Zero Credibility For The Chancellor’s Osbrownomics

Only short political memories will have forgotten the damage George Osborne’s credibility as Chancellor suffered in the wake of the March 2012 Budget: the embarrassments and subsequent U-turns on his micro-economic blunders over pasty tax, granny tax, and caravan tax, as they were gleefully labelled, not without justification, by his many detractors. It’s taken virtually the entire 9 months since then for the damage to his reputation to subside: so to have expected last week’s Autumn Statement to signal a major attempt to regain his credibility would have been no more than reasonable.

That reputational attrition Osborne suffered after the March Budget, though, was focussed mainly on his lack of political acumen. This time, it’s different, and more serious: because rigorous economic analysis after rigorous economic analysis of the Autumn Statement has zeroed in forensically on its manifest macro-economic failings, and the extent to which the accuracy of the Continuity Brown label looks ever more justified. Osborne’s economic credibility as Chancellor has all but disappeared.

The UK public finances are drowning in a sea of red ink, risking dragging the entire economy under the water with it, yet no robust attempt is being made to address either annual deficit or total debt. Even adjusting for some sleight-of-hand with Post Office pensions and Asset Purchase Facility gains, the 2012-13 deficit, at £120.3bn, is forecast to drop only slightly from the 2011-12 total of £121.4bn, and even that pre-assumes the receipts from sales of the 4G spectrum. Disregard that, and the deficit would actually rise. The OBR forecast for Osborne’s first Budget in March 2010 predicted the deficit would be down to £20bn in 2015-16: with the abysmally slow pace of deficit reduction, it now predicts the 2015-16 deficit figure still at £80bn, and that relies on growth assumptions that, in the past, have proved, shall we say, optimistic. So the ambition of a balanced budget, allowing total debt merely to stop increasing, gets pushed further and further out into the future – and under a Conservative Chancellor.

The position with total government debt is just as bleak. On present plans, Osborne will add more to total public debt in 5 years than Gordon Brown managed in 13. Think about the significance of that statement for a moment – and reflect on just how appropriate the labels Continuity Brown, Osbrowne, and Osbrownomics are. The original target – and the one Osborne demanded he be judged on above all others, modest though it was – was to have debt falling as a proportion of GDP by 2015-16. This is now definitely not going to happen before 2017-18: and remember, that prediction again depends for its fulfilment on the OBR’s forecasts for growth in the economy as a whole, and the annual public sector budget deficit, both being correct.

These aren’t just academic numbers, and for several reasons. There are only three ways in which government can finance itself and deficits and debt: by tax revenues from a vibrant, growing economy: by borrowing: or by printing. But, because of a combination of external factors and internal Coalition intellectual timidity about supply-side stimulus, we can very probably discount growth-based financing, so that leaves borrowing and printing to carry the huge burden.

So far, the economy has had about £350bn of the latter in the form of quantitative easing: the effects on savers and private pension funds have been little short of disastrous, driving down both interest rates and gilt yields, and exacerbating domestically any external inflationary pressures, but, crucially, failing to achieve the objective of stimulating bank lending into the productive economy. You and I might conclude that asking banks to boost lending while simultaneously requiring them to repair balance sheets is optimistic, to say the least, but the salient point here is that, unbelievably, a further round of QE is being openly mooted. Yet both Hayek and Friedman teach us that successive rounds of monetary stimulus have a smaller and smaller beneficial effect, while not mitigating the downsides. Relying on QE to fund deficits, therefore, looks counter-productive.

The sheer size of the deficits and debt to be financed by borrowing starts to create funding problems. Already debt interesting servicing takes up an increasing proportion of annual government expenditure: but the UK looks increasingly likely to lose its AAA rating, just as the capacity of the market to absorb the government’s need to borrow might be approaching saturation point. With banks limited in conventional gilts take-up by participation in QE, it would perhaps be a confident commentator who would rule out the possibility of the UK having to pay higher rates of interest to avert a gilts-buyers’ strike. That would push the horizons for deficit reduction and commencement of debt paydown even further into the future. Given that Osborne has virtually staked his entire credibility on the UK retaining its AAA rating and being able to borrow at record low rates of interest, either of those events will destroy his economic credibility irretrievably.

There’s a third reason for anxiety, too: as the above chart shows, the UK faces a period of several years at least of the public-sector-debt-to-GDP-ratio being at above 75%, even above 80%. Yet, as Kenneth Rogoff and Carmen Reinhart point out in “This Time It’s Different”, once a nation’s public-debt-to-GDP ratio approaches 80%, it becomes exponentially more difficult, politically, to enact, in a liberal democracy with an excessive welfare state, the measures needed to get it reduced and the economy self-funding again. That Osborne seems insouciant about this does his diminishing economic credibility no good whatsoever.

The burden of tax on the economy offers no respite. The moves to ease the tax burden on the low paid are welcome, but offsetting them are limiting to 1% the uprating of thresholds for income tax, capital gains tax, and inheritance tax. Inflation and capital values usually increase annually by more than this, however, and inflation alone will be at least double that rate. Even worse, approximately 0.5m people look set to be wrenched into the 40% higher-rate tax band by the fiscal drag implicit in the 1% uprating limit – an income of about £43k, in modern Britain, apparently, makes you “rich”. These are stealth tax measures straight out of the Gordon Brown and Ed Balls playbook – Osbrownonomics again.

Under Osbrownomics, growth projections look anaemic, both for earnings and employment.

The ONS & OBR don’t forecast real average earnings reverting to 2010 levels before 2018 at the earliest, even on a CPI-adjusted basis, while the OBR estimates that, even in 2018, we’ll have an unemployment figure of 2.2m.

The low rate of recovery of earnings, and the huge unutilised capacity in the economy represented by 2.2m unemployed, give scant prospect of growth returning in sufficient strength for tax revenues from incomes and profits to begin contributing to a stabilisation of the public finances, let alone admit the start of deficit and debt reduction. Yet Osborne allows the obvious – a robust attack on the size, reach and cost of the state, and supply-side measures to stimulate the economy’s productive capacity, to go by default. The Telegraph’s Liam Halligan yesterday highlighted the former very well, pointing out that the slight reduction in state spending we’ve hitherto seen has done nothing to slow the real economy.

The extent of Osborne’s adherence to Brownian orthodoxy can be seen in the minimal differences between the Coalition’s unambitious plans for fiscal retrenchment and former Labour Chancellor’s Alistair Darling’s provisional “austerity” budget unveiled in March 2010. Darling would have shrunk public sector capital expenditure by 3.6% of GDP in 2009-10, to 2.7% in 2010-11, 1.9% in 2011-12, 1.6% in 2012-13, 1.3% in 2013-14 and 1.3% in 2014-15. Osborne’s equivalent figures are 2.6% (2010-11), 1.8% (2011-12), 1.6% (2012-13), 1.4% (2013-14) and 1.3% (2014-15). The differences between these are within the rounding errors.

Informed economic commentators are lining up to excoriate the Chancellor’s timidity and call into question his shrinking economic credibility. Why, then is Osborne playing the Continuity Brown role so assiduously? The answer surely lies in the fact that Osborne is, above all other considerations, a primarily highly political Chancellor who sees every aspect of economic stewardship through the prism of, overwhelmingly, partisan political positioning, and on an excessively short-termist basis even for that. Micro-adjustments to benefits are designed principally to wrong-foot Ed Balls into voting for benefits rising while wages stagnate – unpopular with voters. The cancellation of the January 3p fuel duty rise leaves the proportion of pump price taken in tax woefully high – but it’s a politically astute move, because, when only 6% of the population knows the difference between deficit and debt, few votes are risked by the rise’s cancellation adding to the deficit. This is Osborne the inveterate chief election strategist, not Osborne the Chancellor.

The parlous state of the nation’s finances demands something better than this. But just as the serious commentariat has cottoned on to Osbrownomics and the Chancellor’s near rock-bottom economic credibility, so, soon, will the markets on which Osbrownomics relies to sustain itself. When that happens, all the bets, as they say, are off.

Note: I’m indebted to Jonathan Jones’ excellent series of charts published at Spectator Coffee House for the charts above. The interpretations and views are, needless to say, my own.



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