Exclusive: Osborne's supporters turn on him

Leading economists who formerly backed Osborne urge him to change course.

On 14 February 2010, 20 prominent economists wrote to the Sunday Times in support of George Osborne's deficit reduction strategy. They said: "... in order to be credible, the government's goal should be to eliminate the structural current budget deficit over the course of a Parliament, and there is a compelling case, all else equal, for the first measures beginning to take effect in the 2010/11 fiscal year." The Chancellor hailed their letter as a "really significant moment in the economic debate".

Two and a half years later, the UK is mired in a double-dip recession and Osborne is set to borrow £11.8bn more than Labour planned. For this week's issue of the New Statesman (out tomorrow), we asked the 20 whether they regretted signing the letter and what they would do to stimulate growth. Of those who replied, only one, Albert Marcet of Barcelona Graduate School of Economics, was willing to repeat his endorsement of Osborne. Nine urged the Chancellor to abandon his opposition to fiscal stimulus and to promote growth through tax cuts and higher infrastructure spending, while others merely said "no comment" or were "on holiday".

With the UK able to borrow at the lowest interest rates for 300 years (largely owing to its non-membership of the euro and its independent monetary policy), the signatories are both surprised and dismayed at Osborne’s failure to invest for growth. Since he entered the Treasury, the Chancellor has cut investment spending by £24.4bn, a net reduction of 48 per cent.

It is now only Osborne's political pride that is preventing a change of direction. Borrowing for growth would be a tacit admission that his nemesis, Ed Balls, was right and he was wrong. But if Osborne is not to condemn the UK economy - and his party’s poll ratings - to permanent stagnation, there is no alternative.

You can read the economists' responses in full in this week's New Statesman, but here, for Staggers readers, are the key lines.

Roger Bootle
Capital Economics

If I were Chancellor at this point, I would alter the plan, I would stop the cuts to public investment and I might even seek to increase it.

The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump.

Roger Bootle is the managing director of Capital Economics and author of “The Trouble With Markets” (Nicholas Brealey, £12.99)

Danny Quah
London School of Economics

The fear that UK borrowing would become overly costly has become much less relevant ... For most observers, the Bank of England has made clear that it is willing to put considerable resources into monetary easing. That has also reduced the pressure for dramatic debt reduction, compared to the perceived monetary stance at the time I signed the letter.

So, have I changed my mind since signing the letter? Yes. Because circumstances have changed.

Danny Quah is professor of economics and Kuwait Professor at the LSE

David Newbery
Cambridge University

It was necessary to cut current expenditure but, given the poor state of Britain’s publicly funded infrastructure and the looming recession, the necessary counterpart (taught us by Keynes in the Great Depression whose length we have now exceeded) is to increase public investment expenditure even if this worsened the short-run public deficit. That would stimulate private investment, particularly if it relaxed important transport bottlenecks, in a far more positive way than just cutting total government expenditure. That was indeed what the United States did with its immediate response, although many argued that it was at too modest a scale.

We need growth, and that requires investment. In a recession bordering on a depression, public investment in infrastructure that has a high pay-off even in good times must make sense.

David Newbery is emeritus professor of economics at Cambridge University

Michael Wickens
York University

If the government has made a mistake, it is in cutting capital expenditures – expenditures that have to made at some time and would be cheaper to do now than in the future. This could be debt financed. If the government clearly explained this strategy, I believe that the market would not charge higher rates for this additional borrowing. Such a strategy, not reneged on, would help.

Michael Wickens is professor of economics at the University of York

Hashem Pesaran
Cambridge University

My views have not changed – but this does not mean that I have agreed with this government’s obsession with credit ratings and fiscal reductions at the expense of growth-inducing policies. I was in favour of taking account of the possible adverse effects of large and unsustainable government deficits on borrowing costs and financial stability. I believe this government’s policies have not followed the balance I had in mind when I signed the letter.

Hashem Pesaran is professor of economics at Cambridge University

Tim Besley
London School of Economics

I would prefer to see government resources used in a targeted way and there may be creative ways of using the government balance sheet.  For my part, I am particularly keen to have more focus on housing in the near term.

John Vickers
Oxford University
Thanks, but I’ll pass on this.

John Vickers is professor of economics at Oxford University. He has criticised the government for watering down his recommendations for reform of the banking sector

Costas Meghir
Yale University

There is a huge opportunity to carry out important infrastructure projects and improvements in education. Currently both capital and labour are very cheap and available; there is little danger of crowding out private investment; and infrastructure and human capital spending properly thought through (not roads leading to nowhere or just beautiful school buildings but targeted educational interventions and projects useful to economic activity, such as airports and transport) can have high returns in the future making the whole enterprise profitable.

Kenneth Rogoff
Harvard University

I have always favoured investment in high-return infrastructure projects that significantly raise long-term growth.

Kenneth Rogoff is professor of economics and Thomas D Cabot Professor of Public Policy at Harvard University

Christopher Pissarides
London School of Economics

Professor Pissarides was unable to contribute to this feature, but these words are an edited extract from an open letter he wrote to George Osborne published in the New Statesman of 17 October 2011.

I know you worry about the deficit but I think that you worry about it too much. Keynesianism of the kind that guided policy after the Second World War no longer works, but there are still lessons in it for us. Worrying too much about the deficit in a recession makes the recession worse. The problem with a recession is that it punishes a relatively small number of people and it punishes them a great deal. The unemployed, new school leavers and ethnic minorities bear the brunt of it. The cost of recession to them is not only lower income, but loss of self-esteem, loss of skill and damaged future career paths. Less concern about the deficit and more attention to the economy’s ability to create jobs will reduce unemployment and improve well-being.

Your plan for deficit reduction should start the spending cuts gradually and respond to the state of the economy. It should go deeper only when the recovery is more robust. A more flexible approach to the cuts is good both for economic growth and for the size of the deficit.

And the one who backed Osborne

Albert Marcet
Barcelona Graduate School of Economics

I am quite sure there is no room for Keynesian-type policies to encourage growth in the fourth year of a recession; there is virtually no economic theory that will support that. I see no urgency to change the schedule in deficit reduction. The UK cannot unilaterally change the fact that there is a global recession, so growth will be below average. Furthermore, there is the danger of becoming the focus of the market’s speculation if there is any change in the commitment to reduce the public deficit.

Albert Marcet is research professor at the Barcelona Graduate School of Economics

Support for Chancellor George Osborne has fallen as the UK's recession has deepened. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Jeremy Corbyn supporters should stop excusing Labour’s anti-immigration drift

The Labour leader is a passionate defender of migrants’ rights – Brexit shouldn’t distract the new left movement from that.

Something strange is happening on the British left – a kind of deliberate collective amnesia. During the EU referendum, the overwhelming majority of the left backed Remain.

Contrary to a common myth, both Jeremy Corbyn and the movement behind him put their weight into a campaign that argued forcefully for internationalism, migrants’ rights and regulatory protections.

And yet now, as Labour’s policy on Brexit hardens, swathes of the left appear to be embracing Lexit, and a set of arguments which they would have laughed off stage barely a year ago.

The example of free movement is glaring and obvious, but worth rehashing. When Labour went into the 2017 general election promising to end free movement with the EU, it did so with a wider election campaign whose tone was more pro-migrant than any before it.

Nonetheless, the policy itself, along with restricting migrants’ access to public funds, stood in a long tradition of Labour triangulating to the right on immigration for electorally calculated reasons. When Ed Miliband promised “tough controls on immigration”, the left rightly attacked him.  

The result of this contradiction is that those on the left who want to agree unequivocally with the leadership must find left-wing reasons for doing so. And so, activists who have spent years declaring their solidarity with migrants and calling for a borderless world can now be found contemplating ways for the biggest expansion of border controls in recent British history – which is what the end of free movement would mean – to seem progressive, or like an opportunity.

The idea that giving ground to migrant-bashing narratives or being harsher on Poles might make life easier for non-EU migrants was rightly dismissed by most left-wing activists during the referendum.

Now, some are going quiet or altering course.

On the Single Market, too, neo-Lexit is making a comeback. Having argued passionately in favour of membership, both the Labour leadership and a wider layer of its supporters now argue – to some extent or another – that only by leaving the Single Market could Labour implement a manifesto.

This is simply wrong: there is very little in Labour’s manifesto that does not have an already-existing precedent in continental Europe. In fact, the levers of the EU are a key tool for clamping down on the power of big capital.

In recent speeches, Corbyn has spoken about the Posted Workers’ Directive – but this accounts for about 0.17 per cent of the workforce, and is about to be radically reformed by the European Parliament.

The dangers of this position are serious. If Labour’s leadership takes the path of least resistance on immigration policy and international integration, and its support base rationalises these compromises uncritically, then the logic of the Brexit vote – its borders, its affirmation of anti-migrant narratives, its rising nationalist sentiment – will be mainlined into Labour Party policy.

Socialism in One Country and a return to the nation state cannot work for the left, but they are being championed by the neo-Lexiteers. In one widely shared blogpost on Novara Media, one commentator even goes as far as alluding to Britain’s Road to Socialism – the official programme of the orthodox Communist Party.

The muted and supportive reaction of Labour’s left to the leadership’s compromises on migration and Brexit owes much to the inept positioning of the Labour right. Centrists may gain personal profile and factional capital when the weaponising the issue, but the consequences have been dire.

Around 80 per cent of Labour members still want a second referendum, and making himself the “stop Brexit” candidate could in a parallel universe have been Owen Smith’s path to victory in the second leadership election.

But it meant that in the summer of 2016, when the mass base of Corbynism hardened its factional resolve, it did so under siege not just from rebelling MPs, but from the “Remoaners” as well.

At every juncture, the strategy of the centrist Labour and media establishment has made Brexit more likely. Every time a veteran of the New Labour era – many of whom have appalling records on, for instance, migrants’ rights – tells Labour members to fight Brexit, party members run a mile.

If Tony Blair’s messiah complex was accurate, he would have saved us all a long time ago – by shutting up and going away. The atmosphere of subterfuge and siege from MPs and the liberal press has, by necessity, created a culture of loyalty and intellectual conformity on the left.

But with its position in the party unassailable, and a radical Labour government within touching distance of Downing Street, the last thing the Labour leadership now needs is a wave of Corbynite loyalty-hipsters hailing its every word.

As the history of every attempt to form a radical government shows, what we desperately need is a movement with its own internal democratic life, and an activist army that can push its leaders as well as deliver leaflets for them.

Lexit is no more possible now than it was during the EU referendum, and the support base of the Labour left and the wider party is overwhelmingly in favour of free movement and EU membership.

Jeremy Corbyn, John McDonnell and Diane Abbott are passionate, principled advocates for migrants’ rights and internationalism. By showing leadership, Labour can once again change what is electorally possible.