It is easy to forget how confident George Osborne was that his great experiment with austerity would work. The Chancellor promised not only that his economic programme would restore the public finances to a sustainable path but also that it would unleash a private sector recovery to compensate for the shrinking state. The Autumn Statement offered the clearest evidence yet that he has failed on both counts. For the fifth time since it was established, the Office for Budget Responsibility (OBR) downgraded its growth forecasts, predicting that the economy will shrink by 0.1 per cent this year and grow by just 1.2 per cent next year. As a result, an austerity programme that was originally intended to last for five years will now last for eight and Mr Osborne will miss his target to reduce the national debt as a share of GDP by 2015-16. The Chancellor was right to abandon that pledge, rather than announce even greater tightening, but he has indisputably failed on his own terms.
The results of Mr Osborne’s strategy were both predictable and predicted. In October 2009, when he was being hailed by much of the British press as the country’s economic saviour, the New Statesman warned that “the only economic plan he seems to have is for attempting to balance the books. He does not have a plan for growth. He has a plan for a lack of growth.” But Mr Osborne caricatured his opponents as “deficit deniers” and dismissed calls for a “plan B”, led by our economics editor David Blanchflower, as Keynesian dogma. He is now paying the price for doing so.
The Chancellor offered a series of familiar explanations for his failure – the eurozone crisis, higher oil prices and the slowdown in emerging markets – but the UK remains the only G20 country apart from Italy to have suffered a double-dip recession. With its own currency, its own independent monetary policy and the ability to borrow at historically low rates, Britain could and should be doing better. Four years on from the beginning of the crisis, GDP remains 3.1 per cent below its pre-recession peak. In the US, by contrast, where the Obama administration maintained fiscal stimulus, it is 2.3 per cent above.
There was little in Mr Osborne’s statement to suggest that the UK’s economic prospects will improve in the near future. The £5bn increase in capital spending, the most effective stimulus according to the OBR, was a belated acknowledgement that the state must intervene at times of stagnation to promote growth. But since the move is funded through additional cuts elsewhere, it will make little difference to output. The Institute for Fiscal Studies has forecast that it will increase growth by less than 0.2 per cent a year.
As before, Mr Osborne is largely relying on the Bank of England to prop up the economy through quantitative easing and the maintenance of ultra-low interest rates. He won near-universal plaudits for the appointment of Mark Carney, the governor of the Bank of Canada, as the Bank’s new head, but Threadneedle Street cannot be expected to steer the country out of the slump. As John Maynard Keynes once observed, relying on monetary policy to do the heavy lifting at times of economic weakness is like "pushing on a string". The adoption of a higher inflation target by the Bank or one based on nominal GDP or employment could allow for a more expansionist policy, but Mr Carney has previously signalled his opposition to this approach.
In addition to promising sustained growth and deficit reduction, Mr Osborne vowed that the burden of austerity would be shared, a pledge encapsulated in the mantra “we’re all in this together”. His words were honourable. There are important political, social and economic reasons for ensuring that individuals contribute according to their means. But the Chancellor has consistently failed to make sure that they do. The cut in the top rate of income tax from 50p to 45p, worth an average £107,500 to the country’s 8,000 income-millionaires, will proceed as expected next April. At the same time, benefit levels will be raised by just 1 per cent, a real-terms cut in income for the UK’s poorest citizens, many of whom are already dependent on charity. As Daniel Trilling (see page 22) notes, one of the few growth industries in the UK, as in Greece, is food banks. The number of people reliant on them has risen from 26,000 in 2008 to 100,000, and is expected to reach 200,000 over the next year.
Mr Osborne was right to reduce tax relief on pensions for higher earners, but he has missed an opportunity to radically shift the burden of taxation away from earned income and towards unearned wealth. As we have long argued, property taxes are fair, easy to collect and economically beneficial. By shifting investment away from housing and into wealth-creating industries, they boost growth and, consequently, are rated as less economically harmful than taxes on consumption, income and corporations. Some of the more enlightened figures on the Conservative back benches recognise as much and yet, for fear of alienating his party's southern base, the Chancellor has rejected any move towards a “mansion tax”.
We are only at the beginning of what is already the longest sustained squeeze on living standards since the 1920s. Owing to Mr Osborne’s failure, whichever party wins the next election will be forced to preside over years of further austerity. But our politicians must not succumb to the belief that stagnation is inevitable. With a genuine strategy for growth, including the establishment of a National Investment Bank, a major house-building programme and significant tax cuts, the UK could recover. But as long as Mr Osborne’s destructive reign continues, it will become ever harder to do so.