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Osborne’s last fling

Osborne had a choice. Faced with the unrelentingly grim news on the economy, he could admit that plan A had failed and change course. Or he could brazen it out and focus on choice titbits for the 2015 election whilst giving minor tweaks to the economics where he could. He decisively chose the latter by highlighting a flagrantly populist budget whilst downplaying the economic fundamentals.

But that is a fool’s game because it may produce a one-day wonder, but the underlying realities will rapidly re-surface. The dynamite in the budget is that (i) the OBR has been forced to halve the growth prediction for 2013 it made only 3 months ago from 1.2% to just 0.6%, (ii) deficit reduction – the whole aim of the exercise – is going backwards with a deficit expected now to be £120bn in 2014, twice what it was expected to be in 2010, and (iii) by the time of the 2015 election the government will have been forced to borrow £250bn more than was forecast in 2010.

What is so utterly extraordinary about the budget is the continuing wilful blindness that the economy cannot be kickstarted without a major boost to the level of demand. Osborne appears to continue to believe, against all the evidence, that if the fiscal squeeze cuts the deficit, the Bank of England can then pump up growth through ultra-low interest rates, quantitative easing and a falling exchange rate. Ultra-low interest rates will still not persuade businesses to invest if there is stagnant or falling demand so that the extra goods or services they produce won’t sell.

Some £375bn of QE (printing money) has already been swallowed by the banks without being lent on to industry, but rather used to recapitalise their own balance sheets, so showering them with another £25bn won’t make an difference. And a falling exchange rate, now more than 25% down below the trade-weighted level of 2007, has not produced the anticipated export expansion because the de-industrialisation imposed by Thatcher and Blair have destroyed too much of British manufacturing.

Osborne’s policy is so counter-intuitive and so destructive that it is difficult not to draw the conclusion that his real aim is not deficit reduction at all, but rather shrinking the State. The budget boost for growth is a mere £4.5bn (even if his boasted anti-avoidance measures raise the £3bn he claimed, which is very doubtful), but that is only 0.3% of GDP, and a boost as feeble as that will make little difference.

It is only ideology that prevents Osborne from using instruments for expansion readily available to him – instructing the nationalised banks RBS and Lloyds to prioritise lending to key infrastructure and manufacturing projects, taxing the £155bn gains by the ultra-rich in the last 4 years, or diverting QE away from the banks to direct investment in industry.

2 Comments

  1. Sharon Morgan says:

    Ever heard of Agenda 21? Worth doing a study on it. They are indeed deliberately trying to shrink the economy all over the world. They also aim to shrink the world’s population.

  2. Dave says:

    Sharon,
    Do you mean Osborne’s failure to generate significant growth is being done intentionally, in compliance with the ambitions of Agenda 21?

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