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7 March 2016

Will George Osborne heed his own warnings?

With the budget approaching, all eyes are on the Chancellor.

By Alison McGovern

If you are interested in the economy, and haven’t already read it, let me recommend to you GDP by Diane Coyle.  It is the life story of the central of measure of our economic effort, providing both the value and limitations of this set of data.  Coyle expresses the quandary we face in understanding the complexities of a large economy in one measure. She asks:

“How has something so artificial, complicated, and abstract come to be so important…Can it be right that GDP rules key political decisions…After all, this single measure of “the economy” tends to dominate political contests, and governments’ fortunes seem to rise and fall with the difference between plus 0.2 per cent and minus 0.1 per cent in one quarter’s GDP numbers. The latter may mean recession, the former reelection.”

How true. So this article, examining the current risks to our economy, comes with a serious health warning. Whatever we might think is going to happen, it’s rarely that simple. That does not imply that we should give up, or never worry about surprise recessions though. Quite the opposite. When it comes to economic shocks, the clue is in the name. They are usually a shock. It is precisely because they are by and large unpredictable that they can be so disruptive and damaging.

So while we should not start predicting immediate doom at the first sign of trouble, we should always have one eye on the worst-case scenario. We should always ask ourselves, what if it happened again?

For those of us who campaigned to re-elect Gordon Brown’s government in 2010 it was hard to get a clear perspective of how effectively Labour coped with the downturn.  No period of history is more obscure than the recent past. Then the crash was simply too recent to get a good look at how the rescue had gone. 

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Now the events of 2007 are in greater focus. And what I have been struck by, looking back on those years, is how well the economy coped with that shock. Rapid action saved the banking system from total collapse. Job losses were far below the level initially predicted. Good sensible policies, like the scrappage scheme, saved jobs and kept manufacturing on its feet. This resilience was based on the latent strength built up over a number of years with regional development agencies, regional government offices and others all laying strong foundations across the country.

But political expediency is often the enemy of clear economic analysis, and so it has proved again. Whilst there is a serious point to be made about how exposed our economy was to the global banking crisis, this has been lost in the bun-fight about whether the Labour government somehow “caused” the US subprime mortgage crisis. But this is a deeply unserious debate and it was maddening to see it raised from the dead again last week.

Both the government of the day, the regulators and to a large extent the bankers themselves, were caught out with little idea of the risks haunting City balance sheets. Understanding how to prevent this happening again is crucial for a country that will continue to have a natural advantage in financial services.

Rehashing this debate is particularly frustrating because for a while it looked like a promising cross-party consensus was emerging on banking. The independent Vickers Commission, recommending the ring fencing of retail and investment banking and requirements for higher capital reserves, was welcomed by government and opposition alike. Andrew Tyrie, the Tory chair of the Treasury Select Committee, also did good work with his commission into banking standards. Instead of uniting to sling mud at Gordon Brown, the party leaders were uniting behind sensible regulatory reforms. We all agreed on capital reserves, culture change and the vital role of challenger banks.

Yet once again, politics got in the way as George Osborne’s last budget strangled this fledgling consensus. Reforms to the bank levy and the wider taxation framework for banks were a clear bribe to HSBC and the other big players, but were a serious blow to the ambitions of the very challengers that Osborne had pretended to champion. For those of us who trace our banking woes back to the big bang and the demutualisations of 1986 onwards, it was infuriating to see responsible building societies put in jeopardy in order to give big bankers an easier ride. Osborne has also missed a big opportunity with his mismanaged sell-off of the banks brought into public ownership. At the coming budget, we will see how much this has cost him

Osborne’s economic incoherence is truly a sight to behold. One day he is giving doom-laden sermons about global economic headwinds, the next he leaps to the defence of bank bonuses. This matters, because he might be right about the global economy and if he is then the UK is currently worrying underprepared.

Osborne’s failure to generate enough growth to substantially reduce the deficit, and ultimately the national debt, means there is much less room for the kind of counter-cyclical fiscal policy we would need if there was another recession. It would also be difficult to boost the economy again through quantitative easing or other similar schemes. What is more, the growth of precarious employment means that it would be much harder to hold down unemployment and our public services are already starved of investment.

All of this means that the government should be doing everything possible to reduce our exposure to shocks. But more than this is needed. If there is another storm on the horizon then building up our internal strength will be just as important as battening down the hatches. Action is urgently needed to rebalance our precarious housing market, reduce our trade deficit and strengthen our infrastructure. Deficit reduction remains important, but there needs to be a new focus on levels of personal debt and the worrying decline in savings as my colleague Rachel Reeves has argued.It is telling that nearly a decade on from the crash, so much of the heavy lifting remains to be done. The threat of another downturn is one we should take seriously. With the budget fast approaching, it is time to see whether our Cassandra Chancellor-who has a history of missing his own targets-really believes his own dire warnings and, more importantly, if he acts on them.