The political consequences of Mr Osborne’s economics
I had this on Labour Uncut last year:
George Osborne’s exhausted economic strategy will undercut his political strategy. Nothing in his speech on Monday changes this.
He knows that political narratives need pasts, presents and futures. His past is of Labour “overspending” producing economic failure; his present is about tough Tory “medicine”; and in his rosy future “together we will move into the calmer, brighter seas beyond”.
This “medicine” seeks to close the deficit this parliament, which is intended to secure market confidence and create space for “fiscal conservatism” (cuts and tax rises) to be offset by “monetary activism” (rock bottom interest rates and quantitative easing, of which we may see more soon). “In a debt crisis”, these interest rates are, “the most powerful stimulus that exists”.
However, this “stimulus” hasn’t stopped breakdown in Osborne’s economic strategy threatening his political strategy.
First, interest on government debt may be low, but Osborne can’t claim all the credit for this. Expectation of more QE pushes yields downwards, as does the “worldwide bond bubble”.
Second, if low interest on government debt was a sufficient condition for growth, Japan wouldn’t have suffered a lost decade and UK growth wouldn’t have been so anaemic as to see falling tax revenues create fiscal holes for Osborne. He either needs to accept that he’s been too aggressive and the deficit cannot be closed this parliament or be more aggressive still and impose further cuts and tax increases this parliament to fill the fiscal holes.
Neither the former nor the latter comes without political cost. The former is to admit, as Labour warned, that he’s cut too far and too fast. The latter is to impose more austerity on a people already hurting. It’s a choice between Osborne losing political face and unnecessary pain for more people. It isn’t, for Osborne, really a choice.
He will, however, short of conceding that he got it wrong, desperately grab any wiggle room. For example, the structural component of the deficit depends on how the economic cycle is defined and so is amenable to massage, which the OBR must resist if it is to be properly independent. As Alastair Darling wrote over the weekend, Osborne “won’t admit it, or call it Plan B (but he) will change course”.
Labour should monitor any wiggling and expose it. And Osborne’s credit-easing is nothing if not both an acceptance that his attempts to get banks lending have failed and a picking-winners fudge on the deficit.
Third, Osborne would rather blame the euro crisis and the global economy for our lack of growth than concede fault. “The resolution of the eurozone debt crisis is the single biggest boost to confidence that could happen to the British economy”. Yet this is to plead “the Lamont defence” and shift the key frame in his political strategy, which is that our economic predicament is a consequence of Labour “overspending”. The low interest rates that Osborne is so proud of are not independent of global conditions either.
Fourth, even if one supports the government’s deficit reduction strategy, as the leading Conservative Andrew Tyrie does, and even given global conditions, it is still possible to think, as Tyrie does, that the government’s growth strategy is “inconsistent, even incoherent”.
By the time of the last general election, targeted interventions like the future jobs fund and the car scrappage scheme helped return the economy to growth, keep unemployment, business failures and home repossessions down to half the levels of the 1990s recession, and contribute towards falling public borrowing. Global conditions were as inclement prior to the general election as they are now, which suggests that Osborne’s policies – both cutting too far and too quickly and failing to make effective targeted interventions – created the contrast in our growth and borrowing performance between then and now.
Let’s return to Osborne’s political narrative in light of these failures in his economic strategy.
The past: it’s all about Labour’s “overspending” and nothing to do with a global financial crisis, right? This seems less convincing when Osborne is explaining his failings in terms of global conditions.
The present: Osborne’s “medicine” is meant to be reducing the deficit. But, at £15.9bn, as Chuka Umunna noted, the Tory-led government recorded the highest ever borrowing for a government in the month of August.
The future: It’s hard to buy in to Osborne’s optimistic vision when his growth strategy is attacked by the likes of Tyrie and his painful deficit reduction isn’t on course.
The only political oxygen available to him is the perception of profligacy that continues to attach to Labour. It reinforces Osborne’s story and might make him seem the least bad option. If we redouble our efforts to remove this perception, Osborne’s political strategy will become as broken as his economic strategy already is.