‘Osbornomics’ and the death of benign government

Osborne’s plan to bind all future Chancellors to produce annual budget surpluses is not driven by economic logic, but is intended to reshape the meaning of government

Matthew WatsonThere is something really rather smug about the British Chancellor of the Exchequer, George Osborne, intending to legislate formally for constant year-on-year budget surpluses.  ‘I have been so right all along in my management of the post-crisis economy’, he seems to be saying, ‘that my gift to the nation is to force all of my successors to continue on my course’.  With the top rate of income tax due to fall and little political appetite in the Conservative government for dealing with corporate tax avoidance, the budget surpluses of the future will need to be created on the back of a dwindling tax base.  The permanent austerity of today looks sure to be followed by an even more aggressive permanent austerity tomorrow.

Of course, there are objective limits to such a strategy.  The promised £12 billion of as-yet-undetailed cuts to the welfare budget in the current Parliament will be difficult enough to find.  The government will come up against all sorts of statutory duties already written into legislation.  Following last week’s decision to change the definition of child poverty, it could do something similar across the board so that people had to become measurably poorer before they could be classified as being in poverty.  Yet the Conservatives’ cherished mantra of ‘all in it together’ would be absolutely impossible to sustain when relying on statistical sleight-of-hand to reimagine who is poor in the interests of facilitating top-end tax cuts.  What else, though, might the government do on this front, given that there are simply too few ‘shirkers’ left to provide easy justification for accelerated changes to the benefits system?

But maybe this is to miss the point: a sharp line now needs to be drawn between the separate experiences of Coalition and emerging majority Conservative government.  Osborne’s overall masterplan seems to have moved on from attacking the poor to an all-out assault on the very notion of benign government itself.  The qualifier ‘benign’ is important here, because the mechanisms and apparatus of government will still be used to discipline, harangue, shame and overpower anyone from whom Cameron’s ministers now wish to remove welfare entitlements.  The desire to ‘lock in’ annual budget surpluses opens new spaces for this hectoring, bullying approach at the same time as it closes down established spaces for transfer payments designed to compensate people for life’s misfortunes.

There are precedents in economic theory of policy-makers deliberately choosing to tie their own hands in this way.  However, they do not make for happy reading when thinking about where we are today.  The models in question derive from Finn Kydland and Edward Prescott’s pioneering – and Nobel Prize-winning – 1977 study of so-called time consistency dynamics.  ‘Time consistency’ in this regard is not the same as the literal meaning of the words, of doing the same thing over and over again.  Rather, it has the technical meaning that the only credible commitments policy-makers can make are to a policy path from which the general population believes the government has no incentive to deviate.  Kydland and Prescott asked how governments could rid themselves of social policy commitments that made their counter-inflationary commitments something less than credible in the eyes of the private sector and also why the public should believe that they would overlook boosts to short-term political popularity to continue on their newly austere path.  The parallels with the Osborne plan are plain to see on the first point, but there is also a distinct twist in the tale.

In the original time consistency models the government created an additional stock of credibility for itself every time it had a chance to do good but chose to ignore it.  The dystopian world of anti-interventionist macroeconomic models is clearly echoed in the Britain that Osborne is frogmarching us towards.  Both centre on a conception of political agency which celebrates the refusal to embrace a higher social welfare function, and neither recoils from turning the whole process of government into disciplinary acts designed to force people to take regressive economic medicine.  Kydland and Prescott remove all possibility that government might be a benign force by restricting welfare entitlements in the interests of squeezing inflation out of the macroeconomic environment.  Osborne is doing likewise in the interests of squeezing top-end tax cuts out of a shrinking spending pot.  The same class bias is evident in both cases, as the end result can only ever be greater inequality.

However, there is a tautological trick written right into the heart of Kydland and Prescott’s model.  The private sector is provided with the ability to restrict policy-makers only to credible counter-inflationary commitments by being given both perfect foresight to identify the optimal policy path and perfect rationality always to act upon that foresight.  Osborne, by contrast, is faced with a general population which has very different characteristics.  By the end of the General Election campaign a majority of British voters were already saying that they did not support the degree of austerity introduced since 2010, let alone the extra austerity promised in the Conservative Party manifesto.

It is therefore a safe bet that Osborne is speaking the preferences of only a small section of the population when preparing future top-end tax cuts against the backdrop of constant year-on-year budget surpluses.  The numbers simply do not add up when comparing the welfare programmes that remain popular as an expression of benign government and those that will have to be sacrificed for Osborne to meet his targets.  The only chance he has of squaring this particular circle is by activating a notion of government that is much harsher, meaner and more completely unforgiving of people’s bad luck than anything that even Kydland and Prescott ever envisioned.