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The Osborne audit: what have we learned?

Ahead of this week’s budget, the economic historian Robert Skidelsky examines how four years of austerity have affected Britain.

George Osborne by Ralph Steadman

On Wednesday, for the first time in four Budgets, George Osborne will be able to claim plausibly that Britain has come out of the Great Recession. Growth was 1.8 per cent in 2013 and is expected to be between 2.4 and 2.8 per cent in 2014. That’s the good news. The bad news is that the economy is still 1.4 per cent smaller than it was in 2008 and 14 per cent smaller than it would have been had the recession not struck.

That lost output, amounting to £210bn, is gone for ever. Every household is almost £2,000 poorer on average than it would have been; the government’s revenue is £70bn less – that is (say) 70 hospitals, 1,000 schools and 250,000 housing units not built. Or, to take another number: 650,000 people now unemployed would have been in employment.

This is not all. Every year of the recession has reduced our growth potential. Economists use the word “hysteresis” to describe the rusting away of economic resources through misuse or underuse. Hysteresis has to do not just with the output lost during the slump but with the potential output lost in the subsequent period of near-zero growth. Headline unemployment is an incomplete measure of such rusting, because it also occurs when people work less than they want to, or are in jobs below their skill level, or just leave the workforce. A physics graduate may be able to find employment as a taxi driver or waiter. But how much physics “potential” will he retain after years of doing such jobs?

These are heavy costs. Just as George Osborne did not cause the recession, he has not caused the recovery. Intertwined economies usually fall and rise together, and Britain has been lifted off the rocks by the global upturn. Yet policy does make a difference – to the speed of recovery, its strength and its durability. On all three counts, the Chancellor’s policy is open to severe criticism.

Fiscal austerity slowed and weakened the recovery; monetary looseness ensured that it would be highly unbalanced and therefore fragile. Significantly, the official independent watchdog, the Office for Budgetary Responsibility (OBR), in its December 2013 Economic and Fiscal Outlook, judged the “surprising” growth surge of the past year to be “cyclical . . . rather than indicating stronger underlying growth potential”. That the bank rate needs to be kept near zero shows that the economy is still on life support. 

Missed budget targets

Let’s start with the targets Osborne set himself in his first Budget of June 2010. He inherited a prospective deficit for 2010-2011 of £149bn, equivalent to 10.1 per cent of GDP. He promised to get this down to £20bn, or 1.1 per cent of GDP, in 2015-2016, mainly through spending cuts. By 2013-2014 the deficit should have been £60bn. In fact, it is projected to be £111bn, or 6.8 per cent of GDP this year. Now the Chancellor must cut spending by another £62bn over the next four years to meet his original target, two years later than promised.

There were no growth targets – those were abandoned years ago – but there were growth forecasts. Fulfilment of Osborne’s budgetary targets depended on the economy growing at 2.3 per cent in 2011, 2.8 per cent in 2012 and 2.9 per cent in 2013. In fact, the growth rates achieved were 0.9 per cent in 2011, 0.1 per cent in 2012 and 1.8 per cent in 2013. In other words, Osborne’s failure to meet his deficit targets was caused by the failure of the economy to grow to expectation.

The official explanation for this failure is “bad luck”. In familiar language, policy was “blown off course” by unexpected events. Chief of these was said to be the eurozone sovereign debt crisis, which started with fears of a Greek default in March 2010 and then spread, by contagion, to Ireland, Spain, Portugal and Italy. For the next three years the eurozone slumped almost as badly as Britain. The eurozone slump, it is argued, stymied the British recovery.

There are two things wrong with this. First, with its own currency and control of its exchange rate, Britain should have done better, not worse, than the members of the eurozone. Second, although the eurozone financial crisis undermined confidence, and hit British exports, the European slump arose in part because European finance ministers were pursuing exactly the same policy as was George Osborne. So it makes more sense to say that the coincident slumps of the eurozone and Britain between 2010 and 2013 were the effects of a single cause: the policy of cutting public spending. The “unexpected” element in the situation was the failure of so-called fiscal consolidation to deliver growth.

Why should anyone expect a policy of cutting public spending in a recession to produce growth? It is counterintuitive. A recession is caused by businesses and households spending less. If the government also spends less, one would expect this to worsen, not reverse, the recession. This, I think, is exactly what happened.

Making the case: George Osborne on his first Budget Day, 2010

Primitive economics

Over the past four years, I kept asking myself: what did Osborne have to believe to convince himself that cutting government spending was necessary to “get the economy moving again”? His core belief, I concluded, is ideological. This is that state spending is heavily wasteful. From this, it follows that the smaller the share of GDP spent by the state, the larger GDP will be, because the private sector allocates resources more efficiently. It’s as simple as that.

This ideological fundament generates three seemingly common-sense, short-run propositions, which I call “primitive economics”. The first, known by the cognoscenti as “real crowding-out”, states that if the government commandeers an extra quantum of “real” resources such as workers and factories this will deprive the private sector of their use.

Second, there is the idea of “financial crowding-out”. If the government borrows additional financial resources (money) to fund its spending, this will force up interest rates and oblige businesses to pay more for their money.

Finally, there is “Ricardian equivalence”. This says that government borrowing is just deferred taxation. Expecting to pay more taxes tomorrow, people increase their savings today. So increased government consumption “crowds out” an equivalent volume of private consumption.

Eighty years ago, John Maynard Keynes pointed out that this trade-off view of the relationship between public and private spending may be valid at full employment, but is quite wrong in a severe recession.

In such a situation, extra government spending does not necessarily “crowd out” real resources. Where there is slack in the economy – the labour supply exceeding labour demand as today – extra government spending can bring into use the idle resources by creating more employment. There is no displacement; the public spending is not done at the expense of private spending. Rather, the public spending compensates for a lack of private spending.

Second, it is not true that whatever the government borrows is a subtraction from a fixed pool of savings that would otherwise be invested by the private sector. Many savings are just lying idle in bank accounts, because the private sector lacks the confidence to invest them. By offering investors a risk-free rate of return, the government can put these savings to active use. And by generating employment, this “crowds in” additional savings.

Finally, “Ricardian equivalence” ignores how government spending can pay for itself, not just by increasing national income (and therefore government revenue) but by investing in projects that create value for the economy, such as schools, houses, transport infrastructure, green energy, and so on.

Probably few policymakers today believe these “crowding-out” stories literally. I doubt whether even George Osborne does. But they believe that governments need to behave as though they believe these ideas in order to retain the “confidence” of the markets.

So, the question is: why do the markets believe them? Why do they scream “Default” whenever government borrowing goes up? Why did Osborne feel that unless he got the deficit under firm control, he would be spooked by the markets?

The reason is that, for the past 30 years, all economically literate or market-savvy persons (who do not generally include politicians) have been slaves to “models” of the economy which ruled out severe recessions by assumption. Even social democrats, who wanted to use the tax system to redistribute the wealth created by the private sector, bought in to the dominant view that, on average, markets do not make mistakes. This was the tragedy of Gordon Brown; it is also why Labour under Ed Miliband has been unable to deploy a convincing case against Osbornite economics.

Consequently, it is not surprising that governments and central banks failed to take precautions against a slump happening; more surprising that they did not thoroughly revise their beliefs when it did happen. To some extent, they did. When the world economy crashed in the winter of 2008 all the main governments came in with bank bailouts and stimulus packages. But as soon as the danger of another Great Depression was removed, the old orthodoxies reasserted themselves. In particular, as it was bound to do, the slump left a legacy of rising deficits and taxpayer liabilities. In this kind of climate, fears about the solvency of governments seemed reasonable.

And mainstream economics offered no help at all. What was going on, the economists said, was just a readjustment of economic life from one optimum equilibrium to another. Thus there was no “output gap” that needed to be filled by extra government spending. Rather, what needed to be done was to cut down state spending in order to make the existing output more productive. The Chancellor is no economist: but this presentation played to his ideological preconceptions. In a world-view of this type, there is no distinction between the short run and the long run. We always live in the long run, and if we leave the long run to the markets, all will be for the best. 

Delusions

A world in which beliefs and facts have come so far apart will be particularly prone to delusionary thinking. The delusion was that policies that made the recession worse would produce recovery. This delusion was abetted by reputable economists. Three years ago, the doctrine of “expansionary fiscal contraction” was all the rage and a huge research effort went into trying to prove its core proposition: that the less the government spends, the faster the economy will grow. The econometricians produced some striking correlations. One claim was that “an increase in government size by 10 percentage points is associated with a 0.5 to 1 per cent lower annual growth”. In April 2010, Alberto Alesina of Harvard University assured European finance ministers that “many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run”.

An International Monetary Fund paper in 2012 brought Alesina’s hour of glory to an end. Going through the same data as he had examined, the IMF authors pointed out: “While it is plausible to conjecture that confidence effects have been at play in our sample of consolidations, during downturns they do not seem to have ever been strong enough to make the consolidations expansionary at least in the short run.” Fiscal contraction is contractionary, full stop.

George Osborne has said publicly that he was influenced by Carmen Reinhart and Kenneth Rogoff. These two Harvard economists claimed that their data showed that countries’ growth slows sharply if their debt-to-GDP ratio exceeds 90 per cent. It turned out that their findings were skewed by the vast overweighting of one country in their sample. But a much more important error was their confusion between correlation and causation, also seen in the work of Alesina. High debt levels may cause lack of growth but a lack of growth may cause high debt levels; or both may be due to some other factor(s). How, one asks, can good statisticians make these kinds of mistakes? Only, I think, because their theory or model already tells them that this is the way the causation has to run, so that their only task is to establish a correlation.

Quantitative easing to the rescue?

With the failure of fiscal “consolidation” to revive the economy, the Chancellor increasingly turned to monetary policy. This fitted his ideology. Orthodox monetary policy works by the central bank targeting short-term market interest rates, providing banks with the reserves needed to keep the rates on target and, by varying the rates (or expectations of future rates), influencing the volume of private-sector lending and borrowing. It bypasses fiscal policy, which is why it is attractive to those who dislike state intervention. Since 2008, monetary policy has been ultra-loose or “unorthodox”. Not only has the bank rate been kept at 0.5 per cent for a record length of time, but the Bank of England has injected £375bn of “new money” into the economy, £225bn of it before Osborne became Chancellor. This is known as “quantitative easing” (QE).

How big a part has QE played in producing a recovery? The quick answer is that no one knows for sure. Unlike government spending, which has a direct effect on the economy, monetary policy works indirectly by inducing private households and businesses to change their behaviour – to save more or spend more. QE is supposed to work through two “transmission channels”: the bank lending channel and the portfolio rebalancing channel.

The central bank activates both channels by buying government bonds (gilts), mainly from non-banks. The sellers of the bonds receive cash; they deposit their extra cash with the commercial banks. In the first transmission channel, this is supposed to increase bank lending. The banks have more cash to lend out, causing them to lower their interest rates. As a result, more money is borrowed by businesses and households; the spending of the loans raises total spending, and therefore output, in the economy.

Early experience of QE showed that this was not happening: the banks were hoarding their cash, not lending it out. The architects of QE had underestimated the damage that banks had suffered as a result of the collapse of their assets in the crash, and therefore their desire to rebuild their reserves. What Osborne then did was to start subsidising bank lending. The Funding for Lending scheme, introduced in July 2012, was supposed to stimulate bank loans to businesses. It failed to do this – business lending is still well down from its pre-crash levels.

Desperate to get something in the economy going up, the Chancellor switched to Help to Buy in April and October 2013, which insured banks for a 15 per cent loss on 95 per cent mortgages. This has certainly contributed to the recent surge in house-buying and the rise in house prices.

It should be noticed, however, that both attempts to boost bank lending are fiscal policy by the back door, as the contingent subsidies are liabilities for the taxpayer.

Because of the disappointing results of bank lending, the Bank of England came to rely more on the second transmission channel, portfolio rebalancing, to stimulate the economy. Bond purchases by the Bank swell the cash deposits of the sellers, encouraging them to spend. Simultaneously, they reduce the supply of gilts in the market, which causes the price of gilts to rise and their yields to fall. The “search for yield” then induces investors to switch from gilts to stock-market securities and other assets, making it easier for businesses to raise capital. The increase in the price of these assets also expands the net wealth of the asset-holders, causing them to spend more. These various effects will result in growing GDP. Certainly the rise in stock-market and house prices has contributed to a “feel-good” factor, which is bolstering the current optimism about future prospects.

Set against these benefits are two costs. By encouraging excessive risk-taking, QE may reignite the pre-crash asset bubble, against which the new governor of the Bank of England, Mark Carney, has warned. The second is the increase in inequality. Of this, John Kay wrote in the Financial Times: “In the modern financial economy, the main effect of QE is to boost asset prices . . . the one certain outcome of QE is that those with assets benefit relative to those without . . . these policies may not benefit the non-financial economy much, but they are helpful to the financial services sector and those who work in it.”

The trouble with unorthodox monetary policy was that it is not unorthodox enough. Rather than try to increase private-sector cash balances, the Bank should have lent the money directly to the government to spend on public investment. We can be sure the government would not have hoarded the cash! But this operation would have blurred the line between monetary and fiscal policy, and thus the sacred ideological divide between the private and public sectors.

To put the matter crudely: a recovery based on stuffing the mouths of bankers with gold will be weaker and less durable than a recovery based on an upsurge of mass spending power. 

Conclusions

Wealth and income have been growing more unequal in Britain since the 1980s. George Osborne has not created the inequality; but he has exacerbated it by dragging out the slump and using lopsided means to bring about the recovery. Britain may well emerge from the recession with a problem of structural underconsumption. Investment is driven by consumption, so when consumption falls off, so does investment. A tendency to domestic underconsumption – unless offset by a buoyant demand for exports – will result in what economists such as Larry Summers have started to call “secular stagnation”. The chief symptom of this will be rising structural underemployment: a slackening of demand for labour which does not reverse itself with recovery.

This brings us back to the ideological fundament. It is the Chancellor’s firm belief that the government’s share of total spending should be reduced as much as possible. Spending financed by deficits is twice cursed, not just because government spending is wasteful, but because it enables governments to pass on the cost of waste to future generations. Hence Osborne’s pledge to eliminate the Budget deficit entirely. This is tantamount to saying that the government expects to pay out of taxes for all the schools, hospitals, housing and transport systems that it builds. Because all Conservative governments want to reduce taxes as well, this amounts to a vast programme to privatise virtually all public services.

At this point, the ideology destroys sane economics. A sensible view of public spending would distinguish between capital spending and current spending. It would enable one to say that deficits resulting from excessive current spending are bad because they do not generate any revenue and add to the national debt, but deficits that are incurred on capital spending can raise productivity, improving the country’s long-run potential. A sensible Osborne policy would have been to confine cuts to the current account and offset these fully by expanding public investment in green projects, transport infrastructure and social housing, as well as export-oriented small and medium-sized businesses (SMEs). The Business Secretary, Vince Cable, has been arguing this case inside the government; lip-service is paid to the principle, but public investment is still 35 per cent down from the pre-crash levels.

What George Osborne has done is to bring an ideological fervour to a defective theory of macroeconomic policy: the theory that additional government spending can, under no circumstances, move the economy to a better-equilibrium growth path. What may be rational to believe when the economy is fully employed is palpably wrong when resources stand idle.

Moreover, it is not Osborne and his friends and bankers and Top People who suffer. It is the ordinary people of this country, whose lives and prospects are wrecked or diminished. Four years of George Osborne have been four years too many.

Robert Skidelsky is a cross-bench peer and a leading biographer of J M Keynes. His most recent book is “Five Years of Economic Crisis” (Centre for Global Studies, £5)

This article first appeared in the 12 March 2014 issue of the New Statesman, 4 years of austerity

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Tearing down the "caliphate": on the frontline against Islamic State in Mosul

Truck bombs and drone warfare in the fight to take back Iraq’s second city from Islamic State.

The battle to retake west Mosul began, for me, rattling around in an armoured Humvee with two Abaases. “I’m Abaas One. He’s Abaas Two,” the driver, Abaas Almsebawy, said in English with a broad smile, pointing to the gunner on top.

“I have killed two Da’esh,” Abaas Two said, using an Arabic acronym for the so-called Islamic State (IS). “Well, one for sure. The other one crawled away but he was bleeding badly. I was told he died.”

Abaas One was jealous of his gunner’s luck. He was shot twice by IS in the city of Ramadi, in central Iraq; he still had a bullet lodged in his back. “The doctor said it is my gift from Da’esh,” he told me and laughed.

Over the sound of gunfire and mortars, the two Abaases called out to each other, giving directions, spotting targets. The cry of “Abaaaaas!” was constantly in the air. One from Babylon, the other from Baghdad, they stretched out on a felt blanket inside the armoured vehicle during lulls in the fighting and fell asleep, oblivious to its discomforts and the IS mortars landing outside.

They had been involved in the fighting in the east of the city, which it had taken 100 days to recapture, in hard, street-by-street clashes and through an onslaught of IS car and truck bombs. Yet the battle to retake the west, which began on Sunday 19 February and is being led by Iraq’s Emergency Response Division (ERD) and counterterrorism forces, has proved different – and faster.

Abaas One, the driver, was exhilarated. As Iraqi army helicopters flew overhead and the air force strafed villages with machine-gun fire and rockets, he rolled on, part of an armoured assault on a front that stretched for miles. His Humvee was built for this kind of terrain, moving at speed across the desert towards villages, the airport and eventually the city of Mosul.

Something else was different about this battle, too. These men were not technically soldiers: they were policemen. Abaas One went into battle in a hooded top and a leather jacket. Stuck outside manning his gun, Abaas Two, like a fighter from another age, wore a greatcoat, small, circular spectacles and a woolly hat. One lean and broad-shouldered, the other bulky and round-faced, they were a contrast but a good fit.

The Abaases were part of Iraq’s elite ERD, which has led the charge into the west of the city, just as the country’s heralded “Golden Division”, the counterterrorism unit, had pushed into the east. The ERD, part of the ministry of interior, is the less experienced junior brother of the battle-hardened Golden Division but it was determined that west Mosul would be its prize. It made swift progress and, as it took back village after village from IS, troops posed for selfies with enemy corpses on the roadside.

The closer to Mosul you were, the more charred bodies you would see, lying along the route. Two in a ditch, killed by a mortar, and two on the road, the motorcycle they were travelling on cut in half by an air strike.

In command of the 1st Brigade was Colonel Falah al-Wabdan. In Ramadi in 2015, he and his men had been cut off and surrounded by IS forces and had escaped only when more troops came to their rescue.

As he stood on the ruins of a former palace that had belonged to one of Saddam Hussein’s brothers, he had a view of all of Mosul. “I will be very glad when I see my forces move forward,” he said. “Also [when I see that] my soldiers are all safe. And I will be even happier when we have killed IS. These people [IS] are like a disease in the body, and we are now removing it, day after day.”

From there, the Iraqi forces took the town of Abu Saif, and then, in a six-hour battle, what was left of Mosul’s airport. Its runways were in ruins and its terminal buildings reduced to rubble. Yet that was the last open ground before they reached the city. By the end of the week, Colonel Falah’s forces had breached the IS defences. Now they were heading into the dense and narrow streets of the city’s old town. Meanwhile, the elite Golden Division was the secondary force, having earlier been bogged down in heavy fighting.

The competition between the two rival divisions had helped to accelerate the advance. The ERD, however, had a secret weapon. “We need to ask your men to hold off, sir. We have helicopters in the air,” the US special forces officer told an Iraqi lieutenant colonel on the rooftop as the assault on Abu Saif was in full force.

The Iraqi mortar team in the orchard and olive grove below held fire. Then the mighty thud of coalition air strikes could be heard and, just two miles away, a huge, grey cloud rose above the town.

 

***

It is Iraqis who are doing most of the fighting and the dying in the battle against IS, but since the Pentagon relaxed its rules of engagement late last year more Americans are at or near the front lines. They are calling in air strikes and laying down fire from their MRAP (“mine-resistant ambush-protected”) vehicles. They are not in uniform but, despite being a covert force, they are conspicuous and still wear the Stars and Stripes on their helmets. When journalists, especially cameramen, approach, they turn their backs.

In and around Mosul, it is more common now to get stuck in a traffic jam of US vehicles: either artillery or route-clearance teams. The Pentagon will soon respond to President Donald Trump’s call for a new plan – an intensification of US efforts against IS – but on the ground around this city, the Americans are already much more engaged in the fight against the militants.

British special forces were also in the area, in small numbers. Unlike their American counterparts, they went unseen.

Also seemingly absent in the early part of the offensive were civilians. It was three days before I met one: a shepherd, Ali Sultan Ali, who told me that he had only stayed behind because he could not get his flock to safety, as a nearby bridge had been destroyed.

As his sheep grazed, Ali explained: “They continued to attack this area, and now we are three days sitting in our homes, unable to go out because of attack and mortars . . . All the people, they have left this area one after another. They went to the east of the city of Mosul and they rented houses there because there are too many attacks here.”

Almost 60,000 people have fled west Mosul. In this area, with its population of three-quarters of a million, the battle has the potential to become a humanitarian crisis. Camps for internally displaced people still have capacity, but they are filling up.

IS, with anywhere between 500 and a few thousand fighters inside Mosul, is again using the local population as cover. But coalition air strikes may be taking a heavy toll on civilians, too. Officially, the US-led force claims that 21 civilians have died as a result of its bombs since November, but an independent monitoring group, Airwars, suggests that as many as 370 have been killed by Western aircraft since the start of March.

After the airport was recaptured, the columns of desperate people heading south began to thicken. The children among them usually held a white flag – perhaps a clever distraction thought up by terrified parents for their long walk to safety. Near the airport, I met a man who was too distraught to give his name. He told me that his brother’s family – six people – had been killed in an air strike. With his eyes red from crying and a blanket over his shoulders, he stood by the roadside, pleading. “For God’s sake,” he said. “We need you to help us. We need a shovel to get the dead bodies out of the building, because there are still two bodies under that building.”

But the battle was reaching a new pitch around him, so he left for a camp to look for his brother, the only remaining member of his family, he told me.

When the ERD finally made it inside the city, the first thing I noticed was the fresh laundry hanging in the yard of a family house. Then I heard a huge explosion as an IS truck bomb slammed into one of the Iraqi Abrams tanks.

The tank trundled on regardless and, by nightfall, the ERD had a tiny foothold inside the city: the al-Josak neighbourhood.

 

***

 

Islamic State is steadily losing Mosul and in Iraq, at least, the end of the so-called caliphate is in sight. In Abu Saif, state forces found the corpses of foreign fighters and, hiding, an IS operative who was still alive.

“He’s Russian,” one officer told me, but the man might have been from one of the central Asian republics. There were dead Syrians on the battlefield, too, men from Deir az-Zour; and for the tens of thousands of foreign fighters who joined IS, Syria will likely be a last refuge.

There may be another reason for the faster pace of the assault in west Mosul. The Iraqi forces, having fought IS in Ramadi, Fallujah and east Mosul, are getting better at dealing with the militant group’s tactics.

Truck bombs took a huge toll on their men in eastern Mosul. It is hard to describe the force unleashed when one of these detonates near you. In an early assault on one village, IS sent out four truck bombs and one of them exploded a few hundred metres from where I was standing. The shock wave ripped around the building and shards of engine went flying over our heads. My mouth was full of dirt. The debris was scattered for what seemed like miles around – yet no one died.

The suicide attack driver may have been taken out by an Iraqi soldier firing a rocket-propelled grenade (RPG). Whenever they advance now, men stand ready with RPGs, specifically to tackle the threat of car bombs. And they are becoming better at “hasty defence”. An armoured bulldozer is always in the lead. When a new street is taken, defensive berms made of mud or rubble are built to halt any speeding car bombs.

The IS fighters are crafty. Iraqi forces took me to a house on a captured street. Its yard was covered and the front wall was gone. Parked in the front room was what looked like an ambulance. Hidden from surveillance aircraft, this was another truck bomb.

“It’s still live. I wouldn’t go any further,” a major warned me. Even the bomb disposal team said that it was too dangerous to touch. It was later destroyed from a very safe distance.

Although the group violently suppresses modernity, IS fighters are innovators. They have no air force but they can get their hands on drones, which are commercially available, and they have “weaponised” them. If the battle for east Mosul was the attack of the car bombs, the battle for the west began as a drone war.

For the men on the ground, IS drones are enormously disconcerting. During a gun battle in west Mosul, I stopped to speak to some troops taking cover behind a wall. As I asked a final question, the captain I was talking to cupped his ear and leaned forward because of a sudden eruption of gunfire. Then, just to my right, I felt a shock wave of a detonation that seemed to come from nowhere.

A member of the BBC team was hit, receiving a small blast injury to the arm. When we got back to the Humvee, the driver explained that there had been a drone above us. The gunfire was from Iraqi troops trying to bring it down. The detonation had not come from nowhere; it had come from directly overhead. As we drove out of there, I noticed that the gunner had closed the hatch. We were protected inside, but he was outside manning his weapon, looking for more drones.

“They drop MK19 40mm grenades from the drones to stop the movements forward. All the time, they will use four to five drones to attack one location,” Captain Ali Razak Nama of the federal police explained. “As you know, we can’t always see these drones with our eyes, but if we do see them we can attack the drones with our rifles. [But] when we go into the battle, we are not looking at the skies. We are looking ahead of us for car bombs, suicide attackers, IEDs or snipers.”

A unit of the Golden Division was hit 70 times in a single day by wave upon wave of IS drones. The operator managed to drop a grenade inside a Humvee from above; all four men inside, members of a bomb disposal unit, were killed. Dozens more were injured that day.

The sound of a drone, even one of their own, is enough to make the Iraqi forces hit the dirt and scramble under a vehicle. They are difficult to bring down. I once watched as snipers and heavy machine-gunners opened fire on some drones; they managed to strike one but still it flew on.

The IS fighters control them from motorcycles in an attempt to prevent the operators being tracked and killed. They switch frequencies in the hope that they will not be jammed. Yet as a coalition commander told me: “The enemy aren’t going to win by dropping grenades from the sky. So it is certainly not a game-changer.” Iraqi and coalition forces now appear to be having success in countering the threat. Just how, they will not say, but in recent days there has been a “very significant” drop in their use.

 

***

 

Mosul has been the biggest battle for Iraqi forces against Islamic State, but commander after commander said that others had been tougher. In Ramadi and in Fallujah, IS had a better grip. In Mosul, the local people have been quicker to turn away from the militants.

In the eastern part of the city, the bazaars are busy again and children have returned to school. Girls are receiving education for the first time in nearly three years, since IS captured the city. The so-called caliphate was declared on 29 June 2014 and, four days later the new “caliph” and IS leader, Abu Bakr al-Baghdadi, made his first and only filmed appearance, delivering a sermon at the city’s al-Nuri Mosque. Iraqi forces are now in sight of the mosque, with its Ottoman-era leaning minaret.

Mosul is Iraq’s second-largest city and has a cosmopolitan heritage, but Islamists had influence here for many years before IS arrived. As one Mosulawi told me, after neglect by the Iraqi capital, “There is discontent with Baghdad, not support for Isis.”

Al-Baghdadi is believed to have fled the city already. According to US and Iraqi commanders, he is hiding out in the desert. Shia militiamen and Iraqi army forces are attempting to seal off escape routes to the west, into Syria. Yet senior commanders accept that in a city Mosul’s size, it will be impossible to close all escape routes. Capturing al-Baghdadi is not a priority, they say.

There is also an acknowledgement that neither his death nor the loss of Mosul will be the end of Islamic State. But in Iraq, at least, it will destroy the caliphate.

Quentin Sommerville is the BBC’s Middle East correspondent

This article first appeared in the 16 March 2017 issue of the New Statesman, Brexit and the break-up of Britain