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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Bernie Sanders is America’s most popular politician – and he’s coming after Donald Trump

Sanders, unlike Clinton, had a clear and coherent vision. As of now, he is the best hope the Democrats have of retaking the White House in 2020.

“I like Bernie Sanders,” my four-year-old niece in Texas said to me last month. “Why isn’t he president?” More than six months on from the defeat of Hillary Clinton, it’s a question that countless frustrated progressives across the United States continue to ask aloud.

Remember that the election of Donald Trump was not the only political earthquake to shake the US establishment last year. A 74-year-old, self-declared socialist and independent senator from the tiny state of Vermont, in a crumpled suit and with a shock of Einsteinian white hair, came close to vanquishing the Clinton machine and winning the Democratic presidential nomination. Sanders began the campaign as the rank outsider, mocked by the former Obama strategist David Axelrod as the candidate with whom Democratic voters might “flirt” and have a “fling” before settling down with Clinton. By the end of the campaign he had won 13 million votes and 23 states, and raised more than $200m.

In this dystopian age of Trump, it is remarkable that Sanders is now by far the most popular politician in the US – and this in a country where “socialist” has long been a dirty word. Increasing numbers of Americans seem nevertheless to “feel the Bern”. As such, Sanders supporters cannot help but ask the big counterfactual question of our time: would Trump be the president today if he had faced Bernie rather than Hillary in the election? Throughout the campaign, polls showed him crushing Trump in a head-to-head match-up. In a poll on the eve of the election, Sanders trumped Trump by 12 percentage points.

Democratic voters were told repeatedly that Clinton was more “electable” – but had they opted for Sanders as their candidate, there would have been none of the backlash over her emails, Benghazi, Bill, her Iraq War vote, or her Goldman Sachs speeches. So did the Democrats, in effect, gift the presidency to the Republican Party by picking the divisive and establishment-friendly Clinton over Sanders the economic populist?

I can’t prove it but I suspect that Sanders would have beaten Trump – although, to be fair to the much-maligned Clinton, she, too, beat Trump by nearly three million votes. Also, one-on-one polls showing Sanders ahead of Trump in a hypothetical match-up fail to tell us how the independent senator’s support would have held up against a barrage of vicious Republican attack ads during a general election campaign.

Then there is the matter of race. Clinton, despite deep support in African-American and Latino communities, was unable to mobilise Barack Obama’s multiracial coalition. Sanders would have done even worse than she did among minority voters. Trump voters, meanwhile, were motivated less by economic anxiety (as plenty on the left, including Sanders, wrongly claim) than – according to most academic studies, opinion polls and the latest data from the American National Election Studies – by racial resentment and an anti-immigrant, anti-Muslim animus. Sanders, who at a recent rally in Boston defended Trump voters from accusations of bigotry and racism, would probably have struggled as much as Clinton did to respond to this “whitelash”.

Nevertheless, Sanders, unlike Clinton, had a clear and coherent vision and I would argue that, as of now, he is the best hope the Democrats have of retaking the White House in 2020. His support for greater Wall Street regulation, debt-free college tuition, universal health care and a higher minimum wage is not only morally correct and economically sound but also hugely popular with voters across the political spectrum.

The Democrats have a mountain to climb. They have to find a way to enthuse their diverse, demoralised base while winning back white voters who are concerned much more by issues of race and identity than by jobs or wages. A recent poll found that the party had lower approval ratings than both Trump and the Republicans as a whole.

Yet press reports suggest that at least 22 Democrats are thinking about running for president in 2020. This is madness. Few are serious contenders – thanks to the dominance of the Clinton machine in recent years, the party doesn’t have a deep bench. There is no new generation of rising stars.

The only two people who could plausibly prevent Sanders from winning the nomination next time round are the former vice-president Joe Biden and the Massachusetts senator Elizabeth Warren. The good news is that all three of these Democratic contenders are, to varying degrees, economic populists, willing to stand up passionately for “the little guy”. The bad news is that the Democratic base may fantasise about a young, dynamic Justin Trudeau or Emman­uel Macron of their own but, come the 2020 election, Sanders will be 79, Biden 77 and Warren 71. (Then again, they’ll be up against a sitting Republican president who will be 74, behaves as if he has dementia and refuses to release his medical records.)

Bizarrely, that election campaign has already begun. On 1 May, Trump released his first official campaign ad for re-election, 1,282 days before the next presidential vote. Biden visited New Hampshire last month to give a speech, while Warren is on a national tour to promote her new bestselling book, This Fight Is Our Fight.

Sanders, however – riding high in the polls, and with his vast database of contacts from the 2016 race as well as a clear, popular and long-standing critique of a US political and economic system “rigged” in favour of “the billionaire class” – is the man to beat. And rightly so. Sanders understands that the Democrats have to change, and change fast. “There are some people in the Democratic Party who want to maintain the status quo,” he said in March. “They would rather go down with the Titanic so long as they have first-class seats.”

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

This article first appeared in the 18 May 2017 issue of the New Statesman, Age of Lies

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