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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. 


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. 


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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The age of loneliness

Profound changes in technology, work and community are transforming our ultrasocial species into a population of loners.

Our dominant ideology is based on a lie. A series of lies, in fact, but I’ll focus on just one. This is the claim that we are, above all else, self-interested – that we seek to enhance our own wealth and power with little regard for the impact on others.

Some economists use a term to describe this presumed state of being – Homo economicus, or self-maximising man. The concept was formulated, by J S Mill and others, as a thought experiment. Soon it became a modelling tool. Then it became an ideal. Then it evolved into a description of who we really are.

It could not be further from the truth. To study human behaviour is to become aware of how weird we are. Many species will go to great lengths to help and protect their close kin. One or two will show occasional altruism towards unrelated members of their kind. But no species possesses a capacity for general altruism that is anywhere close to our own.

With the possible exception of naked mole-rats, we have the most social minds of all mammals. These minds evolved as an essential means of survival. Slow, weak, armed with rounded teeth and flimsy nails in a world of fangs and claws and horns and tusks, we survived through co-operation, reciprocity and mutual defence, all of which developed to a remarkable degree.

A review paper in the journal Frontiers in Psychology observes that Homo economicus  might be a reasonable description of chimpanzees. “Outsiders . . . would not expect to receive offers of food or solicitude; rather, they would be fiercely attacked . . . food is shared only under harassment; even mothers will not voluntarily offer novel foods to their own infants unless the infants beg for them.” But it is an unreasonable description of human beings.

How many of your friends, colleagues and neighbours behave like chimpanzees? A few, perhaps. If so, are they respected or reviled? Some people do appear to act as if they have no interests but their own – Philip Green and Mike Ashley strike me as possible examples – but their behaviour ­attracts general revulsion. The news is filled with spectacular instances of human viciousness: although psychopaths are rare, their deeds fill the papers. Daily acts of kindness are seldom reported, because they are everywhere.

Every day, I see people helping others with luggage, offering to cede their place in a queue, giving money to the homeless, setting aside time for others, volunteering for causes that offer no material reward. Alongside these quotidian instances are extreme and stunning cases. I think of my Dutch mother-in-law, whose family took in a six-year-old Jewish boy – a stranger – and hid him in their house for two years during the German occupation of the Netherlands. Had he been discovered, they would all have been sent to a concentration camp.

Studies suggest that altruistic tendencies are innate: from the age of 14 months, children try to help each other, attempting to hand over objects another child can’t reach. At the age of two, they start to share valued possessions. By the time they are three, they begin to protest against other people’s violation of moral norms.

Perhaps because we are told by the media, think tanks and politicians that competition and self-interest are the defining norms of human life, we disastrously mischaracterise the way in which other people behave. A survey commissioned by the Common Cause Foundation reported that 78 per cent of respondents believe others to be more selfish than they really are.

I do not wish to suggest that this mythology of selfishness is the sole or even principal cause of the epidemic of loneliness now sweeping the world. But it is likely to contribute to the plague by breeding suspicion and a sense of threat. It also appears to provide a doctrine of justification for those afflicted by isolation, a doctrine that sees individualism as a higher state of existence than community. Perhaps it is hardly surprising that Britain, the European nation in which neoliberalism is most advanced, is, according to government figures, the loneliness capital of Europe.

There are several possible reasons for the atomisation now suffered by the supremely social mammal. Work, which used to bring us together, now disperses us: many people have neither fixed workplaces nor regular colleagues and regular hours. Our leisure time has undergone a similar transformation: cinema replaced by television, sport by computer games, time with friends by time on Facebook.

Social media seems to cut both ways: it brings us together and sets us apart. It helps us to stay in touch, but also cultivates a tendency that surely enhances other people’s sense of isolation: a determination to persuade your followers that you’re having a great time. FOMO – fear of missing out – seems, at least in my mind, to be closely ­associated with loneliness.

Children’s lives in particular have been transformed: since the 1970s, their unaccompanied home range (in other words, the area they roam without adult supervision) has declined in Britain by almost 90 per cent. Not only does this remove them from contact with the natural world, but it limits their contact with other children. When kids played out on the street or in the woods, they quickly formed their own tribes, learning the social skills that would see them through life.

An ageing population, family and community breakdown, the decline of institutions such as churches and trade unions, the switch from public transport to private, inequality, an alienating ethic of consumerism, the loss of common purpose: all these are likely to contribute to one of the most dangerous epidemics of our time.

Yes, I do mean dangerous. The stress response triggered by loneliness raises blood pressure and impairs the immune system. Loneliness enhances the risk of depression, paranoia, addiction, cognitive decline, dem­entia, heart disease, stroke, viral infection, accidents and suicide. It is as potent a cause of early death as smoking 15 cigarettes a day, and can be twice as deadly as obesity.

Perhaps because we are in thrall to the ideology that helps to cause the problem, we turn to the market to try to solve it. Over the past few weeks, the discovery of a new American profession, the people-walker (taking human beings for walks), has caused a small sensation in the media. In Japan there is a fully fledged market for friendship: you can hire friends by the hour with whom to chat and eat and watch TV; or, more disturbingly, to pose for pictures that you can post on social media. They are rented as mourners at funerals and guests at weddings. A recent article describes how a fake friend was used to replace a sister with whom the bride had fallen out. What would the bride’s mother make of it? No problem: she had been rented, too. In September we learned that similar customs have been followed in Britain for some time: an early foray into business for the Home Secretary, Amber Rudd, involved offering to lease her posh friends to underpopulated weddings.



My own experience fits the current pattern: the high incidence of loneliness suffered by people between the ages of 18 and 34. I have sometimes been lonely before and after that period, but it was during those years that I was most afflicted. The worst episode struck when I returned to Britain after six years working in West Papua, Brazil and East Africa. In those parts I sometimes felt like a ghost, drifting through societies to which I did not belong. I was often socially isolated, but I seldom felt lonely, perhaps because the issues I was investigating were so absorbing and the work so frightening that I was swept along by adrenalin and a sense of purpose.

When I came home, however, I fell into a mineshaft. My university friends, with their proper jobs, expensive mortgages and settled, prematurely aged lives, had become incomprehensible to me, and the life I had been leading seemed incomprehensible to everyone. Though feeling like a ghost abroad was in some ways liberating – a psychic decluttering that permitted an intense process of discovery – feeling like a ghost at home was terrifying. I existed, people acknowledged me, greeted me cordially, but I just could not connect. Wherever I went, I heard my own voice bouncing back at me.

Eventually I made new friends. But I still feel scarred by that time, and fearful that such desolation may recur, particularly in old age. These days, my loneliest moments come immediately after I’ve given a talk, when I’m surrounded by people congratulating me or asking questions. I often experience a falling sensation: their voices seem to recede above my head. I think it arises from the nature of the contact: because I can’t speak to anyone for more than a few seconds, it feels like social media brought to life.

The word “sullen” evolved from the Old French solain, which means “lonely”. Loneliness is associated with an enhanced perception of social threat, so one of its paradoxical consequences is a tendency to shut yourself off from strangers. When I was lonely, I felt like lashing out at the society from which I perceived myself excluded, as if the problem lay with other people. To read any comment thread is, I feel, to witness this tendency: you find people who are plainly making efforts to connect, but who do so by insulting and abusing, alienating the rest of the thread with their evident misanthropy. Perhaps some people really are rugged individualists. But others – especially online – appear to use that persona as a rationale for involuntary isolation.

Whatever the reasons might be, it is as if a spell had been cast on us, transforming this ultrasocial species into a population of loners. Like a parasite enhancing the conditions for its own survival, loneliness impedes its own cure by breeding shame and shyness. The work of groups such as Age UK, Mind, Positive Ageing and the Campaign to End Loneliness is life-saving.

When I first wrote about this subject, and the article went viral, several publishers urged me to write a book on the theme. Three years sitting at my desk, studying isolation: what’s the second prize? But I found another way of working on the issue, a way that engages me with others, rather than removing me. With the brilliant musician Ewan McLennan, I have written a concept album (I wrote the first draft of the lyrics; he refined them and wrote the music). Our aim is to use it to help break the spell, with performances of both music and the spoken word designed to bring people together –which, we hope, will end with a party at the nearest pub.

By itself, our work can make only a tiny contribution to addressing the epidemic. But I hope that, both by helping people to acknowledge it and by using the power of music to create common sentiment, we can at least begin to identify the barriers that separate us from others, and to remember that we are not the selfish, ruthless beings we are told we are.

“Breaking the Spell of Loneliness” by Ewan McLennan and George Monbiot is out now. For a full list of forthcoming gigs visit:

This article first appeared in the 20 October 2016 issue of the New Statesman, Brothers in blood