Thursday, 3 March 2011

George Osborne's bad economics

One of the main reasons behind this blog is the bad economics of George Osborne.  There are four fundamental reasons why his economic strategy doesn't add up:

The deficit is so big that we are in an economic emergency and we must take immediate action to reduce it – but the current deficit is, by the standards of the last two hundred years, not particularly large and is actually rather smaller than that run by the British economy for most of the nineteenth century.  Because Britain’s public debt matures later than that of most other Western economies – certainly than that of the oft-quoted Greece or Ireland – the comparison with other economies is not valid; ironically enough it is the much-maligned Gordon Brown’s management of debt repayment as Chancellor that has put us in this beneficial position.  The deficit is a problem if it is allowed to continue, but as Keynes explained, the best way out of it is stimulus to create employment, not to take £80bn out of the economy.  Comparisons with the family housekeeping are, as Keynes pointed out, economically illiterate. Government funding doesn’t work like that. And Cameron gave the game away when he said that even when the deficit had been dealt with (fat chance) public expenditure would remain constrained.  There are plenty of eminent economists – from Nobel Laureate Paul Krugman on the centre-left to the doyen of British monetarism and one of Margaret Thatcher’s favourite economists, Samuel Brittan, on the right -  who claim that the current policy is madness. This is about ideology, not economics.

Labour’s profligate spending took us to the edge of bankruptcy – complete nonsense. The problem we face is not a spending crisis, but a tax revenue problem.  Within the parameters of market capitalism  Labour actually did a rather good job, but the endemic failures of the system are bigger than the attempts of competent individuals to manage it. The basic problem arises from the more than £40bn that was sunk into bailing out the banks, brought low by speculators, and the economic shock that followed it, which , according to many economists, has resulted in a hit of between 10% and 15% to GDP – and as a result of which tax revenues have fallen of a cliff. Not only do cuts mean that the poor and vulnerable are made to pay for the bankers’ delinquency – while the bankers continue to pay themselves large bonuses (£7bn this year, or the equivalent of the cuts to the welfare budget announced yesterday), but the economic fact is that Osborne has got it the wrong way round – public expenditure cuts, which take demand out of the economy, will reduce the tax base further while increasing welfare spending.  A Tobin Tax on international financial transactions – most of which are speculative – would slash the deficit overnight.  There is an international appetite for it.  But the bankers would howl, and they’re in charge.  Which brings us on to …

The newly liberated private sector will create the hundreds of thousands of jobs needed to offset those lost in the cuts – which is even more ludicrous than the last one.  The historical evidence is obvious and overwhelming – every time a Government has indulged in cuts of this magnitiude, it has tipped the economy into depression.  While the much-maligned Brown and Darling were trying desperately to manage the crisis in the least painful manner possible, with a deftness that was lauded around the world, Ireland embarked on precisely the course that Osborne is following now.  Four emergency budgets later, the Irish economy is on its knees.  And it’s the same whenever slash and burn economics is tried.  It happened in Britain in the 1920s and 1930s, in New Zealand in the 1980s, in Ireland now.  No economy in the world, even in boom times, has succeeded in creating jobs at the rate that Osborne is forecasting in the UK in the next few years, least of all one that has taken £80bn of demand out of the economy.  It’s sheer economic illiteracy.

We’re all in this together – the most pernicious lie of all.  Osborne's strategy is deeply, profoundly regressive – the poorest and most vulnerable people on benefits will lose 10 per cent of their income.  (Incidentally the idea that New Labour promoted a benefits culture is frankly risible – the evidence base shows overwhelmingly shows that inequality widened dramatically after 1997, not least due to benefit cuts)Women, who represent the majority of workers in the public sector, will be hit particularly hard, as will families with children.  As budget votes in council after council are showing, cuts in local government funding will mean the evisceration of front line services. And it is demonstrably true that Labour councils, which tend to represent the poorest and most vulnerable parts of Britain, have been hit hardest.   Corporate taxation is reduced, and the Coalition – while referring to benefit cheats as “muggers” – does nothing to deal with big tax avoidance.  Vodafone owed £6bn tax from asset deals – Osborne looks the other way and it gets written off.  And a Government which in opposition pledged that no banker would receive a bonus of more than £2000 has given the green light to vast bonus payments in precisely those banks that were close to collapse in late 2008. 

In other words – dishonest, wrong and economically illiterate, based on the belief that you can soften up the electorate with tabloid prejudice and the sonorous repetition of the claim that there is no alternative.  When in opposition, Osborne famously said that the British economy should learn to follow the example of Ireland.  The Coalition is certainly doing that now.

This is an edited and updated version of a post that first appeared at Notes from a Broken Society in October 2010

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