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
ANDREY BORODULIN/AFP/GETTY IMAGES
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Letter from Donetsk: ice cream, bustling bars and missiles in eastern Ukraine

In Donetsk, which has been under the control of Russian backed rebels since April 2014, the propaganda has a hermetic, relentless feel to it.

Eighty-eight year-old Nadya Moroz stares through the taped-up window of her flat in Donetsk, blown in by persistent bombing. She wonders why she abandoned her peaceful village for a “better life” in Donetsk with her daughter, just months before war erupted in spring 2014.

Nadya is no stranger to upheaval. She was captured by the Nazis when she was 15 and sent to shovel coal in a mine in Alsace, in eastern France. When the region was liberated by the Americans, she narrowly missed a plane taking refugees to the US, and so returned empty-handed to Ukraine. She never thought that she would see fighting again.

Now she and her daughter Irina shuffle around their dilapidated flat in the front-line district of Tekstilshchik. Both physically impaired, they seldom venture out.

The highlight of the women’s day is the television series Posledniy Yanychar (“The Last Janissary”), about an Ottoman slave soldier and his dangerous love for a free Cossack girl.

They leave the dog-walking to Irina’s daughter, Galya, who comes back just in time. We turn on the TV a few minutes before two o’clock to watch a news report on Channel One, the Russian state broadcaster. It shows a montage of unnerving images: Nato tanks racing in formation across a plain, goose-stepping troops of Pravy Sektor (a right-wing Ukrainian militia) and several implicit warnings that a Western invasion is nigh. I wonder how my hosts can remain so impassive in the face of such blatant propaganda.

In Donetsk, which has been under the control of Russian-backed rebels since April 2014, the propaganda has a hermetic, relentless feel to it. If the TV doesn’t get you, the print media, radio and street hoardings will. Take a walk in the empty central district of the city and you have the creeping sense of being transported back to what it must have been like in the 1940s. Posters of Stalin, with his martial gaze and pomaded moustache, were taboo for decades even under the Soviets but now they grace the near-empty boulevards. Images of veterans of the 1941-45 war are ubiquitous, breast pockets ablaze with medals. Even the checkpoints bear the graffiti: “To Berlin!” It’s all inching closer to a theme-park re-enactment of the Soviet glory years, a weird meeting of propaganda and nostalgia.

So completely is the Donetsk People’s Republic (DPR) in thrall to Russia that even its parliament has passed over its new flag for the tricolour of the Russian Federation, which flutters atop the building. “At least now that the municipal departments have become ministries, everyone has been promoted,” says Galya, wryly. “We’ve got to have something to be pleased about.”

The war in the Donbas – the eastern region of Ukraine that includes Donetsk and Luhansk – can be traced to the street demonstrations of 2013-14. The former president Viktor Yanukovych, a close ally of Vladimir Putin, had refused to sign an agreement that would have heralded closer integration with the EU. In late 2013, protests against his corrupt rule began in Maidan Nezalezhnosti (“Independence Square”) in Kyiv, as well as other cities. In early 2014 Yanukovych’s security forces fired on the crowds in the capital, causing dozens of fatalities, before he fled.

Putin acted swiftly, annexing Crimea and engineering a series of “anti-Maidans” across the east and south of Ukraine, bussing in “volunteers” and thugs to help shore up resistance to the new authority in Kyiv. The Russian-backed rebels consolidated their power base in Donetsk and Luhansk, where they established two “independent” republics, the DPR and its co-statelet, the Luhansk People’s Republic (LPR). Kyiv moved to recover the lost territories, sparking a full-scale war that raged in late 2014 and early 2015.

Despite the so-called “peace” that arrived in autumn 2015 and the beguiling feeling that a certain normality has returned – the prams, the ice creams in the park, the bustling bars – missiles still fly and small-arms fire frequently breaks out. You can’t forget the conflict for long.

One reminder is the large number of dogs roaming the streets, set free when their owners left. Even those with homes have suffered. A Yorkshire terrier in the flat next door to mine started collecting food from its bowl when the war began and storing it in hiding places around the flat. Now, whenever the shelling starts, he goes to his caches and binge-eats in a sort of atavistic canine survival ritual.

Pet shops are another indicator of the state of a society. Master Zoo in the city centre has an overabundance of tropical fish tanks (too clunky to evacuate) and no dogs. In their absence, the kennels have been filled with life-size plastic hounds under a sign strictly forbidding photography, for reasons unknown. I had to share my rented room with a pet chinchilla called Shunya. These furry Andean rodents, fragile to transport but conveniently low-maintenance, had become increasingly fashionable before the war. The city must still be full of them.

The bombing generally began “after the weekends, before holidays, Ukraine’s national days and before major agreements”, Galya had said. A new round of peace talks was about to start, and I should have my emergency bag at the ready. I shuddered back up to the ninth floor of my pitch-dark Tekstilshchik tower block. Shunya was sitting quiet and unruffled in his cage, never betraying any signs of stress. Free from Russian television, we girded ourselves for the night ahead.

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war