Magazine article The Spectator

George, You Need a Holiday

Magazine article The Spectator

George, You Need a Holiday

Article excerpt

How printing money and an income-tax cut could help Osborne balance the books

Why is it all going so wrong for George Osborne? Only 16 months ago, the poor guy entered the Treasury full of sound principles and good intentions. He would put in order the dodgy public finances inherited from Gordon Brown's regime, stand back and let market forces do the rest. The Office for Budget Responsibility would certify that he had.

Within a short period, the benign influence of sound finance would restore confidence in the private sector; and room for it to take up the running in promoting national economic growth would be created by reining back the bloated public sector. Tory priorities and the national interest would happily cohere to lead Britain out of crisis and recession back to the sunlit uplands, the halcyon days of yore - well, not perhaps the deep recession of 1980-86 with unemployment rising above three million, nor the Lawson boom of 198789, nor the 'if it is not hurting, it isn't working' recession of 1990-92, but you know what we mean - Thatcher in the golden age.

This narrative always contained a heavy dose of faith, faith that sharply cutting back public-sector demand would automatically stimulate a compensating - or more than compensating - increase in private sector demand by way of rising business investment and consumer expenditure. Faith is, as the Chancellor should know, a tricky commodity, being nothing more than a nice-sounding name for believing something for which there is no good reason.

The private sector has failed the Chancellor, or at least his faith in it has been disappointed. Economic theory would have warned him of this risk, after the decisive exchanges in the 1930s between A.C. Pigou and Nicholas Kaldor as to whether or not the economy has any reliable built-in tendency to revert promptly to equilibrium at a high level of unemployment following a deflationary shock. It does not.

The Chancellor now confronts an economy which has virtually stopped growing and which is firmly in the grip of a second stage recession (except for those who clutch at the semantic straw of Arthur Okun's arbitrary definition of a recession as requiring negative, rather than just sub-normal, GDP change). The IMF, the CBI, the Bank of England's MPC - all the usual suspects - are busy revising down their forecasts.

This matters, not because it leaves egg on the Chancellor's face, but because it undermines the entire strategy based on fiscal balance and reduced public debt, at least as a proportion of GDP. When growth falters, or fails to materialise, public revenues (taxes etc) fall more than proportionately, mainly because direct taxes are progressive. This rapidly deepens the hole in the government's finances, whether public spending is being cut or is allowed to continue at its planned level.

The IMF itself confirmed this danger in its latest study of fiscal austerity.

At this point a strategy which sees fiscal balance, however defined, as the sovereign good from which all other benefits will flow is breached below the waterline. There is no prospective balance and therefore there are no benefits. And the gap between the economy's current and required performance is enormous, and now increasing by something like a further 2 per cent a year.

Blaming the private sector for failure to respond to the opportunity which the Chancellor claims he was creating works neither politically nor economically. The businesses that do not invest and the consumers who do not spend put the blame right back on the Chancellor for conditions - above target inflation, higher VAT, reduced benefits, faltering demand - which inhibit them from spending. Such a sterile dialogue further sours the atmosphere and erodes confidence.

One may spare some sympathy at this point for the Chancellor, as he prepares to deliver a difficult speech at next week's Conservative party conference. He acted, did he not, in good faith. …

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