George Osborne is in Washington today to deliver what has been billed in advance as his “I told you so” speech. With the IMF forecasting that Britain will grow faster than any other G7 country this year, the Chancellor has decided to round on his critics. In a preview of his AEI speech in the Wall Street Journal, he writes: “pessimistic predictions that fiscal consolidation was incompatible with economic recovery have turned out to be comprehensively wrong.”
To the extent that growth last year was stronger than expected, Osborne can claim some vindication (almost alone, his chief economic adviser Rupert Harrison predicted that the economy would be “going gangbusters“). But in claiming that his critics have been proved “comprehensively wrong” (who could he possibly have in mind?), he is engaging in a crude rewrite of history. Contrary to the Chancellor, his Keynesian opponents never said that there would be no recovery, only that it would be painfully slow.
And they were right. More than five years after the financial crisis, GDP is still 1.4 per cent below its pre-recession peak. The US, by contrast, is more than 5 per cent above. To this, the Conservative riposte is that the UK suffered a bigger crash than any other major country, with output falling by 7.2 per cent from peak to trough. But as Larry Summers noted during his recent face-off with Osborne at the World Economic Forum, “The deeper the valley you are in, the more rapidly you are able to grow.”
The tardiness of the recovery cannot be blamed on the Chanceller alone. The eurozone crisis, the rise in global commodity prices and the fragility of the banking sector have all constrained growth. But it is precisely for these reasons that wise minds counselled him against austerity. As Ed Balls warned in his Bloomberg speech in 2010, Osborne was “ripping out the foundations of the house just as the hurricane is about to hit”. Hippocrates’s injunction to “first, do no harm” should have been his watchword. Instead, with the private sector already contracting, he chose to tighten the squeeze. VAT was raised to 20% and infrastructure spending was slashed by 42% (an act even coalition ministers now concede was reckless).
We are still paying the price today. The double-dip may have been revised away (growth was 0% in Q1 2012 rather than -0.1%; only an economic illiterate would celebrate that) but the austerians didn’t only promise that Britain would avoid another recession, they promised, in the words of Osborne’s first Budget, “a steady and sustained economic recovery”. What we got was the slowest recovery for more than 100 years. To meet the OBR’s original 2010 forecasts, the economy would need to expand by 1.6 per cent each quarter between now and the election. That there is now growth is in spite of austerity, not because of it. Despite his unflinching rhetoric, the Chancellor has adopted his own “plan B” in the form of Help To Buy (the largest-ever state intervention in the mortgage market), higher capital spending and deferred deficit targets.
Even judging by the flawed metrics he adopted in 2010, Osborne has failed. Britain has lost its AAA credit rating and borrowing is forecast to be £48bn higher this year (£108bn) than promised in his first Budget. Having originally vowed to eliminate the structural deficit by 2014-2015, he has been forced to extend this pledge by three years to 2017-2018.
But despite this track record, Osborne is still offering his services as a forecaster. He predicts that those who argue that “the link between living standards and economic growth has broken, will also be proved wrong” (again, who could he possibly have in mind?) The Chancellor’s boast is not just that wages will finally crawl above inflation this year (after falling for the longest period since 1870) but that the proceeds of growth will be fairly shared.
He may well be right (and let us hope he is). But the experience of the US, where the wealthiest 1 per cent have captured 95 per cent of the proceeds of post-recession growth, shows why it would be complacent to assume as much. Even after real wages start to increase, there will be no rise in living standards for the millions of public sector workers who have had their salary increases capped at 1 per cent (nearly half the rate of inflation) and for those most reliant on benefits. That Osborne knows all of this (indeed, as Chancellor, he’s responsible for it) makes his sanguinity all the more puzzling. Having recovered from his “omnishambles” low, the Chancellor is setting himself up for a fall all over again.