Show Hide image

George Osborne’s cunning plan: how the chancellor's austerity narrative has harmed recovery

The Tories claim austerity saved the country from disaster. But Osborne's neoliberal right economics drew on discredited theories - and ultimately scuppered growth.

© Jonathan McHugh

Over their five years in power, the Conservatives have claimed their austerity policy saved the country from disaster. This purported economic competence sits at the heart of their election campaign. It needs critical scrutiny.

The coalition government has given two main reasons why austerity – cutting the Budget deficit – was necessary. The first is that its predecessor Labour government, living “beyond its means”, left the nation with a rising mountain of public debt. The only way to restore fiscal probity was to start austerity as soon as possible.

The second reason was that commitment to austerity was the only way to reassure the bond markets that the British government would not “go the way of Greece”: that is, default on its debts. Both arguments were false but they have never been properly exposed in the media; and for various reasons Labour has not attacked them with the vigour they deserve.

In economic logic, the two reasons are independent of each other. How much a government needs to borrow should be determined by the state of the economy, not by how much debt its predecessor has left it. In a slump, a government should aim to increase its deficit, not reduce it, to compensate for the fall in private-sector spending. This will normally cause the economy to grow faster than the deficit and in turn reduce the deficit, and eventually the national debt, as a share of national income. But to understand this, you need to understand that a slump is defined by the existence of spare capacity: spare because the private sector is unwilling to create the jobs to use it. Instead of borrowing to keep people in idleness, the government should borrow to create jobs. Yet this common sense was seemingly no longer the common understanding.

Linking Labour overspending with the risk of “going the way of Greece” offered the Conservatives an alternative narrative of undoubted persuasive power. Had the Labour government not left so much debt, the Conservatives said, there would have been less need for austerity to reassure bondholders. George Osborne had to be so austere because Gordon Brown had been so profligate.

This message resonated politically. The collapse of the economy in 2008 took place on Labour’s watch. So it was easy to blame Labour for it. Labour felt unable to defend its record; so the Conservative narrative became the accepted one among the punditry. However, it is far from clear that voters bought this story at the time. Labour only narrowly lost the 2010 election; most political analysts believe that Brown’s lacklustre leadership cost the party between 20 and 30 seats. So, defending Labour’s record was not a hopeless task politically. But the Labour opposition soon gave up the attempt to do so, leaving the telling of Labour’s story to the Conservatives.

In the interests of truth, we need to ask two questions. How profligate or extravagant had Labour been? And how real was the threat of a bondholder strike?

The myth of Labour profligacy

The answer to the first question can be divided into two parts: Labour’s economic record before 2008 and its record in the post-crash years 2008 to 2010.

The Labour government had committed itself to Gordon Brown’s famous fiscal rules. In its draft election manifesto of 1996, it promised to “enforce the ‘golden rule’ of public spending – over the economic cycle, we will only borrow to invest and not to fund current expenditure”. This pledge was buttressed by the “sustainable investment rule”: over the cycle, the government would hold net public debt to below 40 per cent of GDP. Significantly, Brown’s tight spending plans of 1997-98 were set against “Conservative mismanagement of the public finances” – which only goes to show that, following a change of government, the incoming government always blames its predecessor for the fiscal mess it inherits.

A detailed, and far from uncritical, analysis of Labour’s fiscal record by Malcolm Sawyer of Leeds University, dating from 2007, found that between 1997-98 and 2005-2006 Brown, as chancellor, “nearly met” his fiscal targets. The current account deficit was close to zero over the period and the national debt stayed under 40 per cent of GDP. Sawyer put this record “close to achievement of the golden rule” partly down to good luck – surpluses generated by the dotcom boom of the late 1990s, reduction in world nominal interest rates – but partly to tricky (“creative”, in the jargon) accounting. The use of the private finance initiative (PFI) to fund the building of schools and hospitals “off budget” lowered the deficit in “real time” at the cost of raising it in the future. Had this investment programme been financed by conventional borrowing, the net debt-to-GDP ratio would have been closer to 50 per cent, rather than the recorded 33.6 per cent.

Second, the Brown Treasury kept redating the “economic cycle” (a fuzzy concept at best) to make its fiscal rules easier to meet. The main effect of this redating was to postpone the achievement of the zero balance on public investment needed to meet the sustainable investment rule. It was for these reasons that in 2005 the OECD noted that Britain’s fiscal policy “required attention”.

By 2007 the Treasury admitted that it was time to slow down the public-sector growth engine. Its Comprehensive Spending Review of February 2007 cut projected public spending from 4 per cent a year to 2.1 per cent a year over the following three years, less than the expected growth of the economy, which was itself expected to be lower than in the previous boom years. This would yield a current account surplus of 0.3 per cent and cap the national debt at 39.8 per cent by 2010-11. However, Brown’s luck finally ran out: instead of slipping gently into a new economic cycle, the economy fell into a deep hole. Economic growth did not slow down – it collapsed.

To summarise: in its first ten years Labour may have fiddled the books a bit, as all governments do, but it had certainly not created a mess. And it had built lots of hospitals and schools. The more honest charge is that New Labour overestimated the revenue flows it would go on receiving from a flaky financial services sector, whose largely unregulated expansion it had encouraged, and whose inherent instability it had ignored. But this is a judgement after the event. Most academic economists ignored the possibility of a financial crash. Nor did the Conservative opposition think the government’s finances were messed up in 2007. In September of that year, the shadow chancellor, George Osborne, confirmed that he would match Brown’s spending plans and that, “under a Conservative government, there will be real increases in spending on public services, year after year”.

The mess, if that is what it was, came in the two big slump years, 2008 and 2009. Owing to the collapse of its revenues and the additional spending on social security, public-sector net borrowing shot up from 2.7 per cent to 10.2 per cent of GDP. The cost  of bailing out banks added to a national debt that ballooned from 43.6 per cent of GDP pre-crash to 76.4 per cent by 2010.

In short, the big holes in the public finances inherited by the coalition when it took office were the result not of misguided splurging, but of the sudden emergence of deep craters in the British and world economy. This is confirmed by a 2011 IMF report, which calculated that of the 37 per cent increase in UK public debt from 2007-2011, 25 per cent was due to loss of revenues, 7 per cent to support of the financial sector and only about 2 per cent to fiscal stimulus. Furthermore, it’s true that the rise in the deficit was somewhat higher than the OECD average, but this was because British governments were more dependent on revenues from the financial services sector.

The Conservative charge of Labour profligacy boils down to the claim that Labour did not start cutting spending immediately it saw its revenues falling. But Conservative spokesmen have never honestly faced up to the question: what would have happened if the government had started cutting its spending with the economy in a tailspin?

Labour did what any sane and civilised government would have done in the circumstances (and which all other governments did): continue to support the economy as best it could to limit the damage caused by the collapse in private spending.

The Greek excuse

Enter the coalition and George Osborne. The British economic collapse bottomed out at the end of 2009 and the economy started growing modestly. Then came the Greek sovereign debt crisis and the switch to austerity. Osborne made the link explicit when he declared in his “emergency” Budget of June 2010 “you can see in Greece an example of a country that didn’t face up to its problems, and that is the fate that I want to avoid”. That austerity was the only way to avoid a British sovereign debt crisis remains the official defence of austerity to this day. As the Treasury minister Paul Deighton told the House of Lords only last month, “the markets would not have allowed us to continue with the scale of deficit we had”.

But Britain was not like Greece or any other country in the eurozone. Locked into a system of nation-state debt issuers without currency-creating powers, Greece and other eurozone debtors faced a dire choice between austerity and default. But with its own currency and its own “lender of last resort” central bank to backstop its bond issues, Britain had an extra margin of freedom (secured, ironically, by the Labour government when it decided not to join the single currency) to conduct a macroeconomic policy suited to the condition of its economy. Fiscal policy was not disabled by the bond markets as in the eurozone; there was no need for “an accelerated plan” to reduce the deficit. What did happen was that Osborne’s alarmist anti-Labour rhetoric talked influential commentators who should have known better into believing that Britain was on the road to deficit-fuelled ruin.

 

***

 

So, why did Osborne do it? Historians will debate his motives but I believe that this intensely political Chancellor saw in a manufactured crisis of confidence a once-in-a-lifetime opportunity to cut the size of the state. The view, long held by the neoliberal right, that state spending steals resources from the productive economy, was repackaged for the purposes of austerity as the doctrine that government spending was “crowding out” more efficient private-sector spending and therefore damaging recovery: a restatement of the Treasury view of the 1920s, which Keynes exploded with a common-sense argument – in a slump, increased government spending does not take resources from the private sector: it brings into use resources that are idle.

From his theoretical ragbag, Osborne constructed a consummate political narrative that linked folklore economics (“the government can’t spend money it hasn’t got”) to the politics of blame (“cleaning up the mess left by Labour”) to the politics of fear (“the Greek bogey”) to grand economic strategy (“reducing the deficit is a necessary condition for sustained recovery”).

There is no doubt that, aside from his basic instincts, Osborne received some very bad economic advice. “Unless we deal with debts there will be no growth,” he declared in June 2010. This echoed the briefly fashionable views of two American economists, Carmen Reinhart and Kenneth Rogoff, who claimed that if the ratio of public debt to GDP rose above 90 per cent, growth would go into reverse. Their headline finding was quickly discredited but Osborne said that they were the economists who most influenced him.

Another argument briefly called into use in 2010 was the theory of “expansionary fiscal consolidation”. The theory was that the boost to business confidence given by cutting welfare benefits would more than offset their contractionary effects on demand. Indeed, its main advocate, Alberto Alesina of Bocconi University in Milan, assured European finance ministers at a meeting in Madrid in April 2010 that not only would a “credible policy of fiscal consolidation” boost growth but it would do so quickly.

The failure of the “Alesina effect” to materialise in those European countries that were unwise enough to try out his remedies should have discredited austerity as a recovery policy. For nearly three years following Osborne’s 2010 deficit-cutting Budget, the British economy stagnated. The Chancellor forecast an average GDP growth of 2.7 per cent between 2011 and 2013. Actual growth in the period was 1.3 per cent. Austerity’s supporters blame the stagnation on “headwinds” – the continuing eurozone crisis, higher oil prices – but the Office for Budget Responsibility (OBR), the watchdog that Osborne himself set up to monitor his performance, disagrees. Austerity, it says, reduced GDP growth by 1 per cent in 2010-11 and a further 1 per cent in 2011-12.

Extrapolating these OBR figures puts the cumulative cost of austerity since 2010 at 5 per cent of GDP. Some leading economists, including Simon Wren-Lewis of Oxford University, consider 10-15 per cent a more realistic figure. That means between 5 and 15 per cent of British output has been permanently lost. The lowest estimate, 5 per cent, indicates £100bn, or £1,500 for every citizen. The truth is that austerity stopped the recovery in 2010 and caused the economy and society unnecessary damage.

Growth’s failure to materialise dished the Chancellor’s five-year timetable for cutting borrowing. With government revenues failing to recover, Osborne quietly slowed down the speed of his cuts, eventually declaring that a further £35bn of consolidation would be needed in the next parliament. The Bank of England injected a further £175bn into the economy between October 2011 and July 2012. In 2012, the government started subsidising bank lending for mortgages through its “Help to Buy” scheme. The shaky recovery that the easing of austerity brought about in 2013 made possible the Chancellor’s rhetorical masterstroke: we are growing faster than any country in Europe. This shows austerity works!

 

Labour’s weakness

Conservative rhetoric has left Labour floundering. The Conservatives have been able to take the narrative of the crisis away from Labour and turn their disastrous economic stewardship to political advantage. Their surprising weakness in the polls suggests their story is not entirely believed. This may yet enable Labour to form a minority government. Osborne does not deserve another go. He has done his best and worst.

Could Labour have done better? Its first, and probably decisive failure, was in mounting a convincing defence of its own record. Yet there was much to be proud of and particularly in the crisis years of 2008-2010 – the very years in which, according to the Conservatives, they messed up the public finances. In fact, the Labour government’s decent and principled reluctance to cut public spending in the crisis years was what kept the economy going; to which must be added Gordon Brown’s exceptional leadership in co-ordinating the global recovery effort in 2009. But the chance to establish this as the story of the crisis was missed; and after the electorate had given its verdict in 2010, it could not be resurrected politically.

Once Osborne had put his strategy for recovery into place, it would have required not only exceptional rhetorical skill to have countered it, but economic understanding of a high order. The Greek finance minister, Yanis Varoufakis, a professional economist, has shown how important it is to have at least one political leader who combines rhetorical power with a solid knowledge of macroeconomics. For Varoufakis has the knowledge and confidence to confront the banalities that pass for economic wisdom in the temples of power and finance. Has anyone in these august places, one wonders, heard of the paradox of thrift? But no one in the post-2010 Labour leadership could have done that job except the shadow chancellor, Ed Balls, and his inability or unwillingness to make a decisive attack weakened Labour’s intellectual firepower and in effect let Osborne get away with it. It is pretty scandalous that it is left to the SNP to make the case Labour should have been making.

The opposition to austerity was also weakened by a factor outside Labour’s control, namely the rapid reassertion of macroeconomic orthodoxy in treasuries, central banks, international organisations such as the IMF and much economic journalism, following their brief flirtation with Keynesianism in 2008-2009. Why, after the economies of the world had fallen into a hole, did these people start turning their guns on the governments that had rescued their economies from another Great Depression? That is something historians and political analysts will have to puzzle out.

One baleful consequence of the return to orthodoxy was that the statistical basis for policymaking was consistently slanted in the wrong direction. There was a systematic underestimate of spare capacity in the period 2010-11 and a systematic overoptimism about growth prospects.

Keynes said: “When statistics do not make sense, I find it generally wiser to prefer sense to statistics.” Common sense should have told policymakers that the financial system and economy had been deeply damaged by the crash of 2008 and needed a very strong stimulus from government to avoid years of waste and stagnation. Prudence should now tell policymakers that the promise to cut the welfare state to the bone will not only inflict further economic damage but cause social resentment on a scale not seen since the 1980s.

Little of this common sense of the matter has emerged so far in the general election. The Conservatives have spun their familiar yarn of rescuing Britain from “Labour’s Great Recession”, restoring “confidence” by borrowing less, pledging to start “paying down debt”. Labour has mostly tried to be plus royaliste que le roi: it will “cut the deficit” every year; it will impose a “Budget Responsibility Lock” to stop governments fiddling the accounts. More promisingly, it will set up a “British Investment Bank” but has said nothing about its funding or powers. Perhaps the voters will see through Labour’s disordered head to its humane heart. But with so little to choose between the big parties on the main issue of the day, it is not surprising that the election remains too close to call.

Robert Skidelsky is a cross-bench peer and a leading biographer of J M Keynes. His most recent book is “Britain Since 1900: a Success Story?” (Vintage)

This article first appeared in the 24 April 2015 issue of the New Statesman, What does England want?

Photo: Getty
Show Hide image

The gay Syrian refugees still living in limbo two years after making it to the UK

They still have no right to live and work in the UK, no permanent accommodation or means of financially supporting themselves. 

31-year-old Ahmed and his boyfriend Said* fled Syria in 2013, after the civil war intensified. They both headed to Turkey – where they first met – then moved on through Greece, Croatia and Western Europe. In December 2015, they completed their 4,500km, two-year journey and arrived in the UK.

When Ahmed and Said shared their story with the New Statesman two months later, the Home Office was still deliberating on whether to accept responsibility for their asylum claim. At the time, their lawyer feared plans were being made to deport the couple back to Croatia, where they’d previously been registered while incarcerated in a refugee camp. 

Eventually though, in November 2016, the Home Office officially agreed to process their claim. The decision to do so is one of the few positive developments in their situation since they arrived in the UK more than two years ago. Little else has changed.

They still have no right to live and work in the UK, no permanent accommodation or means of financially supporting themselves. They’re unable to engage in basic day-to-day functions, from owning a bank account to booking a cab through an app. They still have to keep their identity and status as a gay couple anonymous – a precaution in case they are made to return to Syria, or outed to intolerant family members. They continue to live in fear that they could be summoned and deported at any moment. It’s been two years in limbo.

“For everything here you need documents or a bank account,” says Ahmed. “We don't have an address because you need income. So the minimum of life requirements we cannot get. We're not asking for much. We're not asking for financial support, we're not asking for accommodation. Just give us the right and we will depend on ourselves. We will work. We will study. We will find accommodation. We will pay tax.”

Shortly after the couple arrived, they were given temporary accommodation in Rochdale and a weekly allowance of £35. With no right to legally work in the UK, this was all they had to survive on. And while the flat in Rochdale was the first place they had space to themselves, they were isolated from the reason they came to the UK in the first place: to be with the only friends they knew in Europe.  

“We couldn't stay there, we tried really hard,” says Ahmed. “At that time we were alone, completely alone, in Rochdale. We were living separately there was no one around us… we got depressed. We got stressed there. So we decided to move to come to London because we have a friend here who can support us, who can be with us.”

In May 2016 the couple moved in to the spare room of their friend’s Mayfair apartment. She had arrived from Syria six years ago on a student visa. In the time they’ve been in London they’ve tried, in vain, to prepare for work, readying themselves in case they are actually granted asylum. After another friend loaned them some money, Ahmed, a trained architect, took an animation course, while Said, a chef, took a course to improve his English. Said finished the first level, but wasn’t allowed back to complete the next module without a passport. Ahmed stopped the animation course after running out of money from their friend’s loan.

Moving in with their friend may have bettered their living conditions, but it proved detrimental to their financial situation. The small sum they received from the Home Office stopped when they moved out of the accommodation in Rochdale. The Home Office claims this was due to the fact they were no longer classed as destitute.  The few friends they do now have in London have often had to loan them money or lend them essentials, like clothes. With no money and little to keep them occupied during the day, the limbo they’ve found themselves in has taken its toll on their mental health.

“Most of the time we get depressed because we don't have money to do anything,” says Ahmed. “You can't work, you can't study…you can't imagine how you feel when you spend your days doing nothing. Just nothing. Nothing useful in your life. Nothing. Can you imagine the depression you get?”

Though their friend has helped over the last year or so – giving them the place rent-free and providing them with food – she is now selling the apartment. They have four weeks to find new accommodation. If they don’t they’ll be homeless. The stress has caused Said’s hair to start falling out and he now has a plum-sized bald patch on the back of his head.

“If any country can accept us we would go back,” says Said. “But Turkey can't accept us. Syria can't accept us. Croatia can't accept us. So no one needs us. Where we can go? What are the options we have?”

The Home Office officially began processing the couple’s asylum claim in November 2016, and stated it aimed to make a decision by 27th May 2017. According to its own guidelines, claims should be processed within six months. Ahmed and Said have been waiting more than a year.

On 11 September 2017 they received a letter from the Home Office via their legal representatives at the Greater Manchester Immigration Aid Unit, an organisation which provides free advice and representation predominantly through the legal aid scheme. The letter apologised for the fact their asylum claim had taken longer than six months to process. It went on to say that they would be invited for a “substantive asylum interview within 14-18 weeks with a decision to follow 8 to 12 weeks after.” More than 22 weeks later, the couple are still waiting an invitation.

“When they didn't [invite them to an asylum interview], we threatened them with a judicial review again,” says Ryan Bestford, an immigration lawyer at the unit, who has been working with the couple. In Ahmad’s case, the judicial review – an application to a higher court which seeks a review of a government decision - would look for an order forcing the Home Office to interview him. “In response to our [judicial review] threat, they then claimed that they will interview Ahmed within 10 weeks.”

The letter to their lawyers also states that there are many reasons why a claim may take longer than six months. According to the Home Office “further internal enquiries in relation to your client’s asylum claim were being made,” hence the delay in Ahmed and Said’s case. No additional information for the delay was provided.

According to a recent report in the Guardian, claims are often classified as complicated or non-standard by the Home Office to excuse the UK Visa and Immigration Unit from processing claims within six months. Ahmed and Said’s lawyer scoffs at the notion their case is complex.

"This case is not complicated," says Bestford. "They are from Syria and even the UK government accepts that the situation in that country is so bad that all Syrians are entitled to refugee status. In addition they are gay. This case is straightforward."

Bestford has been working with the couple since January 2016, when the Home Office wanted to return them to Croatia, despite the fact the Croatian government had made it clear that they did not want them. As LGBT asylum seekers, Ahmed and Said are an especially vulnerable group. Said is also HIV positive, and when the Home Office consider his application to asylum they’ll need to consider his ability to access treatment.

Such vulnerabilities are no guarantee of asylum. According to a Home Office report published in November 2017, 3,535 asylum applications were made on the basis of sexual orientation, 2,379 of which were rejected. Just 838 were approved.

"They should have been granted refugee status a long time ago," says Bestford. "I have no idea what the reason for the delay is. But it certainly cannot be the complexity of the case. If the Home office are saying that it is because of the complexity of the case – they are not fit for purpose."

As well as support from the few friends they have in the UK, they’ve also found an ally in Lord Paul Scriven, the Lords spokesperson for international LGBT rights. He highlighted the plight of the couple in July last year, in a speech which raised concerns about the detention of LGBT asylum seekers and the systemic delays in processing asylum claims.

“I am both bewildered and surprised that [Ahmed] and [Said]* are still waiting for their case to be dealt with and them been granted right to stay,” says Scriven. “I have written to the Home Office and made it clear it is totally unacceptable and needs now to be dealt with as a matter of urgency.

“As in many cases the reason for this delay lies at the door of the Home Office and the way in which they deal with cases of asylum for people claiming on the grounds of their sexuality or gender identity.  In many cases this slow and cold approach is all too common by the Home Office.”

Ahmed has contacted the UK Visa and Immigration Unit helpline to try and seek temporary accommodation. He is still waiting to hear back from them. For now the couple’s situation is no clearer; but with impending homelessness it’s certainly more desperate.

They arrived in the UK eager to work and excited about the possibility of living openly as two gay men. They arrived brimming with ideas for what a new start could look like. The last two years have taught them to abandon any forward planning and to avoid imagining a life where they have been granted asylum.

“I can't plan anymore,” says Ahmed. “All our plans have disappeared…we thought we escaped from the war…we thought we're gonna start again. We thought there's justice here. We thought there are human rights. But nothing exists. There's no justice. There's no fair. There are no human rights. They treat us like animals. The dogs live better than us here.”

Close to defeat, Ahmed and Said have discussed one final alternative. “Or I go back to Syria,” says Ahmed. He swiftly disregards any concerns about the conflict and his identity as a gay man. “I prefer to die there at least with my family in my country. Better than dying here alone. “

In a statement provided to the New Statesman, a Home Office spokesperson said:

“The UK has a proud history of granting asylum to those who need our protection.

“An asylum case that does not get decided within 6 months is usually one classed as a non-straightforward asylum case. These cases are usually not possible to decide within 6 months for reasons outside of our control.

“Asylum seekers who would otherwise be destitute are supported with free accommodation and a weekly cash allowance for each person in the household. This is available until their asylum claims and  any appeals are finally determined or they decide they do not require Government support.”

*names have been changed

This article first appeared in the 24 April 2015 issue of the New Statesman, What does England want?