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In graphs: How George Osborne learned to stop worrying and love the debt

1 December 2014

8:49 PM

1 December 2014

8:49 PM

I have just been on Adam Boulton’s Sky News show, talking about the forthcoming Autumn Statement with Ann Pettifor, a left-wing economist. “I bet you didn’t expect me to defend George Osborne,” she told me, after our discussion finished. The UK economy is doing well, she argued, because Osborne has been borrowing like a drunken Keynesian (a good thing, in her book). And she does have a point.

The left made a great error when they attacked Osborne for cruel, fast, deep cuts – he is shaving just 4pc from total government spending and giving himself eight years to do it.

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To give himself so much time. has had to borrow shedloads of money. As much as Alistair Darling planned to. In fact, he has now borrowed more money in five years than the Labour Party did in 13 years.

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Right now, in Year Five of his tenure at the Treasury, the national debt is rising at £3,000 per second – debt that households will have to pay off. Or, more likely, debt that we’ll interest on, but never be able to pay off. Permanently higher interest payments: it is this generations’ gift to the next.

This was not Osborne’s original plan. He said we’d be kissing goodbye to the deficit next year – now it’s due to stay with us to the 2018, perhaps even later. Here’s now his deficit plans have drifted from his original plan (in yellow):-


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While I admire much of what the Chancellor has done – the corporation tax cuts, the 50p tax cut, raising the income tax thresholds – it’s hard to say that he has had much success with the deficit. This ought not to be a controversial statement: you can look at what he said he’d do (in yellow, above), then compare it to what he ended up doing (in blue). There’s rather a big gap between them.

This gap grew because Osborne’s original growth forecasts were too optimistic – the revenue didn’t come in as fast as he expected. The problem was that, even in June 2010, HM Treasury underestimated the extent of the economic damage. It expected a rebound back to normal, but only later realised that much of what it considered ‘normal’ was a debt-fuelled illusion.

This presented Osborne with a choice: more debt, or more cuts? He went for more debt because he could then afford to: world over, the cost of borrowing was falling. Gilt yields (the amount of interest governments have to pay on their debt) were falling. Let’s compare the borrowing rates Osborne first envisaged to ones he ended up with…

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Even the above forecast is an exaggeration: HM Government is being charged 1.98%  on its borrowing now, less than half what Osborne feared initially. We’ve seen (above) how he’s borrowing a lot more than he envisaged. But he is paying less than he expected in debt interest because global borrowing rates have plunged. Britain’s 1.98% is expensive compared to Sweden (1.07%) France (1.01%) Germany (0.74%) or  Japan (0.43%).

So Osborne’s original stated mission statement – to abolish the deficit – became less and less important to him. He has come to be as relaxed about the national debt as Labour once was. When he came to office, his stated pledge was to have the debt/GDP ratio (shown below) falling by now (as per the yellow line) which certainly did mean borrowing less than Labour’s plans (blue line). Now, he’s borrowing way more (red line).

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So Ann Pettifor is right to say that, for all his protestations, George Osborne has ended up implementing the borrowing plan he once rejected as being too dangerous. And that the market has not punished him for it, and has not imposed the high interest rates that he once feared.

Broadly speaking, Osborne has adopted the Labour borrowing plan by taking on as much debt as much as the markets would let him, while keeping the AAA credit rating. Indeed, he went a bit beyond this limit when Moody’s and Fitch downgraded Britain to AA+.

Of course, we’ll never know how Alistair Darling would have reacted to the Eurozone crisis. But my hunch is that a Labour government would have done the same: borrowed as much as it could, while keeping the AAA rating.

This leaves conservatives like me facing an awkward question: in all honesty, do we believe that Osborne has been that much better on debt than Labour would have been? When it comes to debt, did the general election actually make a difference?


Budget_2013Join Andrew Neil, Fraser Nelson and James Forsyth on Wednesday evening to discuss George Osborne’s Autumn Statement. For tickets and more info, click here.

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