Since 2009 the economy has struggled to recover from the mire of a slump caused by the banking sector. But each time economic activity quickens, it hits a series of buffers. These buffers are well known , but denied by the Chancellor: a vast overhang of private debt now slowly being de-leveraged; a banking sector whose financial transmission system is broken; falling real incomes, rising unemployment, high energy costs and a collapse in investment.
In conditions of uncertainty, without the steady and cheap availability of credit, firms and individuals wisely refuse to spend and invest. And so the private sector is stuck, and the economy stagnates.
The British Chancellor, like his peers in Europe, refuses to acknowledge this reality. Instead he is trapped by an ideological aversion to the role of government, and by a misplaced understanding of the role of public finance in the economy. Despite the fact that government has access to unlimited finance via the Bank of England, the Chancellor pretends that he is constrained by private financial markets. And instead of exercising economic leadership by spurring on the public investment that will revive the private sector, the Chancellor sits on his hands.
So yesterday’s Budget was all about upholding the pretence: that by cutting welfare and employment rights and restoring Dickensian labour conditions to the workplace, the private sector will find the money and confidence to spend and invest. That by cutting corporation tax and taxes for the rich, global investors will find a stagnant, heavily indebted British private sector attractive.
Because of Britain’s vast private debts and the broken banking system, these supply-side solutions will not work. Until, that is, the Chancellor addresses the real reason for the stagnant economy: the absence of demand. And the only way to stimulate recovery is by public infrastructure investment in a shrinking private economy. Such investment will create jobs, which in turn will generate income for the private sector, and tax revenues for the Treasury.
But as Nick Prior, head of infrastructure at accountants Deloitte notes, the Chancellor has ‘watered down’ government investment plans. Which is why even the Daily Telegraph despairs of Osborne’s ideological but macro-economically hollow Budget.
