Austerity hasn’t worked
If the polls are to be believed, the General Election is heading for pretty much a dead heat, with days if not weeks of wrangling ahead before a workable coalition – or even minority – government is in place.
Meanwhile, business is supposed to dislike uncertainty yet the stock market is near record highs. The FTSE 100 passed its dotcom era peak this year, passing through the 7000 level in March, reaching a record high last month, boosted by the start of the European Central Bank’s €1.1 trillion quantitative easing programme and speculation the Bank of England would delay raising interest rates (thanks to low oil prices).
Of course, the political uncertainty has already been discounted in the markets, and latter know as well that it’s the Bank of England which will still be setting interest rates whoever is PM in a few weeks’ time. And I doubt very much whether the markets would really miss George Osborne very much as Chancellor, either.
For, despite all the Tory claims, Osborne hasn’t presided over quite the economic miracle he claims, and seems to have learned little if nothing from the experience of the 2010-2015 government.
As I’ve noted before, by late 2012 a desperate Osborne was facing the prospect of a ‘triple dip’ recession and so effectively scrapped his much-vaunted ‘Plan A’. He slowed the deficit reduction plan (and pump-primed the housing market - so much for all that talk of rebalancing).
When the spending cuts were slowed, and some of the government’s Ill-advised capital investment cuts were reversed, the economy started to pick up in 2013 and 2014.
That should be no surprise, as the Nobel Prize winner Paul Krugman dryly noted last week: “A return to growth after austerity has been put on hold is not at all surprising… ‘If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.’”
Osborne seems to think that we didn’t notice his discreet scrapping of ‘Plan A’ back in 2012, as he is now promising a new ‘Plan A’ all over again with severe cuts from 2015 if he and Cameron get the chance to “finish the job”.
So it’s austerity déjà vu all over again (as Yogi Berra once put it). Promises of a dash to cut will probably mean slower economic growth all over again.
Labour’s position is that it would slow the cuts and would be willing to borrow for investment projects. That’s sensible given the historically low levels at which the government can currently borrow money.
But Labour is also promising more austerity. As Krugman has observed, “It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation”.
A key lesson of the last five years is surely that filling the hole in the public finances is about growth as much as it about cuts. Cutting too far too fast means slower growth and – as the deficit figures so painfully show - slower progress on deficit reduction. Osborne was warned on this back in 2010, particularly with reference to Japanese experience, but he ignored the advice.
Of course, the Tory campaign machine has worked wonders in getting a message over that the government’s “long-term economic plan” has worked. Sadly, that doesn’t stack up.
This has been the slowest recovery from recession in 100 years. The deficit has only been halved in five years when Osborne claimed in 2010 that it would be eliminated. Despite all the hype over a ‘march of the makers’, manufacturing and construction are operating below pre-recession levels. There has been no real rebalancing, this region excepted. Productivity has stagnated.
There’s also a concern that the consumer led recovery has again been built on more borrowing as incomes were squeezed up to the end of 2014, and that things could come a cropper if yet another housing bubble blows up.
On that, it should be noted that prior to the financial crisis, the debt to income ratio in the UK was around 170%. The Office for Budget Responsibility (OBR) reckons it will reach over 180% by 2020, and currently stands at 146%. ‘Rebalancing’ seems more like shifting the burden of debt from the public to the private sector, it seems, so far at least.
Even the recent (2013 onwards) pick-up in growth has waned. That was because the government went back to the old trick of trying to stimulate a housing price boom to trigger spending and confidence. The Bank of England spotted it, and has tried to slow the housing market.
The so called “long term economic plan” has failed even on its own terms. That’s no surprise as the theory underpinning it was always nonsense. There was much bluster back in 2010 about having an “expansionary fiscal contraction” whereby cutting the budget deficit quicker would boost confidence and allow interest rates to be lower.
But “expansionary fiscal contractions” don’t work when interest rates are already very low, and when other countries are trying to contract fiscal policy as well. Rather, we ended up with an at-best flatlining economy over 2010-2012.
So we have a Tory campaign which strangely claims to have “rescued” the British economy – and promising more 'Plan-A' style big cuts (still not specified in detail of course). Labour, meanwhile, offers austerity-lite. Because of the austerity-mantra, both could end up slowing the recovery unnecessarily when much of the economy has yet to make up the ground lost during the global financial crisis and the 2010-2012 austerity years.
Let’s be clear, austerity hasn’t worked. Doing it all over again isn’t likely to work either.
* Professor David Bailey works at the Aston Business School