The magnitude of Osborne’s failure

Blinded by the cascade of populist trivia in the budget, the sheer scale of destructiveness of Osborne’s economic policies over the last 4 years has been hidden. It is immense. The economy is still after 4 years of austerity 1.4% smaller than in 2008, while the US economy is 5% larger than before the crisis.

Put another way, the UK economy is today 14% smaller than it would have been if growth had carried on in the way already achieved in 2010 when Alastair Darling’s policies of economic stimulus produced 2.4% growth in the 12 months to the third quarter of that year. That means, as a result of Osborne’s policy about-turn at that point in favour instead of fiscal consolidation and austerity, the UK has lost output totalling £210bn. That is gone for ever, down the drain, now irrecoverable – a sum equal to one-seventh of Britain’s entire GDP. It means also that households on average are today nearly £2,000 poorer as a result of Osborne’s witless folly.

Even the deficit reduction – the whole aim of the plan – has worked disastrously. Osborne inherited a deficit of £149bn and pledged to reduce this to £60bn by now and £20bn by next year. In fact it is projected to be £108bn this year, nearly double what he promised, and he’s now planning another £62bn of cuts, but virtually no tax increases, over the next 4 years to get him back on target 2-3 years late. Any chief executive who performed as drastically badly as this would be out on his ear without more ado.

So how could Osborne have got it so dramatically wrong? There are two views on this. One is that he genuinely believed in the dogma of ‘expansionary fiscal contraction’, i.e. the less the government spends, the faster the economy will grow because then the public sector will no longer ‘crowd out’ the private sector which will be free to expand to fill the gap. The theory is counter-intuitive and nonsensical.

What prompts the private sector to invest is the prospect of the future growth of demand and hence of their future profits. When the economy is stagnant or contracting, what incentive do private companies have to invest at all? The second view, which I think is the more likely, is that Osborne and Cameron are obsessed with the idea of shrinking the State to the smallest size they can get away with via privatisation and outsourcing of everything that moves. For them, austerity was not a painful but necessary instrument of reform so much as a gift from heaven to enable them to realise their deepest-held prejudices.

When fiscal consolidation so blatantly failed to revive a flat economy, Osborne turned to monetary policy. He used quantitative easing to inject £150bn of newly printed money into the economy to increase cash in the hands of the banks to lend on to industry. The banks instead sat on the cash to help consolidate their balance sheets.

Osborne then tried to bribe the banks to lend more to industry via Funding for Lending. The banks invested most of the money into property because it was safer and more profitable. Then in desperation Osborne turned to Help to Buy even though increasing the supply of mortgages without increasing the supply of new homes merely set off yet another asset price bubble.

Thye only answer that will sure-fire work is staring Osborne in the face – use the QE money to revive the economy directly through public investment. But that is one thing that this most ideological of Chancellors won’t under any circumstances do.