The coalition government has run up a load of impressive successes, but I’m not sure that economic performance has been one of them. George Osborne is winning the war of words, and the Labour Party appears to be in meltdown. But the actual economic facts are not quite as strong as his rhetoric. So here’s a wee Fisk
of his speech.
1. ‘We’re turning a corner’. Great news. Or at least it was when he told us this three years ago. I admire the way that Osborne spins this delay into a matter for celebration. The truth is that this is now the worst recovery in British history. Look at GDP per capita (which the Treasury says is the more valid measure) and one of the words that Ed Balls uses does spring to mind…
2. ‘Our plan for the economy is a plan for living standards’. Really? Living standards have been the bleak spot: growth is up, jobs are at a record high, gilt yields are lowish, house prices rising again. But the cost of living is midway through its longest-ever squeeze, and people feel this way more than they feel GDP data. Recent OBR data suggests it will take until 2018 for the average earner to get back to 2008 salary levels: a lost decade. As a result of government policy.
QE has inflated the assets of the richest and left the poorest worse-off due to inflation. The living standards of the wealthiest have never been better. Their mortgage rates have collapsed, their asset values and share portfolios have surged. The poor have seen real income nailed to the floor. QE is social justice – Alan B’Stard style. The below graphic is extrapolated form the Bank of England’s assessment about the distributional effects of QE. The left, or anyone who cares about fairness, should be fuming about this. Luckily for Obsorne, almost no one understands QE.
3. ‘The soaring budget deficit had its roots in an unsustainable increase in public spending in the eight years before the crisis’ Unkind souls might mention that Osborne made great play of signing the Tories up to Labour’s unaffordable spending plans. But if the spending is ‘unsustainable’ why does he sustain it? Osborne has now stopped the cuts in total spending (see bottom graphic) and borrows £2,000 a second to keep this spending up. The problem of unaffordable government persists.
4. ‘Employment has grown extremely strongly – more so than even the most optimistic forecasts, with over 1.3 million net new jobs created in the last three years.’ Yes, and he’s right to say that this confounds Ed Balls who claimed it was a fantasy to imagine new private sector jobs more than offsetting public sector job cuts. But who is taking those jobs? Look behind the figures and you can see that most of the net increase in employment is accounted for by more immigration. Breakdown below:
5. But Osborne is right to say the no1 problem is that the hole was deeper than we thought. Osborne had been blaming the Eurozone crisis for his being blown off course; the real reason for the setback is that it took the economists far, far longer to work out the size of the bubble they’d all missed. All of a sudden, it seemed like his austerity plan was not going to be enough. This presented Osborne with a choice: more cuts, or more debt. He went for the latter. But he kept the same old ‘austerity’ speeches so, like today, there is a detachment between what he’s saying and what he’s doing. Some might say that he is, actually, implementing Plan B (see graph, below).
6. ‘What does set the UK apart from many countries is that we set out a clear plan early on’. Yes but he abandoned that plan pretty quickly, as the below graph shows.
7. ‘And the whole credibility of the plan has been buttressed by the creation of an independent Office for Budget Responsibility’ That was the theory: that the OBR would hold Osborne to his deficit reduction
plan. In practice, the OBR stayed mute as Osborne tore up this plan (above) and it took an S&P downgrade to alert us to the implications of what had happened.
8. ‘Plan B would have risked higher interest rates as the UK became sucked into the eurozone sovereign debt crisis on our doorstep’. Higher interest rates? Perish the thought. Perhaps the speech was drafted before the UK government 10-year borrowing rate broke the 3pc barrier (it was 2 per cent six months ago) and mortgage lenders began to jack up their fixed rate deals. Rates are creeping upwards, which is a worry given that Osborne’s dependence on low rates, through the systematic peddling of underpriced debt.
9. ‘Amazingly, even with the evidence we now have, there are still those calling for the government to abandon its economic plan in order to spend and borrow more’. Chief amongst those wanting the UK government to borrow more is the Chancellor of the Exchequer.
10. ‘Charles Goodhart, now at Morgan Stanley, estimated that Help to Buy could increase housing starts by more than 30 per cent by 2015′. Yes, economic experts have quite a lot to say about Osborne’s Help to Buy. Like Andrew Bridgen from Fathom Consulting: ‘Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it’. And SocGen: ‘‘Why are houses too expensive in the UK? Too much debt. So what is George Osborne’s solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt!’ A politician interfering in the housing market by encouraging sub-prime lending? What could possibly go wrong?
11. ‘And HS2 will transform the economic geography of our country and help spread rising prosperity to the Midlands and the North of England.’ Yes, the least convincing HS2 argument. A rather London-centric guide to regional development: let them come to King’s Cross! Twenty minutes earlier on £250 train tickets! It’ll transform their economies! But the HS2 argument has its own dynamics. The Commons Public Accounts Committee has probed them rather well today.
12.’Tinkering around the edges while ignoring the tough decisions required will not rise to the scale of the challenge’. Quite so. But compare this grandiose language with Osborne’s actual plans for state spending over the next few years.
I should say that I quite liked his overall argument, but that’s not the point. George Osborne is far better at making the case for austerity than implementing it, and started doing so while it was deeply unfashionable. He is right to say that the apocalyptic and hysterical arguments made by Ed Balls have been exposed as ridiculous. Osborne sold the public on the need for austerity and purchased the political ‘permission’ to implement it, but then moved so slowly that we’ve up with stagnating living standards and more debt than even Gordon Brown proposed. Of course, things might be better than the above graph predicts. As Matthew Parris brilliantly argued at the weekend, economists are pretty useless at prediction — so maybe, just maybe, the recent momentum will gather. My concern about Osborne’s overall approach is that it — like Brown’s — is based on debt, and that the housing recovery may prove to be illusory. Let’s hope not.Tags: Fauxsterity, George Osborne, OsborneFail