On Friday, the Financial Times published a devastating critique of the government’s misguided fiscal austerity programme from an important source. Last week, Mervyn King; this week, Jonathan Portes, who is the new director of the National Institute for Economic and Social Research (NIESR). He took over in February from Martin Weale, who became an external member of the MPC and one of the three inflation hawks.
What makes this intervention so important is that, until February, Portes was chief economist at the Cabinet Office and adviser to the cabinet secretary, Gus O’Donnell, and No 10 on economic and financial issues. Previously, Portes was chief economist at the Department for Work and Pensions. So he knows a thing or two.
Portes argued that, given that the revised GDP data for the fourth quarter showed that Britain’s economy was, at best, flat, there is a “good case for delaying planned fiscal consolidation over the next year or two in the forthcoming Budget”. He also argued strongly for more assistance for young people and the reintroduction of the Educational Maintenance Allowance.
Importantly, Portes dissented from Osborne’s claim that changing the government’s plans would be bad for confidence — far from it. His view is that a change would likely be supportive. Portes also dismissed comparisons with countries such as Greece as being without foundation and called them “scaremongering”.
One much-cited argument . . . that any change in the current plan would damage confidence in the economy is fundamentally flawed . . . Markets can, of course, be irrational. But there is neither a theoretical reason nor any empirical evidence to suggest that they are irrational in this particular way. Indeed, history suggests the opposite: that the real hit to credibility comes from sticking to unsustainable policies — think Argentina in 2001 or Britain in 1992.
How would markets respond to a delay in fiscal consolidation? With borrowing cheap, debt default risks very low and a significant output gap there is essentially no evidence to believe that a short-term loosening would lead to markets losing confidence in the UK’s ability to service its debts. To suggest otherwise — to liken the UK to Greece — is scaremongering. Indeed, some loosening, particularly if offset by a sensible adjustment to medium-term plans, could actually boost both growth and employment without any significant cost to inflation or longer-term fiscal sustainability . . . If Mr Osborne really wants to inspire confidence, he should think again.
Osborne is going to find it increasingly hard to claim that the world and his dog supports his economic strategy, when the Cabinet Office’s former chief economist clearly does not share that view. And neither do the Nobel Prize-winners Krugman, Stiglitz and Pissarides, as well as a growing consensus of economic commentators, along with the majority of the British public. The time for turning is approaching.