What Osborne won't admit: growth has increased because of slower cuts

The Chancellor's claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data.

Many others – perhaps Fraser Nelson does it best – have poked fun at the most Panglossian elements of the Chancellor’s speech on Monday. But I’d like here to address the substantive arguments he makes about what the path of the UK economy over recent years says about the impact of fiscal policy on growth.

The Chancellor doesn’t deny that growth has been much weaker than forecast, although it’s worth repeating the scale of this underperformance. In June 2010, the Office of Budget Responsibility predicted that by now the economy would be about 7 per cent larger, driven by a sharp rise in business investment and exports, while the deficit would have fallen by two-thirds. What has actually happened? In fact, GDP has grown at less than a third of that rate, business investment has fallen, and the path of deficit reduction bears no resemblance at all to the original projections (which is, as I'll elaborate below, a good thing).    

But, the Chancellor argues, this underperformance has nothing to do with fiscal policy:

the composition and timing of the slowdown in GDP growth relative to forecast is better explained by external inflation shocks, the eurozone crisis and the ongoing impact of the financial crisis on financial conditions. 

The Chancellor claimed his analysis was supported by many "independent economists" - although, oddly, he failed to mention the IMF, which has been the most prominent independent organisation to argue the contrary. Of course, the IMF and those of us who thought the fiscal consolidation plan was too aggressive never denied that these other factors played a par (and that their reversal will indeed help boost recovery).  As I put it here:

it now seems clear that the negative impact of ‘Plan A’ on growth has been significantly greater than expected, although matters have also been exacerbated by even more damaging policy mistakes in the eurozone, as well as high commodity prices.

Coincidentally, on the same day the Chancellor made his speech, other "independent economists" (Oscar Jorda and Alan Taylor) published a widely reported paper suggesting precisely the opposite (an earlier, non-technical summary is here). They find, as shown in their chart:

Without austerity, UK real output would now be steadily climbing above its 2007 peak, rather than being stuck 2% below. 

And they conclude:

Fiscal contraction prolongs the pain when the state of the economy is weak, much less so when the economy is strong....Keynes is still right, after all: “The boom, not the slump, is the right time for austerity at the Treasury.

However, despite the weight of academic research, the Chancellor goes on to claim that current developments support his interpretation of recent past history:

Proponents of the ‘fiscalist’ story cannot explain why the UK recovery has strengthened rapidly over the last six months. The pace of fiscal consolidation has not changed, government spending cuts have continued as planned, and yet growth has accelerated and many of the leading economic indicators show activity rising faster than at any time since the 1990s.

But this is an obvious sleight of hand.  The claim that "the pace of fiscal consolidation has not changed" is not supported by any of the available data. Here is the OBR’s own chart. As Robert Chote, the OBR’s Chair puts it, "deficit reduction appears to have stalled".

Indeed, the OECD, the government’s favourite of the international forecasting bodies (since, as noted above, the IMF shares my interpretation of the impact of fiscal consolidation on growth) goes even further. According to its calculations, the UK is actually expanding its structural deficit in 2013. In other words, the government is engaging in fiscal stimulus.  Personally I find this implausible - the OBR's estimate is that the structural deficit was broadly flat in 2012-13 - but the data hardly seem consistent with the Chancellor's view.

How did this happen? As I explained earlier this year:

So what's going on? As I noted earlier, most of the deficit reduction has come from cutting public sector net investment (spending on schools, roads, hospitals, etc) roughly in half. Pretty much all the rest came from tax increases (note that the investment cuts and tax increases were both, to a significant extent, policies inherited from the previous government). And we can see when it happened - between 2009-10 and 2011-12.

But these sources of deficit reduction stopped in 2011-12, because the government belatedly realised that cutting investment was a major mistake and that the economic imperative was actually to do precisely the opposite (not that there was much investment left to cut); and it stopped putting up taxes overall. So we can see also what's happened since - with the impact of the weak economy on tax receipts reducing revenues, the deficit has been flat and is projected to stay flat.

So the Chancellor’s argument is simply a non sequitur, supported neither by the research evidence nor the data. 

As I wrote here at the turn of the year, we should give the government credit for not digging us further into a hole by trying to stick to its original plans. Fiscal consolidation has slowed, at least for the time being, and as a consequence it is playing a considerably smaller role in driving economic developments than it did two years ago. Meanwhile, the eurozone and global environment is, at least at present, considerably more favourable. Poor policy and bad luck has delayed recovery, relative to NIESR's original forecasts and everyone else's, but has not removed the ability of the UK economy to generate growth. 

So it is perfectly reasonable to ask economic forecasters (including both the OBR and us at NIESR) why we appear so far to have underpredicted the strength of the current upturn. But claiming that this improvement vindicates the earlier damaging mistake the government made by going for front-loaded fiscal consolidation in 2010 just doesn’t make any economic sense. 

George Osborne makes a speech on the economy at a construction site in east London. Photograph: Getty Images.

Jonathan Portes is senior fellow The UK in a Changing Europe and Professor of Economics and Public Policy, King’s College London.

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David had taken the same tablets for years. Why the sudden side effects?

Long-term medication keeps changing its appearance – round white tablets one month, red ovals the next, with different packaging to boot.

David had been getting bouts of faintness and dizziness for the past week. He said it was exactly like the turns he used to get before he’d had his pacemaker inserted. A malfunctioning pacemaker didn’t sound too good, so I told him I’d pop in at lunchtime.

Everything was in good order. He was recovering from a nasty cough, though, so I wondered aloud if, at the age of 82, he might just be feeling weak from having fought that off. I suggested he let me know if things didn’t settle.

I imagined he would give it a week or two, but the following day there was another visit request. Apparently he’d had a further turn that morning. The carer hadn’t liked the look of him so she’d rung the surgery.

Once again, he was back to normal by the time I got there. I quizzed him further. The symptoms came on when he got up from the sofa, or if bending down for something, suggesting his blood pressure might be falling with the change in posture. I checked the medication listed in his notes: eight different drugs, at least two of which could cause that problem. But David had been taking the same tablets for years; why would he suddenly develop side effects now?

I thought I’d better establish if his blood pressure was dropping. I got him to stand, and measured it repeatedly over a period of several minutes. Not a hint of a fall. And nor did he now feel in the slightest bit unwell. I was stumped. David’s wife had been watching proceedings from her armchair. “Mind you,” she said, “it only happens mid-morning.”

The specific timing made me pause. I asked to see his tablets. David passed me a carrier bag of boxes. I went through them methodically, cross-referencing each one to his notes.

“Well, there’s your trouble,” I said, holding out a couple of the packets. One was emblazoned with the name “Diffundox”, the other “Prosurin”. “They’re actually the same thing.”

Every medication has two names, a brand name and a generic one – both Diffundox and Prosurin are brand names of a medication known generically as tamsulosin, which improves weak urinary flow in men with enlarged prostates. Doctors are encouraged to prescribe generically in almost all circumstances – if I put “tamsulosin” on a prescription, the pharmacist can supply the best value generic available at that time, but if I specify a brand name they’re obliged to dispense that particular one irrespective of cost.

Generic prescribing is good for the NHS drug budget, but it can be horribly confusing for patients. Long-term medication keeps changing its appearance – round white tablets one month, red ovals the next, with different packaging to boot. And while the box always has the generic name on it somewhere, it’s much less prominent than the brand name. With so many patients on multiple medications, all of which are subject to chopping and changing between generics, it’s no wonder mix-ups occur. Couple that with doctors forever stopping and starting drugs and adjusting doses, and you start to get some inkling of quite how much potential there is for error.

I said to David that, at some point the previous week, two different brands of tamsulosin must have found their way into his bag. They looked for all the world like different medications to him, with the result that he was inadvertently taking a double dose every morning. The postural drops in his blood pressure were making him distinctly unwell, but were wearing off after a few hours.

Even though I tried to explain things clearly, David looked baffled that I, an apparently sane and rational being, seemed to be suggesting that two self-evidently different tablets were somehow the same. The arcane world of drug pricing and generic substitution was clearly not something he had much interest in exploring. So, I pocketed one of the aberrant packets of pills, returned the rest, and told him he would feel much better the next day. I’m glad to say he did. 

This article first appeared in the 13 March 2018 issue of the New Statesman, Putin’s spy game