George Osborne has turned austerity debate on its head, despite his failures
|
Version 0 of 1. Judged by the targets he set himself, George Osborne has been a failure as chancellor. He has missed his growth targets. He has missed his deficit targets. He has failed to rebalance the economy. He has dragged two million potential Tory voters into the 40% income tax bracket. He has ensured that some of the poorest people in Britain pay for economic mistakes for which they were not responsible. It was seen as a key moment in the 1980 US presidential election when Ronald Reagan asked voters during his televised debate with Jimmy Carter whether they were better off than they were four years earlier. Labour’s best hope of winning the 2015 election is that the British public asks itself the same question, because the past five years have seen the biggest drop in living standards since Gladstone and Disraeli were slugging it out. Governments normally get punished at the polls when prices rise faster than wages. The fact that the Conservatives are still in the race speaks volumes about Labour. It is also a tribute to the way Osborne has crafted the economic debate. Things have gone nowhere as well as Osborne expected when he arrived in spring 2010 and this is partly, though not entirely, due to his own blunders. Increasing VAT to 20% slowed consumer spending. The cuts in capital spending were too deep. He underestimated the impact of the eurozone crisis. There was a period in 2011 and 2012 when it seemed the economy would never stop moving sideways. But it did eventually and just in time to support the political narrative Osborne has carefully pieced together during his period at the Treasury: Labour profligacy had left the economy in a terrible state; Conservative prudence was repairing the damage; Labour had learned nothing and would resort to its bad old ways if re-elected. The soundbites accompanying the narrative were that Labour had failed to mend the roof while the sun was shining; we are all in it together; and that you don’t hand the keys back to the driver who put the car in the ditch. Ed Miliband’s pitch last week to voters at Labour’s conference was that you can’t trust the Tories with the NHS. Even against a backdrop of ministerial resignations and backbench defections to Ukip, Osborne thinks he can trump that with the message that you can’t trust Labour with the economy. If this approach proves successful, it will be for three main reasons. Firstly, Osborne had a clear idea about how he wanted economic policy to work. He told the Bank of England to do everything in its power to get the economy moving again while using his powers over tax and spending at the Treasury to reduce the budget deficit. In the jargon of economics, monetary policy was loose but fiscal policy was tight. Encouraged to be proactive, the Bank of England kept interest rates at 0.5%, created money through the quantitative easing programme and in 2012 came up with Funding for Lending, under which banks could get access to cut-price funds provided they increased business or mortgage lending. Businesses remained starved of funds but lending for home loans quickly recovered. This was not quite the rebalancing of the economy that had been promised, but by this stage Osborne did not really care what sort of growth there was just so long as there was some. Secondly, the chancellor has been a lot more flexible than he likes to admit. It doesn’t really fit with Osborne’s narrative, but he has significantly modified his deficit and debt reduction targets in response to slower than expected growth. The chancellor took the view that it would have slowed the economy still further had he tried to meet his original plans with additional tax increases or spending cuts, and he was absolutely right about that. What’s more, Osborne has been willing to use fiscal activism to support the economy when it suits him. Witness Help to Buy, under which subsidised mortgages are underwritten by the taxpayer. The Institute for Fiscal Studies, the thinktank that specialises in assessing the state of the public finances, has also raised eyebrows at Osborne’s 2014 budget, in which tax cuts were supposed to be cancelled out by spending cuts. “A set of definite and permanent tax cuts look to have been matched by more unspecified spending cuts, some changes in the timing of tax receipts, and our old friend tax avoidance measures,” said Paul Johnson, the IFS’s director. Finally, Osborne is helped by the fact that Labour’s own policy blunders are still relatively recent. It is a bit rich of the chancellor to claim he is rebalancing the economy when he is feeding the beast that is the UK housing market. Even so, there have been initiatives such as the business bank, the cuts in corporation tax, the tax breaks for companies that exploit patents, the catapult centres to encourage exploitation of spinoffs from universities, that may improve Britain’s industrial performance given time. Osborne can justly say that Labour had three terms to rebalance the economy but failed to do so, and that it had three terms to regulate the City effectively but failed to do that either. The Office for National Statistics will produce figures on Tuesday that are likely to show that the UK economy is bigger than previously thought. It is possible the revised data will also show that the recovery started sooner. It is, though, unlikely to change the basic story of the past seven years – a deep recession followed by a weak recovery that has left most people worse off than they were before the crisis began. Osborne is handicapped by the cuts to living standards and by the perception – encouraged by the decision to reduce the top rate of tax while cutting welfare – that austerity is for the many, not the privileged few. Even so, the chancellor is in a better place politically than his opposite number as the next election looms, because the terms of engagement next May will not be Ed Balls’s choosing. When Labour won in 2001 and 2005, Gordon Brown framed the debate in such a way that the Conservatives were portrayed as the party that wanted to take the axe to public spending to pay for tax cuts and the party whose sums didn’t really add up. That debate has now been turned on its head. The next election looks like being about which party has the more credible plans to shrink the deficit. Thanks to Osborne, voters blame Gordon Brown’s government for austerity and would rather have Tory austerity than Labour austerity. For all the chancellor’s failures, that is some success. |