Government's remedy and austerity medicine appear to be being swallowed, but this treatment will continue for years
The countdown to the election starts here. For George Osborne, his fifth budget on Wednesday is an opportunity to rehearse the main Conservative theme for 2015: a severe Labour-induced sickness means the economy remains a suitable case for treatment.
This is not quite what Osborne envisaged four years ago. When he took over, the economy was growing briskly and there were hopes that the recession of 2008-09 would be like the others of the post-war era: painful but relatively short lived. It didn't turn out that way.
The economy lost momentum during 2010 and flatlined in 2011 and 2012. It has only been in the past year that the economy has at last shown a bit of vim. For the chancellor, the upturn came in the nick of time.
Sure, he would have preferred an earlier recovery. No question, it would make his life a lot easier had real incomes been rising rather than falling throughout this parliament. But he is encouraged that polling shows the public has more faith in the government's remedy than in any alternative cure and seems prepared to keep swallowing the austerity medicine, even though the treatment will continue deep into the next parliament.
Osborne has been upfront about the state of Britain. It is a poorer country, he says, as a result of the financial and economic crisis of 2007-09. But he has a subsidiary message for voters: "Labour's to blame, not me".
The first part of his argument is true. It will not be until later this year that national output returns to its pre-crash levels, a slower recovery even than in the 1930s. Rising population over the past six years means real living standards have fallen steadily. The only comparable period in living memory is the mid to late 1970s. The post-recession Britain is not only a land of food banks but also where there is a growing army of the working poor.
The notion that this is all Labour's fault, however, is nonsense. The last government made mistakes, some of them real stinkers. But they were mostly sins of omission – such as failing to rein in the City and doing too little to halt the continued decline of manufacturing – rather than sins of commission. The financially-deregulated, debt-driven, London-dominated economy that blew up so spectacularly in 2008 was one Labour inherited rather than created.
Osborne has also made his own mistakes. The deficit reduction programme announced in 2010 was too rapid and too crude, a fact the Treasury has subsequently acknowledged by reversing some of the cuts to infrastructure spending. Bracketing Britain with Greece was harmful to confidence. Putting up VAT was a mistake. The budget squeeze meant monetary policy – interest rates and quantitative easing – has been asked to do too much.
That said, Osborne has been a more subtle chancellor than his critics allow. Slower growth has meant higher than expected deficits throughout this parliament but he has not sought to stick to the plan with even deeper cuts. That has aided the recovery but means the deficit programme now extends almost until the end of the decade.
The case for the chancellor is that he did the best he could in the circumstances. Had he not shown a willingness to get tough with the deficit, the financial markets would have punished Britain. It would have been more difficult to sell government bonds, and this would have pushed up the cost of long-term borrowing. As it is, the commitment to austerity has kept the bond market vigilantes at bay, allowing the Bank of England to keep official interest rates at a record low of 0.5% for the past five years. The pick up has been slow, in part because the British economy is dominated by financial services and in part because of the crisis in the eurozone. The case against Osborne is that austerity has held back recovery but not delivered the promised turnaround in the public finances. In the end, the tough plans of 2010 have been watered down so that they are now similar to the deficit reduction strategy sketched out by Alastair Darling. The bond markets have not come gunning for Britain even after the loss of the AAA credit rating. In the meantime, he has squandered a golden opportunity to use a period of historically low interest rates to borrow for capital projects that would do more to raise the economy's long-term growth rate than all the fiddly tax changes he has announced in his budgets and autumn statements.
Had things gone according to the original plan, this week's budget would have been more generous, with tax cuts designed to whet the appetite for the main course a year hence. With the deficit still running at £100bn a year, Osborne is a bit boxed in. There will, of course, be some feelgood measures but he has to be careful not to scare the markets, not to provoke the Bank of England into early increases in interest rates and not to give the impression to the public that it is job done.
What the chancellor has going for him is an economy that is likely to grow by 3% in the last full year before the election, which should give him a bit more leeway to be generous in the 2014 autumn statement and the 2015 budget. What's more, Osborne is aware that only once since the second world war has a party been returned to office in the first election after losing power, and that was Harold Wilson's minority administration after the three-day week in 1974.
Risks abound. The recovery is vulnerable to a setback, either from an external source such as a war between Ukraine and Russia or a hard landing in China, or as the result of slowing consumer spending caused by weak real income growth. Both Osborne and Mark Carney are uneasy about the fact that the recovery has begun with a massive investment deficit and the balance of payments in such bad shape. Austerity fatigue has not yet set in, but is likely to do so if the recovery falters.
The political risk is that Osborne is reading the voters wrong. Certainly, the electorate is sending out conflicting signals. It senses there was something unhealthy about the pre-crash economic model and that lifestyle changes are needed. It feels that austerity has somehow been deserved even though those primarily responsible are not the ones being hurt. It knows a recovery dependent on rising asset prices is no recovery at all, but is munching on the property bubble happy pills all the same. Analysing what all these guilt complexes and id impulses means for the election requires the skills of a CG Jung rather than a JM Keynes. The economy, it would seem, is not the only suitable case for treatment.
Budget 2014BudgetGeorge OsborneLabourUkraineRussiaMark CarneyAusterityLarry Elliotttheguardian.com © 2014 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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