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28 January 2016

Five years of mistakes from George Osborne have left the economy more vulnerable than ever

The Osborne legacy: an economy too exposed to China and too indebted to weather the storm.

By Jon Ashworth

Another week, and another set of bad news for George Osborne.

Last week the Cabinet met to discuss the UK’s dire trade situation. Earlier this month the Chancellor made a speech covering his own back, warning of a “cocktail of threats” to the UK economy.

This week George Osborne has made headlines because of his derisory tax deal with Google and the unfortunate findings of a Centre for Cities report showing that, far from the UK becoming the “high wage, low welfare” economy the Chancellor keeps trumpeting, many cities are moving in the opposite direction, with workers plagued by low paid jobs and rising living costs.

Not only does the report show that over half of Britain’s cities are ‘low wage, high welfare’, but welfare spending has actually grown fastest in the so-called high wage cities because of soaring costs of housing, leading to an upsurge in the need for housing benefit.

All of this flies in the face of George Osborne’s much vaunted ‘Northern Powerhouse’ project and his attempts to ‘rebalance’ the UK economy. He may talk ambitious talk, but the reality is that the Government’s record on the solutions to these problems – housebuilding, and investment in skills and jobs – is woeful.  Fewer homes were built over the last five years than under any peacetime government since the 1920s and recent research my by colleague Owen Smith has shown that the 2010s are forecast to be a decade of record low pay, with the lowest rate of pay growth for a century.

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This report, and the weekly bad news that has been flowing in, isn’t just a feature of January – it is symptomatic of the fact that Osborne’s ‘long term economic plan’ is failing on many, many fronts.

The UK’s productivity problem is one of the major challenges facing our economy today. But on this George Osborne is clearly failing. The productivity gap between the UK and our competitors in the rest of the G7 is the biggest since 1991 and last year the Office for Budget responsibility (OBR) downgraded their productivity forecasts for the UK over the next three years. Industries like manufacturing are facing some of the biggest challenges, with the sector back in recession and a lower output now than in 2008. 

On trade and our relationship with the rest of the world, Osborne’s plan is failing too. Buried deep in the OBR’s analysis of the Autumn Statement was the revelation that Britain’s current account deficit is now the largest it has been since 1830 – when the Duke of Wellington was Prime Minister. Far from reaching Osborne’s target of UK exports reaching £1 trillion by 2020, we look set to miss this by an enormous £350 billion.

Unfortunately the problem of Britain’s current account deficit is too serious to be side-lined, with the Governor of the Bank of England, Mark Carney, saying yesterday that “relying on the kindness of strangers is not optimal” in current volatile markets.

As Labour’s shadow chancellor John McDonnell warned last autumn there have been warnings signs in the rest of the world for some time now. But George Osborne has delivered an economic recovery poorly prepared to deal with those threats. In fact, his actions have increased that exposure.

George Osborne has spent a lot of his time recently cosying up to China. While strong trade and investment links with one of the world’s major economies are obviously important, John McDonnell and others have warned of Osborne’s over reliance on asset sales to China and the real danger of over-exposure to emerging problems and instability. This last month has been among the most turbulent yet for China which has seen a 25 year low growth rate, its stock market twice suspended, and today the price of stocks plunging to a 13 month low, as capital flows out of the country. 2015 saw Chinese business and household debts rise by 207 per cent of national income and the country’s foreign reserves shrinking for the first time since 1992.

These headwinds from China and accompanying warnings about the effects on the UK have been coming for some time. I wrote about the dangers last summer and just a few months ago the Bank of England warned that if Chinese GDP were to fall by 3 per cent relative to its trend then the output in the UK would be around 0.3 per cent lower as a result.

Despite this George Osborne has been doing everything he can to court Chinese investors. In China in September he stated clearly that “no economy in the world is as open to Chinese investment as the UK”. He subsequently agreed a deal offering £2 billion investment in order for a Chinese company to build and run a huge nuclear power plant at Hinkley Point.

Far from trying to protect Britain from exposure to global economic uncertainty, as he tried to claim in his “cocktail of threats” speech a few weeks ago, George Osborne’s failure has left Britain’s economy in a much weaker position than it really should be.

The hypocrisy of the Chancellor’s position is also staggering. In 2008 when the UK was hit by a recession caused by a global economic crisis, he blamed the Labour government. Now, when the UK economy is in trouble he tries to blame it on global instability, with no recognition given to the fact he’s been in charge for the last five and a half years.

George Osborne can come up with as many excuses as he likes, but at some point he needs to stop looking around for other people to blame and take responsibility for the failure of his so-called long-term economic plan.

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