Mark Carney: spending cuts have been "a drag on growth"

The Bank of England governor tells MPs what George Osborne doesn't want you to hear.

The most politically significant moment during Mark Carney's apperance before the Treasury select committee came when the Bank of England governor stated that "fiscal adjustment" (spending cuts and tax rises) "has been a drag on growth". 

This might appear to put him at odds with George Osborne who in his speech on the economy earlier this week, derided the "fiscalists" who claimed that the cuts had been more damaging than expected. But the Tory Treasury Twitter account has responded by stating that Carney's comments are "consistent" with Osborne's argument that the OBR's 2010 fiscal multipliers (which measure the effect of cuts and tax rises on growth) were not too optimistic. 

The Treasury did, however, refuse to concede that the cuts had, at least to some extent, depressed growth. As David Cameron was reminded by Robert Chote earlier this year (when he suggested that austerity had not hit output), the OBR's multipliers assume that "every £100 of fiscal consolidation measures reduce GDP in that year by around £100 for capital spending cuts, £60 for welfare and public services, £35 for increases in the VAT rate and £30 for income tax and National Insurance increases". Fiscal consolidation is estimated to have reduced GDP by 1.4 per cent in 2011-12 alone.

Cameron and Osborne are understandably reluctant to admit that the cuts mean growth has been lower than in normal circumstances. It allows Labour to argue that a less aggressive deficit reduction plan would have enabled higher levels of output. Which explains why you can expect Ed Balls and Ed Miliband to leap with glee on Carney's quote and the Tories to try and act as if they never heard him. 

Mark Carney, governor of the Bank of England, during a press conference following an address to business leaders in Nottingham on August 28, 2013. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

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