In his Mais Lecture, given on 24 February 2010, George Osborne argued that there was a series of benchmarks for policy for the next parliament, “against which you will be able to judge whether a Conservative government is delivering on this new economic model”. He added: “I have set out the benchmarks against which we can be held accountable . . . We will maintain Britain’s triple-A credit rating . . . We have to deal with our debts.” Well, that didn’t work out.
Our downgraded Chancellor lost the UK’s triple-A credit rating because he has delivered neither on growth nor on the deficit. In June 2010, the Office for Budget Responsibility (OBR) forecast that growth in the UK would be 2.3 per cent in 2011 and 2.8 per cent in 2012. What we got was 0.9 per cent and -0.1 per cent. Most commentators, including yours truly, think that there is a better-than-even chance that we are already in a triple-dip recession. The problem wasn’t caused by Labour profligacy, the wretched weather, Cypriot banks or the number of bank holidays. This remains a slump made in 11 Downing Street and it did not need to happen.
The government hasn’t dealt with the country’s debts – far from it. The coalition has boasted so many times that it has reduced the deficit by a quarter but the reality is that this was done primarily by slashing capital spending, which has had a devastating impact on the construction industry. And the deficit is now rising, as was confirmed in the 20 March Budget. Construction-industry output in January 2013 was 7.9 per cent lower than in January 2012. To get an idea of the scale of these cuts, compare these figures: net investment in the public sector was £30.8bn in 2011 but only £384m in 2012, according to the Office for National Statistics (ONS).
When the National Infrastructure Plan was published in November 2011, the government claimed that it would target up to £20bn of investment from pension funds. However, barely £1bn has reportedly been raised. Analysis of the government-funded “construction pipeline” shows that, as of November 2012, only 1.2 per cent of the 851 projects listed are “in construction”.
Lack of growth has resulted in more – not less – borrowing to pay for the costs of economic failure. Indeed, borrowing is forecast to be over £200bn more than planned at the time of the Spending Review. The government will not “balance the books” by 2015, as David Cameron once promised. National debt as a percentage of GDP is now forecast not to start falling until 2017/2018. The latest ONS figures show that public-sector net borrowing, excluding the Royal Mail and asset purchase facility transfers, is over £5bn higher so far this year than it was in the same period last year. So our part-time Chancellor has his own deficit-expansion programme. Nice work, if you can get it.
This was all so predictable – or, at least, it should have been. One learned commentator argued in response to Osborne’s illconsidered Mais Lecture: “Slashing spending now could push the economy back into recession and inflict further structural damage on the UK that will make it harder to sustain our credit rating. He . . . fails to appreciate that what the markets are looking for is a credible plan to reduce the deficit, not a willingness to slash regardless of economic conditions. In the current climate, it is essential that decisions about the speed and timing of tackling the deficit are based on the state of the economy, not political dogma.”
That commentator was none other than Vince Cable, the Business Secretary, who in a recent New Statesman essay called for greatly expanded capital spending. My concern now is that this was just political posturing, because there has been no change in policy. Osborne’s extra £3bn for infrastructure was derisory. Don’t just talk: do something, Vince, for the sake of the country.
All along, Osborne seems to have believed that, despite the terrible dress rehearsals, everything would work out perfectly well on the night. He has too willingly believed the forecasts of the OBR and the Bank of England’s Monetary Policy Committee (MPC). These have been consistently wrong.
In May 2010, the central projection from the MPC was for growth of around 3 per cent, with some chance of nearly 6 per cent by 2013 and little or no chance of negative growth. It’s clear now that the forecast was wildly over-optimistic, with growth closer to zero. What is astonishing is that the MPC is still forecasting that growth could be as high as 5 per cent by 2015. It has learned nothing from its past failures. Each time the MPC makes a forecast, it has to downgrade it in the next iteration, which is exactly what the OBR did in its Budget forecast: it said that growth this year would be 0.6 per cent – half its earlier forecast of 1.2 per cent.
This brings us to what the Chancellor should do – let’s call it a “reverse Osborne”. First, we need an immediate fiscal boost. He should cut VAT by 5 per cent and a cut in the basic rate of income tax would help. A cut in National Insurance to zero for two years for anyone under 25 would help lower youth unemployment. I would invest an additional £20bn into a housebuilding programme and spend £10bn on fast-acting, shovel-ready projects. Osborne announced a review of the MPC’s remit but there’s no need to make big changes: it is sufficiently flexible. But it would not hurt to provide an explicit dual mandate, following the model of the US Federal Reserve, of targeting both inflation and growth.
Anything that sends the inflation nutters into paroxysms is fine by me. An increase in capital spending of just £3bn, funded by current spending cuts, is both pitiful and inadequate and will change nothing. The coalition’s Plan B is now in full operation – crossing fingers and toes and wishing for good times. LOL.
David Blanchflower is the economics editor of the New Statesman