used by the Office for Budget Responsibility (OBR) to estimate the gap between the economy’s current output and its full potential. They conclude the output gap is pretty modest: under 2%.  If correct, it’s bad news for our economy, as we’ve had a bigger permanent loss in productive capacity than many realise. And it’s bad news for austerity: the return to growth won’t fill the fiscal gap - further painful changes will be needed to meet the objective of eliminating the structural deficit over five years. The SMF estimate that massive extra spending cuts or tax-rises of around £22bn (over and above all of those already planned) would be needed by 2017/18.

Or maybe they won’t be.  Another plausible report – this time by the respected Capital Economics – tells a very different story. It estimates that our flatling economy might be running as much as 6% below its full potential. If that’s the case the structural deficit is far smaller than we are being led to believe – and Osborne may be planning to tighten fiscal policy by too much, way too much – to the tune of around £35bn - in order to meet his own rule.

So that’s all clear then.

In addition to recognising the confusion over the size of the structural deficit it is worth asking whether setting a target that no-one can agree on is likely to result in further economic damage? You’d think so. But the answer depends on whether you believe that the chancellor’s target on eliminating the structural deficit is going to drive new spending and tax decisions that wouldn’t otherwise have been taken.

This question arises because the target is formulated in a way that means, as Jonathan Portes, Director of the National Institute for Economic and Social Research, has highlighted, it never actually bites. Because it is set on a rolling timetable all the chancellor ever needs to do is demonstrate he plans to get rid of the structural deficit five years from a given point in time. He doesn’t actually need to achieve these plans. Each year the date at which the target will be met can just be pushed back by another twelve months (as happened in last year’s autumn statement). Promises rather than delivery will suffice.

Now, a target without a fixed date is clearly a flexible thing. But I doubt this makes it irrelevant to real decisions.  Politics and the chancellor’s craving for ‘credibility’ are likely to result in the target affecting the cuts Osborne actually makes in the here and now.  He won’t want his target to become a joke – the mañana target. Say, for instance, Osborne announces next Wednesday that an extra £15bn of consolidation is needed in 2017/18 - will that really have no impact on the real choices made about the next few years? He may well believe it is vital that he demonstrates additional fiscal resolve –by implementing extra cuts, not just making more promises.  

But in deciding on the timing of any new cuts Osborne faces contradictory pressures. On the one hand, he may well want to bolster credibility as well as build up the size of spending reductions by acting quickly, for instance freezing spending now on aspects of welfare in order that savings accumulate over the forthcoming years.

Alternatively, there are strong arguments for thinking he’d want to push cuts down the road (as his target allows him to do). Most obviously this is because the economy is currently so weak only a fool would contemplate further undermining it.  But there is another subtler reason for playing it long. If the chancellor has a hunch that the true output gap is actually larger than the OBR currently believes he may want to defer cuts – particularly those cuts that he doesn’t actually want to make – in the hope that over the next few years the OBR revises its view. If this hunch turned out to be correct, then at some point the OBR would end up announcing that the output gap is larger (and the structural deficit smaller) than they previously thought.

The result? A return to growth would solve more of our fiscal problems than we currently expect and Osborne (or indeed Balls) would be in the happy position of being able to scale back some of the cuts that have been pencilled in.  Of course, things could turn out worse rather than better than current OBR assumptions. No-one knows. But in an uncertain world one thing is clear: the current target on the structural deficit magnifies rather than minimises the confusion.      

Nor should we forget that the structural deficit isn’t the only fiscal rule in a spot of trouble. The chancellor’s second target – the commitment to reduce debt as a share of GDP by 2015 - is likely to be breached next week (unless a Treasury accounting fiddle is used to avert this). Either way, the rule is highly arbitrary. If the debt to GDP ratio falls marginally in 2015 but grows thereafter then the rule would have been met but the public finances wouldn’t be sustainable.    

Osborne’s fiscal regime is in a state of disrepair.  The finest minds in the Treasury are currently chasing two faulty fiscal lodestars: a deficit rule which is impossible to accurately measure, resulting in starkly different estimates with very different implications for policy and politics; and a debt rule which is highly arbitrary and tells us very little about the nation’s longer term fiscal health.     

All of which would lead you to think that there would be a major debate – not least on the centre-left - about alternatives to Osborne’s rules. After all, fiscal policy is the issue of our times and will define the next Parliament as much as it has this one. To be fair there are indeed those setting out new and interesting thoughts on the type of framework that might better ensure fiscal sustainability whilst taking account of the strength of the economy  and without falling foul of either false precision or arbitrariness. For now this conversation is only happening at the margins. In the meantime we are stuck with fiscal rules that aren’t fit for purpose. That’s likely to remain the case regardless of what George Osborne says in the Autumn Statement.

Chancellor of the Exchequer George Osborne. Source: Getty

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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David Osland: “Corbyn is actually Labour’s only chance”

The veteran Labour activist on the release of his new pamphlet, How to Select or Reselect Your MP, which lays out the current Labour party rules for reselecting an MP.

Veteran left-wing Labour activist David Osland, a member of the national committee of the Labour Representation Committee and a former news editor of left magazine Tribune, has written a pamphlet intended for Labour members, explaining how the process of selecting Labour MPs works.

Published by Spokesman Books next week (advance copies are available at Nottingham’s Five Leaves bookshop), the short guide, entitled “How to Select or Reselect Your MP”, is entertaining and well-written, and its introduction, which goes into reasoning for selecting a new MP and some strategy, as well as its historical appendix, make it interesting reading even for those who are not members of the Labour party. Although I am a constituency Labour party secretary (writing here in an expressly personal capacity), I am still learning the Party’s complex rulebook; I passed this new guide to a local rules-boffin member, who is an avowed Owen Smith supporter, to evaluate whether its description of procedures is accurate. “It’s actually quite a useful pamphlet,” he said, although he had a few minor quibbles.

Osland, who calls himself a “strong, but not uncritical” Corbyn supporter, carefully admonishes readers not to embark on a campaign of mass deselections, but to get involved and active in their local branches, and to think carefully about Labour’s election fortunes; safe seats might be better candidates for a reselection campaign than Labour marginals. After a weak performance by Owen Smith in last night’s Glasgow debate and a call for Jeremy Corbyn to toughen up against opponents by ex Norwich MP Ian Gibson, an old ally, this pamphlet – named after a 1981 work by ex-Tribune editor Chris Mullin, who would later go on to be a junior minister under Blai – seems incredibly timely.

I spoke to Osland on the telephone yesterday.

Why did you decide to put this pamphlet together now?

I think it’s certainly an idea that’s circulating in the Labour left, after the experience with Corbyn as leader, and the reaction of the right. It’s a debate that people have hinted at; people like Rhea Wolfson have said that we need to be having a conversation about it, and I’d like to kickstart that conversation here.

For me personally it’s been a lifelong fascination – I was politically formed in the early Eighties, when mandatory reselection was Bennite orthodoxy and I’ve never personally altered my belief in that. I accept that the situation has changed, so what the Labour left is calling for at the moment, so I see this as a sensible contribution to the debate.

I wonder why selection and reselection are such an important focus? One could ask, isn’t it better to meet with sitting MPs and see if one can persuade them?

I’m not calling for the “deselect this person, deselect that person” rhetoric that you sometimes see on Twitter; you shouldn’t deselect an MP purely because they disagree with Corbyn, in a fair-minded way, but it’s fair to ask what are guys who are found to be be beating their wives or crossing picket lines doing sitting as our MPs? Where Labour MPs publicly have threatened to leave the party, as some have been doing, perhaps they don’t value their Labour involvement.

So to you it’s very much not a broad tool, but a tool to be used a specific way, such as when an MP has engaged in misconduct?

I think you do have to take it case by case. It would be silly to deselect the lot, as some people argue.

In terms of bringing the party to the left, or reforming party democracy, what role do you think reselection plays?

It’s a basic matter of accountability, isn’t it? People are standing as Labour candidates – they should have the confidence and backing of their constituency parties.

Do you think what it means to be a Labour member has changed since Corbyn?

Of course the Labour party has changed in the past year, as anyone who was around in the Blair, Brown, Miliband era will tell you. It’s a completely transformed party.

Will there be a strong reaction to the release of this pamphlet from Corbyn’s opponents?

Because the main aim is to set out the rules as they stand, I don’t see how there can be – if you want to use the rules, this is how to go about it. I explicitly spelled out that it’s a level playing field – if your Corbyn supporting MP doesn’t meet the expectations of the constituency party, then she or he is just as subject to a challenge.

What do you think of the new spate of suspensions and exclusions of some people who have just joined the party, and of other people, including Ronnie Draper, the General Secretary of the Bakers’ Union, who have been around for many years?

It’s clear that the Labour party machinery is playing hardball in this election, right from the start, with the freeze date and in the way they set up the registered supporters scheme, with the £25 buy in – they’re doing everything they can to influence this election unfairly. Whether they will succeed is an open question – they will if they can get away with it.

I’ve been seeing comments on social media from people who seem quite disheartened on the Corbyn side, who feel that there’s a chance that Smith might win through a war of attrition.

Looks like a Corbyn win to me, but the gerrymandering is so extensive that a Smith win isn’t ruled out.

You’ve been in the party for quite a few years, do you think there are echoes of past events, like the push for Bennite candidates and the takeover from Foot by Kinnock?

I was around last time – it was dirty and nasty at times. Despite the narrative being put out by the Labour right that it was all about Militant bully boys and intimidation by the left, my experience as a young Bennite in Tower Hamlets Labour Party, a very old traditional right wing Labour party, the intimidation was going the other way. It was an ugly time – physical threats, people shaping up to each other at meetings. It was nasty. Its nasty in a different way now, in a social media way. Can you compare the two? Some foul things happened in that time – perhaps worse in terms of physical intimidation – but you didn’t have the social media.

There are people who say the Labour Party is poised for a split – here in Plymouth (where we don’t have a Labour MP), I’m seeing comments from both sides that emphasise that after this leadership election we need to unite to fight the Tories. What do you think will happen?

I really hope a split can be avoided, but we’re a long way down the road towards a split. The sheer extent of the bad blood – the fact that the right have been openly talking about it – a number of newspaper articles about them lining up backing from wealthy donors, operating separately as a parliamentary group, then they pretend that butter wouldn’t melt in their mouths, and that they’re not talking about a split. Of course they are. Can we stop the kamikazes from doing what they’re plotting to do? I don’t know, I hope so.

How would we stop them?

We can’t, can we? If they have the financial backing, if they lose this leadership contest, there’s no doubt that some will try. I’m old enough to remember the launch of the SDP, let’s not rule it out happening again.

We’ve talked mostly about the membership. But is Corbynism a strategy to win elections?

With the new electoral registration rules already introduced, the coming boundary changes, and the loss of Scotland thanks to decades of New Labour neglect, it will be uphill struggle for Labour to win in 2020 or whenever the next election is, under any leadership.

I still think Corbyn is Labour’s best chance. Any form of continuity leadership from the past would see the Midlands and north fall to Ukip in the same way Scotland fell to the SNP. Corbyn is actually Labour’s only chance.

Margaret Corvid is a writer, activist and professional dominatrix living in the south west.