Larry Elliott on Is Osborne fit to run the economy - or to ruin it?
"By all accounts, Clement Attlee had a brusque manner when he was prime minister. He was never one for beating around the bush and on one occasion called a junior minister and told him he was being sacked. Somewhat stunned, the minister asked, why? Not up to the job, was Attlee's five-word response.
This government has now been in power for almost a year and here's a check list of their achievements so far. Unemployment, going down a year ago, is now going up. Real incomes fell last year for the first time since 1981 and are on course to fall again this year. Consumer confidence has slumped to levels seen in the depths of the recession. High street retailers are sending out profit warnings. And, to cap it all, the government has been forced to revise up its forecasts for the budget deficit.
So here's the question Attlee might have posed. Is this government fit to run the economy or is it simply "Not up to the job"?
Let's be as fair as we can to the coalition, tempting though it is to speculate that if Keynes were alive he would even now be drafting a new work entitled "The Economic Consequences of Mr Osborne". Labour's bequest to the coalition was a terribly sick economy only kept alive by a cocktail of extremely strong drugs. Debt-ridden; unbalanced; far too dependent on public spending in many regions: all these criticisms made by ministers are true. The brutal reality is that there is no painless way out of this mess.
It is, though, reasonable to ask whether the policies of the government are making things even worse than they need to be. Osborne insists that Britain will enjoy what he calls "expansionary austerity", because the knowledge that the government is getting to grips with the public finances will engender confidence and encourage private spending to replace the cuts in public spending.
This theory relies on a tighter fiscal policy (tax increases and spending cuts) allowing monetary policy (interest rates and the exchange rate) to remain loose. Cheap borrowing costs lead to higher investment, while the low pound stimulates exports. This, in turn, leads to a rebalancing of the economy.
There is a theoretical and empirical answer to the idea of expansionary austerity. The theoretical counter is that tighter fiscal policy can only lead to looser monetary policy if monetary policy is tight in the first place.
Struggling
If monetary policy is already ultra loose - as it was when the coalition came to power - there is little scope for it to get any looser, therefore any tightening of fiscal policy leads to a lower level of aggregate demand in the economy.
The empirical case against expansionary austerity is that it doesn't seem to be working in Britain (or in any of the struggling eurozone countries), whereas good old fashioned fiscal expansion does seem to be doing the trick in the US.
Despite two years when bank rate has been pegged at 0.5%, there is a marked reluctance to borrow. Mortgage demand is running at half the levels seen in the 10 years leading up to the financial crisis, and lending to businesses is not picking up.
Monetary policy, in other words, is proving much less effective in turning the economy round, which is perhaps hardly surprising given the enormous shock suffered by the financial sector between 2007 and 2009.
Where is the evidence of expansionary austerity? Not in the balance of payments figures, which are getting worse not better. Not in the high street, where consumers would need to see their incomes rise by 6% to compensate for the price increases and tax rises of the past year. And not in the business community, where investment fell in the final three months of last year.
It has to be acknowledged, of course, that it would be one heck of a gamble for Osborne to do a screeching U-turn. The financial markets would almost certainly take fright, and would demand a higher price for buying UK government bonds. That would mean higher interest rates for long-term borrowers. Sadly, this is what happens when you make a fetish of deficit reduction and exaggerate the risk of a sovereign debt crisis.
As such, we are stuck with what we've got up to the point - as with membership of the exchange rate mechanism - when it becomes clear that the status quo is untenable. Then, and not before, a Plan B will be conjured up.
Here, then, is the current state of play. The government's economic policy isn't working. Even if things do go according to Osborne's blueprint it is still going to be a terribly grim couple of years for households, who will continue to see incomes squeezed, taxes rise, and benefits cut. After rising by a trifling 0.8% last year, household consumption is expected to grow by 0.6% in 2011 and 1.3% in 2012.
By 2015, household consumption growth is expected to increase by 2.3%, but only because it is assumed that the spending will be financed by extra debt. Buried away in the small print of the Office for Budget Responsibility's forecasts for the budget was the projection that household debt will rise from £1,560bn in 2010 (160% of household income) to £2,126bn in 2015 (175% of income).
Malicious
Osborne, quite correctly, has said Britain was over-dependent on private debt during the bubble years. During the recession, the government pumped up its spending and private debt became public debt.
Now the public debt is to become private debt once more. That looks like a pretty suspect cure, even assuming the private sector is willing to load up on more debt. If households save more, because they are worried about their prospects, the economy will hit the wall with an almighty crash.
It has to be hoped this doesn't happen because the human cost of a second downturn will be higher than it was in 2008-09. Then, the government spent a lot of money beefing up Jobcentre Plus so unemployed people were given customised help to get them back into work. It was expensive, but it was a success. Despite a peak to trough fall in output of 6% between early 2008 and late 2009, the rise in joblessness was smaller than in the 1990-92 recession, when the economy shrank by little more than 1%.
A different ethos appears to motivate the current administration. This paper reported on Saturday that vulnerable jobseekers are being tricked into losing their benefits by staff instructed to hit targets for reducing the welfare bill. If true, that suggests the government is not just economically incompetent but malicious to boot. In quite a crowded field, it would stand as the vilest policy introduced by the coalition so far."
http://www.guardian.co.uk/business/2011/apr/04/coalition-government-osborne-economic-policy-comment
This government has now been in power for almost a year and here's a check list of their achievements so far. Unemployment, going down a year ago, is now going up. Real incomes fell last year for the first time since 1981 and are on course to fall again this year. Consumer confidence has slumped to levels seen in the depths of the recession. High street retailers are sending out profit warnings. And, to cap it all, the government has been forced to revise up its forecasts for the budget deficit.
So here's the question Attlee might have posed. Is this government fit to run the economy or is it simply "Not up to the job"?
Let's be as fair as we can to the coalition, tempting though it is to speculate that if Keynes were alive he would even now be drafting a new work entitled "The Economic Consequences of Mr Osborne". Labour's bequest to the coalition was a terribly sick economy only kept alive by a cocktail of extremely strong drugs. Debt-ridden; unbalanced; far too dependent on public spending in many regions: all these criticisms made by ministers are true. The brutal reality is that there is no painless way out of this mess.
It is, though, reasonable to ask whether the policies of the government are making things even worse than they need to be. Osborne insists that Britain will enjoy what he calls "expansionary austerity", because the knowledge that the government is getting to grips with the public finances will engender confidence and encourage private spending to replace the cuts in public spending.
This theory relies on a tighter fiscal policy (tax increases and spending cuts) allowing monetary policy (interest rates and the exchange rate) to remain loose. Cheap borrowing costs lead to higher investment, while the low pound stimulates exports. This, in turn, leads to a rebalancing of the economy.
There is a theoretical and empirical answer to the idea of expansionary austerity. The theoretical counter is that tighter fiscal policy can only lead to looser monetary policy if monetary policy is tight in the first place.
Struggling
If monetary policy is already ultra loose - as it was when the coalition came to power - there is little scope for it to get any looser, therefore any tightening of fiscal policy leads to a lower level of aggregate demand in the economy.
The empirical case against expansionary austerity is that it doesn't seem to be working in Britain (or in any of the struggling eurozone countries), whereas good old fashioned fiscal expansion does seem to be doing the trick in the US.
Despite two years when bank rate has been pegged at 0.5%, there is a marked reluctance to borrow. Mortgage demand is running at half the levels seen in the 10 years leading up to the financial crisis, and lending to businesses is not picking up.
Monetary policy, in other words, is proving much less effective in turning the economy round, which is perhaps hardly surprising given the enormous shock suffered by the financial sector between 2007 and 2009.
Where is the evidence of expansionary austerity? Not in the balance of payments figures, which are getting worse not better. Not in the high street, where consumers would need to see their incomes rise by 6% to compensate for the price increases and tax rises of the past year. And not in the business community, where investment fell in the final three months of last year.
It has to be acknowledged, of course, that it would be one heck of a gamble for Osborne to do a screeching U-turn. The financial markets would almost certainly take fright, and would demand a higher price for buying UK government bonds. That would mean higher interest rates for long-term borrowers. Sadly, this is what happens when you make a fetish of deficit reduction and exaggerate the risk of a sovereign debt crisis.
As such, we are stuck with what we've got up to the point - as with membership of the exchange rate mechanism - when it becomes clear that the status quo is untenable. Then, and not before, a Plan B will be conjured up.
Here, then, is the current state of play. The government's economic policy isn't working. Even if things do go according to Osborne's blueprint it is still going to be a terribly grim couple of years for households, who will continue to see incomes squeezed, taxes rise, and benefits cut. After rising by a trifling 0.8% last year, household consumption is expected to grow by 0.6% in 2011 and 1.3% in 2012.
By 2015, household consumption growth is expected to increase by 2.3%, but only because it is assumed that the spending will be financed by extra debt. Buried away in the small print of the Office for Budget Responsibility's forecasts for the budget was the projection that household debt will rise from £1,560bn in 2010 (160% of household income) to £2,126bn in 2015 (175% of income).
Malicious
Osborne, quite correctly, has said Britain was over-dependent on private debt during the bubble years. During the recession, the government pumped up its spending and private debt became public debt.
Now the public debt is to become private debt once more. That looks like a pretty suspect cure, even assuming the private sector is willing to load up on more debt. If households save more, because they are worried about their prospects, the economy will hit the wall with an almighty crash.
It has to be hoped this doesn't happen because the human cost of a second downturn will be higher than it was in 2008-09. Then, the government spent a lot of money beefing up Jobcentre Plus so unemployed people were given customised help to get them back into work. It was expensive, but it was a success. Despite a peak to trough fall in output of 6% between early 2008 and late 2009, the rise in joblessness was smaller than in the 1990-92 recession, when the economy shrank by little more than 1%.
A different ethos appears to motivate the current administration. This paper reported on Saturday that vulnerable jobseekers are being tricked into losing their benefits by staff instructed to hit targets for reducing the welfare bill. If true, that suggests the government is not just economically incompetent but malicious to boot. In quite a crowded field, it would stand as the vilest policy introduced by the coalition so far."
http://www.guardian.co.uk/business/2011/apr/04/coalition-government-osborne-economic-policy-comment