Osborne shouts bingo - but let's first keep up with Paraguay

The UK cannot achieve a sustainable recovery until it can pay its way in the world, and despite a 25% depreciation of the currency over the last 5 years it still fails lamentably to do so.

Osborne’s reckless boast that he has been proved right over the economy will come back to haunt him. None of his claims stand up to examination.

“Those in favour of Plan B” (i.e. stimulating the economy to produce growth), he asserts, “have lost the argument”. That will be news to employees whose real earnings at current rates will have shrunk by £6,660 during the 2010-15 parliament. It will also come as a surprise to the UK’s biggest companies still sitting on corporate cash stockpiles of £700bn because they doubt the level of demand justifies new investment in plant or services.   The stock exchange and finance markets may be frothing, but the real economy isn’t.

Nor is it likely to be any time soon. In the last 5 years UK investment has fallen by a quarter in real terms, which is devastating in terms of future growth potential. It now stands at just 14% of GDP, against a global average of 24%. Indeed in terms of the global investment-to-GDP league Britain now stands 159th, behind El Salvador, Guatemala and Mali. A recovery based on low wages, poor productivity and weak investment must be expected to stutter and slip back by 2015.

Nor does the historical evidence indicate that Osborne’s counter-intuitive plan, known by the oxymoron of ‘expansionary fiscal contraction’, has ever worked.  It has been tried three times before – the so-called ‘Geddes axe’ cuts in 1921-2, the May businessmen committee cuts in 1931, and the Howe budget in 1981. The first enforced expenditure cuts very similar in real terms to today and led to a decade of anaemic growth.   The second was only saved from a similar fate by Britain being forced off the gold standard. The third led to growth only because interest rates were eased, bank lending loosened and a reviving US helped to reflate the world economy. None of those conditions remain now to be applied, so there is no reason to believe the Osborne ‘recovery’ will defy historical precedent.

Osborne’s second claim is that “Britain is poorer because of a huge failure of economic policy in the past decade” (i.e. it was all Labour’s fault). In other words, falling incomes today are due, not to his own policies of austerity, but to Labour’s over-spending which caused the recession. But Labour didn’t over-spend, and didn’t cause the recession – the bankers’ crash did that. The budget deficit in 2007 just before the crash was only 2.9%, below the OECD average, and only rose to 11.6% in 2010 because of the enormous bank bailouts. Even by the time of the election in 2010 the UK national debt had only risen to 77% of GDP which compared with 75% for Germany, 84% for France, and 93% for the US. Labour spending was not out of line with other lead countries.

Equally it is disingenuous for Osborne to claim that today’s diminishing incomes – the longest fall in wages since the 1870s and on average 9% down in real terms since pre-crash levels – owes nothing to his austerity programme and all to the recession. Of course the latter has had a major impact, but to pretend that £81bn of expenditure cuts and £18bn (and counting) of benefit cuts have not significantly exacerbated the downward pressure on incomes is absurd.

Third, “nor are we seeing”, the Chancellor has claimed, “a return to unsustainable levels of indebtedness and household borrowing”. Well, actually, we are. Frighteningly, household lending is just 0.3% below its 2008 peak, while lending to firms is now 22% lower and if account is taken of inflation it’s fallen by a stunning 32%. There is no other way of describing this except as unsustainable. At the same time it’s clear that another major housing bubble is well under way, driven by Osborne’s own Help to Buy scheme, with estate agents the fastest growing sector in the workforce. Debt-to-income ratios, previously falling, have now turned up again. Plainly the recovery, such as it is, is propelled by borrowing.  And an economy dependent on consumer debt together with low wages, weak investment and poor productivity is likely once again to slip back after an initial short burst of expansion.

Osborne’s last assertion was that “growth had been too concentrated in one corner of the country – and HS2 will transform the UK’s economic geography”. The former statement is certainly true, with any recovery heavily concentrated in London and the south-east. But HS2, even if it goes ahead with a price-tag heading north of £50bn, will not remotely produce the degree of economic rebalancing required. The country’s finance sector is still too large and dominant, while manufacturing is shrivelled well below its potential.

The UK cannot achieve a sustainable recovery until it can pay its way in the world, and despite a 25% depreciation of the currency over the last 5 years it still fails lamentably to do so. The UK has only had a surplus in traded goods six times in the last 55 years, and last year the deficit on traded goods was £106bn, equal to 7% of GDP. HS2 won’t conceivably solve a problem of these proportions – only a fundamental revival of the UK’s capabilities for high-tech manufacturing will achieve that.

British Chancellor of the Exchequer George Osbourne speaks during the Conservative Party Conference in Manchester. Image: Getty
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After Article 50 is triggered, what happens next?

Theresa May says Article 50 will be triggered on 29 March. The UK must prepare for years, if not decades, of negotiating. 

Back in June, when Europe woke to the news of Brexit, the response was muted. “When I first emerged from my haze to go to the European Parliament there was a big sign saying ‘We will miss you’, which was sweet,” Labour MEP Seb Dance remembered at a European Parliament event in London. “The German car industry said we don’t want any disruption of trade.”

But according to Dance – best known for holding up a “He’s Lying” sign behind Nigel Farage’s head – the mood has hardened with the passing months.

The UK is seen as demanding. The Prime Minister’s repeated refusal to guarantee EU citizens’ rights is viewed as toxic. The German car manufacturers now say the EU is more important than British trade. “I am afraid that bonhomie has evaporated,” Dance said. 

On Wednesday 29 March the UK will trigger Article 50. Doing so will end our period of national soul-searching and begin the formal process of divorce. So what next?

The European Parliament will have its say

In the EU, just as in the UK, the European Parliament will not be the lead negotiator. But it is nevertheless very powerful, because MEPs can vote on the final Brexit deal, and wield, in effect, a veto.

The Parliament’s chief negotiator is Guy Verhofstadt, a committed European who has previously given Remoaners hope with a plan to offer them EU passports. Expect them to tune in en masse to watch when this idea is revived in April (it’s unlikely to succeed, but MEPs want to discuss the principle). 

After Article 50 is triggered, Dance expects MEPs to draw up a resolution setting out its red lines in the Brexit negotiations, and present this to the European Commission.

The European Commission will spearhead negotiations

Although the Parliament may provide the most drama, it is the European Commission, which manages the day-to-day business of the EU, which will lead negotiations. The EU’s chief negotiator is Michel Barnier. 

Barnier is a member of the pan-EU European People’s Party, like Jean-Claude Juncker and German Chancellor Angela Merkel. He has said of the negotiations: “We are ready. Keep calm and negotiate.”

This will be a “deal” of two halves

The Brexit divorce is expected to take 16 to 18 months from March (although this is simply guesswork), which could mean Britain officially Brexits at the start of 2019.

But here’s the thing. The divorce is likely to focus on settling up bills and – hopefully – agreeing a transitional arrangement. This is because the real deal that will shape Britain’s future outside the EU is the trade deal. And there’s no deadline on that. 

As Dance put it: “The duration of that trade agreement will exceed the life of the current Parliament, and might exceed the life of the next as well.”

The trade agreement may look a bit like Ceta

The European Parliament has just approved the Comprehensive Economic and Trade Agreement (Ceta) with Canada, a mammoth trade deal which has taken eight years to negotiate. 

One of the main stumbling points in trade deals is agreeing on similar regulatory standards. The UK currently shares regulations with the rest of the UK, so this should speed up the process.

But another obstacle is that national or regional parliaments can vote against a trade deal. In October, the rebellious Belgian region of Wallonia nearly destroyed Ceta. An EU-UK deal would be far more politically sensitive. 

The only way is forward

Lawyers working for the campaign group The People’s Challenge have argued that it will legally be possible for the UK Parliament to revoke Article 50 if the choice is between a terrible deal and no deal at all. 

But other constitutional experts think this is highly unlikely to work – unless a penitent Britain can persuade the rest of the EU to agree to turn back the clock. 

Davor Jancic, who lectures on EU law at Queen Mary University of London, believes Article 50 is irrevocable. 

Jeff King, a professor of law at University College London, is also doubtful, but has this kernel of hope for all the Remainers out there:

“No EU law scholar has suggested that with the agreement of the other 27 member states you cannot allow a member state to withdraw its notice.”

Good luck chanting that at a march. 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.