Whether or not the chancellor avoids presiding over a triple dip, the truth remains that he took over an economy that was growing slowly in 2010 and pulled it under
Exiguous rates of growth in the parts of the economy that austerity doesn't reach do not constitute a justification for the chancellor's chilling strategy. But be warned: a last refuge of the scoundrel will be to claim "Look! It was all worthwhile. Thanks to our necessary and unavoidable policy of austerity, the economy is in better shape and is growing again."
The chancellor and his supporters will gloss over the inconvenient truth that the economy was in fact growing again when they took over in May 2010 – goodness: was it less than three years ago? It seems more like a decade.
It was not the troubles of the eurozone that derailed the recovery. It was the dramatic impact on business and consumer confidence of an austerity programme based on a misleading analogy – comparing our "plight" to that of Greece – and a false premise, namely that monetary policy would offset the impact of fiscal cutbacks.
What monetary policy – low interest rates, quantitative easing and assorted gimmicks – has achieved is to prevent the degree of monetary contraction that aggravated the depression of 1929-31. Even so, such is the continuing state of the banking system that even an enlightened monetary response has severe limitations.
There are moments in economic policy when governments make such obvious mistakes that even those of us who were taught always to see the alternative point of view wonder whether we are just "seeing things".
The most egregious cases often concern changes in what is known as indirect taxation, of which the most conspicuous element is VAT. Thus a rightwing commentator recently praised the Thatcher government for having "conquered" inflation after inheriting a rate of 10% from Labour in 1979.
What this revisionist omitted from the story was the way that, by almost doubling the rate of VAT for most transactions, the new government aggravated the problem. The conquest began a year later, by which time the year-on-year rate had peaked at 21.9%.
And in Japan, in the mid-1990s, the government of the time put an abrupt stop to an economic recovery by almost doubling VAT.
The big mistake the present British government made was again related to VAT: by restoring the rate to 20%, Osborne deflated the economy by close to 1% of gross domestic product, thereby taking it back into a recession whose length and consequences have justified the phrase "prolonged depression".
So here we are, with a public mood of resignation to prolonged austerity, and a chancellor who hopes that with the reappearance of even an exiguous rate of economic growth he will have fooled people into accepting that it was somehow all worthwhile. The ultimate in defeatism is manifested by those who complain that the economy has not responded enough to the biggest devaluation since 1949.
So what would your correspondent do? The first thing to establish would be that, although the trade and balance of payments figures are bad, there is no need for a devaluation: we have already had one of 25%. Because of the immediate effect on import prices, necessary devaluations tend to make the trading picture look even worse before it gets better – the J-curve effect. That is what has been happening. But, albeit slowly, there is evidence that the manufacturing and service sectors are finally waking up to the opportunities.
Traditionally, in order to make a devaluation work, the government has to "make room" in the economy by depressing domestic demand.
In present circumstances, however, there is no reason to do so. Our economy is so depressed, and operating so far below capacity and potential, that a major boost to domestic demand is necessary, and could be effected by a cut from 20% back to 17.5% in VAT.
This would have a more immediate effect than the longer-term infrastructure projects currently proposed – which are also necessary and for which there is also plenty of room in our depressed economy. These can be financed very cheaply: indeed, in many cases they are investments that will pay for themselves in due course.
The most important investment of all has to be in the sort of ambitious housing programme – no fewer than 300,000 new dwellings a year – that Harold Macmillan pulled off in the 1950s.
It becomes increasingly obvious that the bill for housing benefit is the consequence of neglect of housebuilding by successive governments, starting with Thatcher's. We see the pernicious social effects in the way cuts in benefits and the "bedroom tax" are disrupting so many family lives.
We need a secretary of state for housing (and nothing else) in the cabinet. Macmillan is reputedly one of the present prime minister's heroes. He should go for it!
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