speri.comment: the political economy blog

‘Osbornomics’: forever blowing bubbles?

How does the Chancellor succeed in telling such a positive story about his management of the British economy when it contradicts so much of the evidence?

Dr Matthew L. Bishop, Associate Fellow, SPERI & Senior Lecturer in International Politics, University of Sheffield

Bishop_100As the 2015 budget illustrated, George Osborne is undeniably one of the shrewdest politicians in Britain today.  He is not, in my view, a very good Chancellor, though, and overall his stewardship of the economy has been disastrous.  But that rather evinces the point.  Despite the fact that Osborne has missed just about every target he set for himself in 2010, he still seems to be covered in Teflon.

So, how does he get away with it, and why does it matter?

First, the case for the prosecution: in 2010 the Conservatives came into office arguing that ballooning debt was the most critical problem facing Britain.  Cuts were urgently needed because of ‘the worst economic inheritance in modern history’, with the structural deficit needing to be eliminated within a single parliament in contrast to the plan of his predecessor, Alistair Darling, simply to halve it.

However, a combination of too-early tightening, doom-laden and confidence-draining pronouncements, plus the Eurozone crisis, caused the economy to tank.  Osborne then craftily loosened fiscal policy while proclaiming he was doing the opposite, with the net result that the government will have borrowed well over £200bn more than promised at the outset, leaving a deficit of £95bn for the fiscal year now ending rather than the £37bn initially forecast.  This is a considerably higher figure than Darling’s approach envisaged, so the Chancellor has actually done worse than the Labour plan he derided.

More recently, in the 2014 Autumn statement, Osborne promised that he would seek to achieve a surplus of £23 billion by the end of the next parliament in 2019-20, now revised down to £7bn in the March 2015 budget, partly to neutralise the howls of indignation from the opposition about shrinking the state to its 1930s size, and also to reflect the greater fiscal space available due to revised growth and inflation figures (good) and the sale of more public assets (not so good).

This, in turn, has fed into a number of give-aways in the recent budget which are (claimed to be) fiscally-neutral, such as increasing an already generous personal income tax allowance yet further, an above-inflation increase in the income level at which the 40p rate is paid (benefitting the 4.4 million or 15% of taxpayers that pay it), more subsidies for ‘Help to Buy’ (thereby stoking the housing bubble), and so on.

But – once more – why does all of this matter?

The thing that bothers me more than anything – more, indeed, than the fact that such munificence is targeted at older, better-off people, rather than the poor or young who have suffered so greatly under this government – is that the cynical claims that have been continually made about the overriding importance of deficit reduction are totally meaningless.  In short: Osborne has enjoyed the benefits of being perceived as fiscally conservative when he is actually anything but. In fact, if the 2015 budget tells us anything, it is that the Tories’ spending (and therefore borrowing) instincts are little different to those of the – supposedly – dangerously profligate Labour Party.

If the Chancellor’s avowed commitment to austerity were genuine, then he would view Britain’s current fiscal position with horror: the little bit of wriggle-room that has apparently opened up has only done so relative to the most horrendous recent borrowing figures, not because the implausibly ambitious plan laid out five years ago has been achieved with room to spare.  The deficit remains bigger by a magnitude of tens of billions per year – meaning hundreds of billions added to the national debt – than Osborne promised it would be in 2010.  So, shouldn’t we logically expect that every single extra penny that becomes available should be used for nothing other than deficit reduction?

Osborne’s vow to eliminate the deficit appears little more than a disingenuous fig leaf designed to mislead the electorate and obscure the reality of an ideological assault on the welfare state!

One crucial aspect of the Chancellor’s ‘achievement’ – a highly uneven, unstable and deeply regressive recovery – is that the bubble-blowing has been so carefully orchestrated.  Just as the booming London property market has finally begun to plateau, with average house prices settling at over half a million unaffordable pounds, the government’s looming pension reforms promise to unlock billions in private capital overnight, much of which will immediately be recycled into buy-to-let, thereby postponing (but certainly not averting) a long-overdue and painful correction, further inflating prices and locking out ever more young people from home ownership.

In contrast to the rhetoric, this actually implies a quite terrible ‘economic inheritance’ for the next government: a deficit that is barely a third smaller than that which greeted the Coalition in 2010, and at least another £132bn of borrowing to come in the next parliament if Osborne’s projections are credible (and tens or even hundreds of billions more, if not).

But are they in any way credible?  Just as the deficit was never as significant as the government has proclaimed for the past five years, the Chancellor now has no intention whatsoever of generating a £7bn surplus by 2019.  As his record in office shows conclusively, the targets he sets for the future bear little relation to reality: they are instead designed politically to restrict Labour’s policy options. When they are missed, there is no admission of failure, only assertions of success.

In any case, even were such a surplus remotely realistic, there is no guarantee that the (ever-more inflated) housing bubble will not burst in the middle of the next parliament, destroying bank balance sheets once more and precipitating the destabilising outflow of speculative foreign capital.  This is a very good reason why the upcoming election might be, as Colin Hay has put it, ‘not a good one to win’ (just imagine what it would mean for Labour if Ed Balls is at the helm during such a property crash …).  Add to this the unknowable implications of a potential ‘Brexit’ from the EU, or a Scottish exit from the union, and the dangers are only multiplied further.

Even without such crises materialising, Osborne’s optimistic forecasts are predicated on steady 2%-plus growth year-on-year until the end of the decade.  Will that definitely happen?  I for one doubt it: governments are very good at foreseeing growth years ahead, but never shocks, contractions or recessions!

In sum, George Osborne can say anything he likes about growth and debt.  Despite the massive evidence contradicting him, he can keep repeating his mantras about ‘difficult decisions’, a ‘long-term plan’ and a country ‘walking tall’.  He can also profess a disingenuous commitment to ‘free markets’ while simultaneously intervening to stoke a housing bubble, all of which should horrify any true conservative.

The point is that, until Labour develops a convincing narrative to counter him (getting very late for this), or the Tory press begins to hold him properly to account (inherently unlikely), he will probably keep getting away with it.

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Categories: British growth crisis, Debt, Economics, Inequality, Politics and policy, SPERI Comment, Tax | Tags: , | Leave a comment

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