Slash away . . . but you can’t escape

The Chancellor, George Osborne, should make no mistake –– warm words from the governor of the Bank o

After my dalliance last week with the possibilities of a Labour-Liberal Democrat pact, which didn't happen, I decided it was time to rethink the coalition government's economic plans and, in particular, my view of George Osborne. It was time to declare a unilateral truce. I had been pretty tough on Osborne in the past. He was everyone's Chancellor now and would surely do what was in the best interests of the country. And there was a possibility - admittedly slim - that I had been wrong all along about Slasher George. I felt we should judge him on what he did. Note the past tense.

Osborne has a high-quality staff of civil servants at the Treasury, headed by the very able permanent secretary, Sir Nicholas Macpherson, and his astute chief economist, Dave Ramsden, who, I felt, would help ease him into the job. The practicalities of making policy are quite different from the theory: being a shadow is very different from being the real thing. Given this, I believed that Osborne's actions would have to be driven by economic events.

Time to stop calling him Slasher, which is not fitting for someone holding one of the great offices of state. Lack of experience, I told myself, doesn't mean our new Chancellor could not learn quickly. But he could always win the name back if he did something dumb. And he did so on the morning of Monday 17 May.

King of cuts

Beware central bankers bearing gifts: that is one of the first lessons for this new government. On 12 May, less than 24 hours after David Cameron had been installed as Prime Minister, the governor of the Bank of England, Mervyn King, gave his personal blessing to spending cuts in the first year of this parliament. Presumably, he did this to ingratiate himself with the new Chancellor, who has the power to sack him. (Incidentally, it is becoming clearer that Alistair Darling and Gordon Brown regretted appointing King for a second term.)

King was chairing a press conference to present the Monetary Policy Committee's inflation report when he took it upon himself to offer his own views on the need for slashing public spending in 2010. Such a personal take compromises the Bank's independence, especially as it is now clear that the MPC's members were not consulted before King opened his trap. Indeed, the MPC's report stated that "a significant fiscal consolidation is necessary in the medium term", but made no mention of a need for cuts in the short term.

King has a history of not consulting, or even briefing, the MPC on monetary policy matters. Remember that external members of the MPC, including myself, were not told about the emergency loans to Lloyds and the Royal Bank of Scotland in October and November 2008, a decision that was clearly relevant to monetary policy. It will be interesting to hear the views of individual MPC members on the appropriateness of making cuts this year.

For the first 12 hours of the new government, there was an appreciation in the pound. But from the following morning, when King emphasised the increased risks to growth, sterling went into a downward tailspin. It traded at just over $1.505 and was down 4 per cent by early the following week. Not a great start. Over the first week of the coalition government, oil, commodity and equity prices have fallen by between 10 and 20 per cent because of fears of lower growth in the world economy. This is not an environment supportive of swingeing public spending cuts. Growth is likely to be anaemic and well below the MPC's forecasts, which continue to be based on wishful thinking. The economy is not in strong enough shape to support this crazy cutting agenda.

There has already been some dispute over lines of responsibility at the Treasury, and the differences between the coalition partners will only widen over time. The Lib Dem team, in particular, is going to have a hard time answering the question: "Were you lying then or are you lying now?" Take the following assessment of Osborne's Mais Lecture, made by Vince Cable on 24 February this year and to be found on the Lib Dem's website:
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.

Get out of that one, Vince.

And then there was the press conference on 17 May, when Osborne showed that he fully deserved the title of Slasher. He confirmed that there was going to be £6bn of slashing straight away, and an emergency slashing Budget on 22 June, plus a likely increase in VAT to 20 per cent or more, and additional taxes. And his talking down of the high-level civil servants that any new government depends on showed almost total ineptitude in managing personnel.

Amateur hour

Then there is that worthless Office for Budget Responsibility (OBR), or should that be the Office of Budget Irresponsibility? It seems unlikely that this new body will ever tell Slasher not to slash, and it is unclear why three men and their dog can do better than the hundreds of economists at the Bank and the Treasury.

Would the OBR have called the recession in August 2008? There is no new economics that its members can use that others have not had access to, so they will just make things up as they go along to support Slasher's agenda. Or I suppose they will be fired if they don't produce the required condemnation of all things Labour. Independent? Humbug! This looks like amateur hour. Dogma over common sense.

I will be watching the unemployment numbers for a sign that the new government's policies are working. If the numbers go down, that will represent success. Should they go up, that means failure. I give this bunch of incompetents until the end of the year. I only hope that they don't destroy the economy before they are done. Truce over.

David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and professor of economics at the University of Stirling.