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 director of the National Institute of Economic and Social Research and former chief economist at the Cabinet Office.

John Moore
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The man who created the fake Tube sign explains why he did it

"We need to consider the fact that fake news isn't always fake news at the source," says John Moore.

"I wrote that at 8 o'clock on the evening and before midday the next day it had been read out in the Houses of Parliament."

John Moore, a 44-year-old doctor from Windsor, is describing the whirlwind process by which his social media response to Wednesday's Westminster attack became national news.

Moore used a Tube-sign generator on the evening after the attack to create a sign on a TfL Service Announcement board that read: "All terrorists are politely reminded that THIS IS LONDON and whatever you do to us we will drink tea and jolly well carry on thank you." Within three hours, it had just fifty shares. By the morning, it had accumulated 200. Yet by the afternoon, over 30,000 people had shared Moore's post, which was then read aloud on BBC Radio 4 and called a "wonderful tribute" by prime minister Theresa May, who at the time believed it was a genuine Underground sign. 

"I think you have to be very mindful of how powerful the internet is," says Moore, whose viral post was quickly debunked by social media users and then national newspapers such as the Guardian and the Sun. On Thursday, the online world split into two camps: those spreading the word that the sign was "fake news" and urging people not to share it, and those who said that it didn't matter that it was fake - the sentiment was what was important. 

Moore agrees with the latter camp. "I never claimed it was a real tube sign, I never claimed that at all," he says. "In my opinion the only fake news about that sign is that it has been reported as fake news. It was literally just how I was feeling at the time."

Moore was motivated to create and post the sign when he was struck by the "very British response" to the Westminster attack. "There was no sort of knee-jerk Islamaphobia, there was no dramatisation, it was all pretty much, I thought, very calm reporting," he says. "So my initial thought at the time was just a bit of pride in how London had reacted really." Though he saw other, real Tube signs online, he wanted to create his own in order to create a tribute that specifically epitomised the "very London" response. 

Yet though Moore insists he never claimed the sign was real, his caption on the image - which now has 100,800 shares - is arguably misleading. "Quintessentially British..." Moore wrote on his Facebook post, and agrees now that this was ambiguous. "It was meant to relate to the reaction that I saw in London in that day which I just thought was very calm and measured. What the sign was trying to do was capture the spirit I'd seen, so that's what I was actually talking about."

Not only did Moore not mean to mislead, he is actually shocked that anyone thought the sign was real. 

"I'm reasonably digitally savvy and I was extremely shocked that anyone thought it was real," he says, explaining that he thought everyone would be able to spot a fake after a "You ain't no muslim bruv" sign went viral after the Leytonstone Tube attack in 2015. "I thought this is an internet meme that people know isn't true and it's fine to do because this is a digital thing in a digital world."

Yet despite his intentions, Moore's sign has become the centre of debate about whether "nice" fake news is as problematic as that which was notoriously spread during the 2016 United States Presidential elections. Though Moore can understand this perspective, he ultimately feels as though the sentiment behind the sign makes it acceptable. 

"I use the word fake in inverted commas because I think fake implies the intention to deceive and there wasn't [any]... I think if the sentiment is ok then I think it is ok. I think if you were trying to be divisive and you were trying to stir up controversy or influence people's behaviour then perhaps I wouldn't have chosen that forum but I think when you're only expressing your own emotion, I think it's ok.

"The fact that it became so-called fake news was down to other people's interpretation and not down to the actual intention... So in many interesting ways you can see that fake news doesn't even have to originate from the source of the news."

Though Moore was initially "extremely shocked" at the reponse to his post, he says that on reflection he is "pretty proud". 

"I'm glad that other people, even the powers that be, found it an appropriate phrase to use," he says. "I also think social media is often denigrated as a source of evil and bad things in the world, but on occasion I think it can be used for very positive things. I think the vast majority of people who shared my post and liked my post have actually found the phrase and the sentiment useful to them, so I think we have to give social media a fair judgement at times and respect the fact it can be a source for good."

Amelia Tait is a technology and digital culture writer at the New Statesman.