The Chancellor has finally said it. In a speech in September, George Osborne claimed that, when it comes to the economy, “Britain is turning a corner,” and pointed to a “growing body of evidence.” On cuts and austerity, has he been vindicated?
YES–Mark Littlewood: The doomsayers were wrong. George Osborne’s efforts to get the UK’s chronic budget deficit under control have not crashed the economy. It now appears a modest level of growth has returned to the economy and private sector employment has remained impressively robust.
This is not what the deficit-deniers predicted. At the outset, they enormously overstated the cuts to government expenditure, with the enthusiastic collaboration of parts of the media. In real terms, the coalition is reducing spending by a little less than 1 per cent per annum. By the time of the next general election, it will be spending 96-97p for every pound that was being spent by Gordon Brown when he left office. So, there are indeed cuts, but they can hardly be described as vicious. (How or where these savings are being made is, of course, a different matter).
Looking back on Osborne’s emergency budget of June 2010, the usually temperate Will Hutton of the Work Foundation described these modest spending reductions as “brutal.” The Labour frontbench labelled his plan “reckless” and claimed it would “throw people out of work.” The unions predicted a double dip recession. Nick Robinson of the BBC described the plans as a “massive gamble economically and politically.”
Now, such hyperbole sounds rather ridiculous. While Osborne’s opponents were recently rubbing their hands in anticipation of a triple dip recession, the updated statistics suggest there wasn’t even a double dip. This is boringly bad news for headline writers, but it’s nonetheless a fact. Similarly, the growth of employment in the private sector has more than offset redundancies in the state sector. The coalition’s opponents now complain that these private sector jobs are not as well paid or secure as they would like. But that is shifting the goalposts. Back in 2010 they would have predicted a fall in employment with total, misplaced certainty.
We are witnessing a drawn out recovery from a dreadful crash. In stark contrast to Nick Robinson’s analysis of 2010, the Chancellor has been cautious with the public finances, to the irritation of those of us who would have pursued more radical surgery to tackle the obesity of the state sector. His strategy is to win the race slowly and steadily.
NO–Jonathan Portes: Mark criticises people who shift the goalposts. He’s right to do so, so let’s go back three years. When the government announced its fiscal consolidation plan in June 2010, it predicted that, by now, the economy would be about 7 per cent larger, driven by a sharp rise in business investment and an improvement in the current account balance. As a result of this strong, sustained and balanced recovery, the deficit would have been reduced by two-thirds. But GDP has grown at less than a third of that rate, business investment has fallen and the current account deficit has worsened. This is the weakest and slowest recovery in the UK’s recorded history: As for deficit reduction, the government’s plan was to eliminate the structural current deficit in four years. Well, the plan is still to eliminate it in four years or so. From now. Not so much moving the goalposts as the goalposts moving themselves.
So what happened? Growth was derailed by a combination of bad luck and bad macroeconomic policy, both in the UK and eurozone. Spending was cut too quickly; in particular, the very large cuts in public sector investment are now almost universally recognised as an error. Moreover, while policy was supposed to boost confidence, and spur private sector investment to fill the gap, business was understandably reluctant to invest in a climate of uncertainty about demand.
This is by no means all the government’s fault, although it is a bit rich to try to blame the eurozone—the UK followed similarly misguided policies. But it could easily have been worse. As the Office for Budget Responsibility has pointed out, deficit reduction stalled last year. The government was faced with a choice: when in a hole, should it, as its original fiscal plan suggested, keep digging? To its credit, the answer was no; the fiscal framework was abandoned, and the timetable for debt and deficit reduction allowed to stretch.
So where are we now? As Adam Smith said, “there is a great deal of ruin in a nation.” For those of us who argue that there’s plenty of spare capacity, the scope for rapid growth has always been there; poor policy has delayed, but not killed, the economy’s capacity to grow. The eurozone and global environment is much more benign, and the cuts have slowed. Combined with increasingly aggressive, some would say reckless, action to pump up the housing market, we are seeing a clear return to growth. It’s a pity it’s taken so long.
ML: Jonathan is correct that we have not achieved the government’s 2010 prediction. This is not, however, a result of “very large cuts in public sector investment,” but of Osborne’s lack of courage—he should have cut faster. Those who have criticised the Chancellor on the grounds that cutting government expenditure by 1 per cent per annum is far too much have failed to outline any credible, big spending, high tax alternative. As Jonathan points out, the coalition has abandoned its aim to close the deficit entirely by 2015; it will only get about halfway there.
A favoured line of defence by some of the coalition’s critics has been that savings in the state sector should only be made once economic growth has returned. But this puts the cart before the horse. The truth is that the state’s size—nearly 50 per cent of the total economy—acts as a brake on growth and enterprise. Business has been “reluctant to invest” as a result of swathes of stifling regulation.
Although opponents of spending reductions have been proven wrong, Osborne has failed to make the most of the opportunity afforded by the crisis. Upon assuming office, he was in the position of a medic at the scene of a horrific accident. He correctly analysed the immediate needs to stem the bleeding, but failed to put forward a long-term plan for rehabilitation. Keeping the ship afloat is one thing, moving it full steam ahead is another.
The coalition should have made far greater savings in spending from the outset rather than attempting to salami-slice its way to a balanced budget. Nevertheless, Osborne’s insistence in tackling the deficit, however slowly, has been vindicated and the hysterical shrieking of his tax more, spend more, borrow more opponents look more and more ridiculous as each week passes.
JP: Mark certainly doesn’t practice austerity in his use of metaphors: apparently the Chancellor is a salami-slicing medic. This rhetorical fog obscures a clear change in position. Originally, he argued that growth—and employment—had not performed badly. Now he accepts that economic performance has indeed been mediocre, but blames not cuts but the size of the state and regulation.
But this fails to survive even the most casual encounter with the evidence. Apparently, cutting public sector net investment in half—by about £25bn a year—didn’t damage growth. Tell that to businesses in the construction sector, which saw output fall by about 10 per cent. Instead, he says, business has not invested because of “stifling regulation.” This is faith-based economics at its worst. There is some unnecessary growth-inhibiting regulation, and Mark and I broadly agree on the need for liberalising planning rules, for example. But business investment was growing healthily in the run-up to the crisis, by about 3-5 per cent a year. It’s now down 30 per cent from that peak. Mark’s argument implies, absurdly, that there’s been some huge increase in the regulatory burden since 2008. Equally, his view that the size of the state damages growth is a legitimate ideological position. But claiming that it’s responsible for the weakness of the recovery doesn’t add up, or the eurozone crisis would have its epicentre in Scandinavia.
Mark is trying to use a debate on fiscal macro policy to push his long-held views about public spending and regulation—an example of what the US economics blogger Noah Smith describes as “derp”: when you argue that whatever the facts happen to be, they support the position you already held.
Finally, Mark describes the views of long-standing critics of the government’s macro-economic strategy—ranging from Martin Wolf to Adam Posen to Simon Wren-Lewis to John Van Reenen—as “hysterical shrieking.” That probably says more about him than us. But it is important for us to set out an alternative approach, not just criticise. Broadly, we all support an investment-led growth strategy, with government policy directed at boosting private and public investment, especially in housing, infrastructure, and human capital. That remains a sound approach for the short and long run.
ML: Jonathan misunderstands my case. The size of the public sector (which has edged towards 50 per cent of GDP) and the accompanying tax burden crowd out the private sector and therefore dampen growth. But that is not to say that the composition of tax and spending is an irrelevant consideration. I want overall state spending to be swiftly reduced to around 30 per cent of national income, and agree with Jonathan that capital spending is preferable to consumption spending.
Nor do I suggest that regulation has increased dramatically since 2008, as some areas of regulation are felt more keenly in an economic downturn. For example, a modest, slowly increasing minimum wage may not lead to dramatic rises in unemployment if real wages are increasing. But it becomes more problematic in a flatlining economy.
Osborne recognises that the state has been living well beyond its means. If we want healthy, long-term growth, the solution is straightforward: dramatically reduce the size and scope of the state. The fierce resistance to the coalition’s modest steps in this direction suggests the UK is not ready to take this path. We can expect to perform poorly over the next 20 years as a result. But refusing even to acknowledge our addiction to huge public spending, as the opposition appears to do, would have made things worse still.
JP: Mark again doesn’t subject his ideological priors to any empirical test. It’s hardly convincing to suggest the minimum wage is holding back recovery when the most encouraging statistic is the number of—albeit low waged—jobs that have been created over the last few years. Also, any macroeconomist knows that the “public sector” is nowhere near 50 per cent of GDP—government’s share of output is not much more than half that (money paid to households in pensions and benefits is channelled through the state, but is not government output).
So let me just summarise the last few years. The government chose to embark on a necessary fiscal consolidation programme too quickly, in the wrong way, and without a back-up plan. The consequence was predictable and predicted: economic underperformance. Fortunately, the underlying strengths of the UK economy after 30 years of relatively sensible policy and improvements in the external environment, combined with the government’s commendable willingness to abandon its fiscal plan rather than digging deeper, mean that recovery, while delayed, has not been cancelled. The challenge is to make it sustainable and equitable.
Does the chancellor deserve to be congratulated or is too early to tell? Give us your view at prospectmagazine.co.uk/theduel
