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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The problem with grammar schools – and the answer to Labour's troubles

This week's news, from Erdogan the despot, to memories of Disraeli, and coffee and class.

Whom should we be cheering in Turkey? Coups are by their nature ­anti-democratic, whatever the rhetoric of their instigators, but Recep Tayyip Erdogan, the Islamist president, is about as much of a democrat as Vladimir Putin. Once he regained power, he dismissed several thousand judges, putting some under arrest. A large number of journalists were already in prison.

As recently as 1990, nearly half of Turkey’s employed population worked on the land and, even now, the proportion is more than a quarter. Erdogan has ruthlessly exploited the pious, socially conservative instincts of his people, who are rarely more than a generation away from the peasantry (and therefore politically “backward” in the Marxian sense), to win elections and push through economic liberalisation and privatisation. His foreign affairs ministry claims that the aim is to confine the state’s role to health, basic education, social security and defence. That is good enough for most Western governments. Provided he also co-operates in limiting the flow of Middle Eastern migrants into Europe, Erdogan can be as Islamist and authoritarian as he likes.

 

Quick fix for Labour

I have an answer to Labour’s problems. Its MPs should elect their own leader while Jeremy Corbyn continues as party leader. The former, recognised by the Speaker as the leader of the parliamentary opposition, would get the usual state aid for opposition parties. Corbyn would control Labour Party funds and assets.

He and his hardcore supporters should welcome this arrangement. Their aim, they say, is to build a new social movement. Relinquishing the burden of parliamentary leadership would leave them free to get on with this project, whatever it means. Corbyn could go back to what he enjoys most: voting against the Labour front bench. He would no longer have to dress up, bow to the Queen or sing the national anthem. This, I grant you, would not be a satisfactory solution for the long term. But the long term is more or less extinct in British politics. If Labour had peace for a few months, it might be enough. The situation would be resolved either by Corbyn falling under a bus (preferably not one driven by a Labour MP) or the Tory government collapsing in the face of a mass people’s uprising demanding Corbyn’s installation as supreme ruler. Don’t tell me that neither is likely to happen.

 

Divide and rule

The choice of Birmingham as the location to launch Theresa May’s leadership campaign, combined with proposals such as worker representation on company boards, has drawn comparisons between the new Prime Minister and Joseph Chamberlain.

Chamberlain, who as mayor of Birmingham in the mid-1870s tore down slums, brought gas and water supplies under public control and opened libraries, swimming pools and schools, was a screw manufacturer. There was an Edwardian joke – or, if there wasn’t, there ought to have been – that he screwed both major parties. He became a Liberal cabinet minister who split the party over Irish home rule, putting it out of power for most of the next 20 years. He and his followers then allied themselves with the Tories, known at the time as the Unionists. He duly split the Unionists over tariff reform, excluding them from office for a decade after the Liberals won the 1906 election.

Chamberlain was a populist who brilliantly combined patriotic imperialism with domestic radicalism, proposing smallholdings of “three acres and a cow” for every worker. One can see the appeal to some Brexiteers but he was also divisive and volatile, making him an odd role model for a supposedly unifying leader.

 

Mind your grammar

Justine Greening, the new Education Secretary, is the first to be wholly educated at a mainstream state secondary comprehensive. Pro-comprehensive groups were almost lyrical in praise of her appointment. Yet, unlike her predecessor-but-one, Michael Gove, she declines to rule out the ­return of grammar schools.

To understand how iniquitous grammar schools were, you need to have attended one, as I did. Primary-school friendships were ruptured, usually along lines of social class. The grammars were rigidly stratified. I was in the A stream and do not recall any classmates from semi-skilled or unskilled working-class homes. They were in the C stream and left school as early as possible with a few O-levels. No minister who wants a “one-nation Britain” should contemplate bringing back grammar schools.

 

Living history

Simon Heffer’s recent account in the NS of how his father fought in the Battle of the Somme led one letter writer to ask if anyone alive today could have a grandparent born in the 18th century. Another NS reader replied with an example: John Tyler, a US president of the 1840s, born in Virginia in 1790, had two grandsons who are still alive. Here is another possibility. “As Disraeli said to my husband . . .” If you hear a 94-year-old say that, don’t dismiss her as demented. Disraeli died in 1881. A 71-year-old who married a 24-year-old in 1946 (not impossible; the actors Cary Grant and Anthony Quinn both married women 47 years younger) could have spoken to Disraeli as a boy.

The past is not as far away as we think, though many politicians and journalists behave as though anything before 1980 happened on another planet.

 

Milk money

The class system is alive and well in parts of England. On a family weekend walk, we came across a small village with two adjacent pubs – one clearly for the toffs, the other more plebeian. This was most evident when ordering coffee. The downmarket pub told us that it served only UHT milk with its hot drinks. The other was ostentatiously horrified at the suggestion that it might serve any such thing. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt