What Osborne won't admit: growth has increased because of slower cuts

The Chancellor's claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data.

Many others – perhaps Fraser Nelson does it best – have poked fun at the most Panglossian elements of the Chancellor’s speech on Monday. But I’d like here to address the substantive arguments he makes about what the path of the UK economy over recent years says about the impact of fiscal policy on growth.

The Chancellor doesn’t deny that growth has been much weaker than forecast, although it’s worth repeating the scale of this underperformance. In June 2010, the Office of Budget Responsibility predicted that by now the economy would be about 7 per cent larger, driven by a sharp rise in business investment and exports, while the deficit would have fallen by two-thirds. What has actually happened? In fact, GDP has grown at less than a third of that rate, business investment has fallen, and the path of deficit reduction bears no resemblance at all to the original projections (which is, as I'll elaborate below, a good thing).    

But, the Chancellor argues, this underperformance has nothing to do with fiscal policy:

the composition and timing of the slowdown in GDP growth relative to forecast is better explained by external inflation shocks, the eurozone crisis and the ongoing impact of the financial crisis on financial conditions. 

The Chancellor claimed his analysis was supported by many "independent economists" - although, oddly, he failed to mention the IMF, which has been the most prominent independent organisation to argue the contrary. Of course, the IMF and those of us who thought the fiscal consolidation plan was too aggressive never denied that these other factors played a par (and that their reversal will indeed help boost recovery).  As I put it here:

it now seems clear that the negative impact of ‘Plan A’ on growth has been significantly greater than expected, although matters have also been exacerbated by even more damaging policy mistakes in the eurozone, as well as high commodity prices.

Coincidentally, on the same day the Chancellor made his speech, other "independent economists" (Oscar Jorda and Alan Taylor) published a widely reported paper suggesting precisely the opposite (an earlier, non-technical summary is here). They find, as shown in their chart:

Without austerity, UK real output would now be steadily climbing above its 2007 peak, rather than being stuck 2% below. 

And they conclude:

Fiscal contraction prolongs the pain when the state of the economy is weak, much less so when the economy is strong....Keynes is still right, after all: “The boom, not the slump, is the right time for austerity at the Treasury.

However, despite the weight of academic research, the Chancellor goes on to claim that current developments support his interpretation of recent past history:

Proponents of the ‘fiscalist’ story cannot explain why the UK recovery has strengthened rapidly over the last six months. The pace of fiscal consolidation has not changed, government spending cuts have continued as planned, and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.

But this is an obvious sleight of hand.  The claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data. Here is the OBR’s own chart. As Robert Chote, the OBR’s Chair puts it, "deficit reduction appears to have stalled".

Indeed, the OECD, the government’s favourite of the international forecasting bodies (since, as noted above, the IMF shares my interpretation of the impact of fiscal consolidation on growth) goes even further. According to its calculations, the UK is actually expanding its structural deficit in 2013. In other words, the government is engaging in fiscal stimulus.  Personally I find this implausible - the OBR's estimate is that the structural deficit was broadly flat in 2012-13 - but the data hardly seem consistent with the Chancellor's view.

How did this happen? As I explained earlier this year:

So what's going on? As I noted earlier, most of the deficit reduction has come from cutting public sector net investment (spending on schools, roads, hospitals, etc) roughly in half. Pretty much all the rest came from tax increases (note that the investment cuts and tax increases were both, to a significant extent, policies inherited from the previous government). And we can see when it happened - between 2009-10 and 2011-12.

But these sources of deficit reduction stopped in 2011-12, because the government belatedly realised that cutting investment was a major mistake and that the economic imperative was actually to do precisely the opposite (not that there was much investment left to cut); and it stopped putting up taxes overall. So we can see also what's happened since - with the impact of the weak economy on tax receipts reducing revenues, the deficit has been flat and is projected to stay flat.

So the Chancellor’s argument is simply a non sequitur, supported neither by the research evidence nor the data. 

As I wrote here at the turn of the year, we should give the government credit for not digging us further into a hole by trying to stick to its original plans. Fiscal consolidation has slowed, at least for the time being, and as a consequence it is playing a considerably smaller role in driving economic developments than it did two years ago. Meanwhile, the eurozone and global environment is, at least at present, considerably more favourable. Poor policy and bad luck has delayed recovery, relative to NIESR's original forecasts and everyone else's, but has not removed the ability of the UK economy to generate growth. 

So it is perfectly reasonable to ask economic forecasters (including both the OBR and us at NIESR) why we appear so far to have underpredicted the strength of the current upturn. But claiming that this improvement vindicates the earlier damaging mistake the government made by going for front-loaded fiscal consolidation in 2010 just doesn’t make any economic sense. 

George Osborne makes a speech on the economy at a construction site in east London. Photograph: Getty Images.

Jonathan Portes is senior fellow The UK in a Changing Europe and Professor of Economics and Public Policy, King’s College London.

Photo: Getty
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Who will take responsibility for the rise in far-right terrorism?

Muslims are asked to condemn Islamist terrorism – should the mainstream right do the same when the attackers are white?

Following the attack on a Finsbury Park mosque, both Theresa May and Amber Rudd have issued statements and delivered speeches adopting hard lines against Islamophobia and right-wing extremism. May has gone so far as stating that Islamophobia itself is a form of extremism.

These pronouncements have drawn positive responses from prominent members of the Muslim community such as Miqdaad Versi of the Muslim Council of Britain. But it is important to question whether or not this change in rhetoric signifies a genuine change in government policy.

On the face of it, there are reasons for tentative optimism. The seriousness with which politicians took the Finsbury Park attack is a significant change. On this, the government is ahead of the media. While other terrorism attacks have been condemned as unjustifiable violence, some newspapers framed the Finsbury Park attack as a "revenge".

In fact, radicalisation is not a one-off event, but takes place in a web of institutional, social and ideological conditions. Furthermore this ignores a much longer story about the drip, drip, drip of Islamophobic or anti-Muslim discourse which permeates British society. 

The government has played a part in legitimising this anti-Muslim sentiment. Let’s not forget that Prevent has, since its inception, disproportionately targeted Muslims. The impression of an "us and them" mentality is only underlined by its secrecy. Moreover, the Prevent agenda has conflated a variety of other social policy concerns relating to gender equality, sexual violence, and unemployment as "extremism" issues. For example, Amber Rudd herself suggested that Islamophobia would decline if grooming stopped, which can not only be seen as victim-blaming, but further contributes to stereotyping Muslims as the enemy within.

So are promises to get serious about Islamophobia more empty words from the Prime Minister?

Think about timing. Far-right extremism has been deadly. Mohammad Saleem was brutally murdered in 2013 in Birmingham by a far right extremist. Mushin Ahmed was killed in 2015 (and was notably called a "groomer" by his attacker as his head was stamped on).

Jo Cox was murdered by a far-right extremist this time last year. This is not even mentioning individuals such as Ryan McGee, who made a nail bomb and was intent on murdering immigrants.

Just twelve days ago, the Prime Minister claimed that Britain was too tolerant of extremism, and she was right. Just not in the way she meant it.

Britain has indeed been too tolerant of extremism of the far right kind. This is a rising problem, not just in the UK, but also in Europe.

According to the defence and security think-tank RUSI, far right extremists make up 33 per cent of the threat, with Islamic extremism slightly more at 38 per cent. Furthermore, one in four referrals to Channel, the UK deradicalisation programme, are from the far right.

We cannot forget the government itself peddles the tropes of far right hate. Think of David Cameron referring to migrants as "swarms", May’s hostile environment policy, complete with "go home vans" driving around in multicultural areas, and the uncritical embrace of Donald Trump’s presidency by the Prime Minister. 

The Muslim community has been told many times to fight terrorism from within, but will there be a similar response to far right extremism? The ongoing rhetorical attacks on multiculturalism, and the longstanding association of Islamist radicalisation with a lack of integration, rather than religiously inspired political violence, make it difficult to see how real change will happen.

This would require deep soul-searching, followed by serious changes in public debates about policies relating to both immigration and extremism. Until that happens, May’s words on Islamophobia will be nothing more than political PR.

But this PR also has a more sinister element. Although no specific new counter-terrorism legislation was announced in the Queen’s Speech, there was a promise that the government would review existing counter-terrorism laws, with a spokesman stressing that new legislation would be brought forward if needed.

May continues to lobby for increased executive powers to fight terrorism, which she has done since her time as home secretary. The policy on right-wing extremism is likely to follow that of Islamic extremism: it will focus only on ideology and it will ignore the wider context of structural racism and white privilege.

Ask yourselves, will white men ever be stopped and searched to the same extent as brown men? Will white women be seen as easy targets for violent attacks as Muslim women disproportionately are? Will far right extremists fear for their citizenship status?

And does the solution to extremism, in any form, truly lie in further oppressive legislation and more government power? We also need to be aware that powers extended to address extremism are likely to continue to have a disproportionate effect on minorities.

As long as there is no change in government policy, the status quo will continue to reinforce the same divisive narrative which is the bread and butter of every extremist group. After the Queen’s Speech, we continue to see no evidence of any serious attempt to reform policy and seriously address far right extremism. May’s empty words after the Finsbury Park attack represent nothing more than an opportunistic political move from a weakened Prime Minister who is desperate for approval – and for power.

Dr Maria Norris is a political scientist researching terrorism and national security. She is a Fellow at the  London School of Economics and Political Science. She tweets as @MariaWNorris.

Dr Naaz Rashid is a Research Fellow at the School of Law, Politics and Sociology at the University of Sussex and is author of Veiled Threats: Representing the Muslim Woman in Public Policy Discourse (Policy Press 2016) about the UK government's engagement with Muslim women as part of its Prevent agenda. She can be followed on Twitter @naazrashid.

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