Osborne's dogmatism

This country faces two big challenges. First, how do we reduce borrowing without risking the recovery and damaging our economic and social fabric? Second, how do we respond to the shift in the centre of economic gravity from west to east—a shift that the turmoil of the last three years has almost certainly speeded up? The answer lies in securing growth. It is not clear how the government plans to achieve this.

The government’s plan—let’s call it Plan A—does not begin to answer either question. Any sensible chancellor would already be working on a Plan B, even if he did not admit it openly, one which recognises that the public sector needs to complement the private.

Answering these challenges will determine our prospects for 30 years. But in a very uncertain world, flexibility is vital. To remain dogmatic and unbending means that we will all pay a heavy price. Pragmatism is no bad thing. As Keynes said, “when the facts change I change my mind.” In that, as in so many other things, his approach was right. Since the Office of National Statistics (ONS) published its first estimate of growth for the fourth quarter of 2010—which had GDP falling by 0.5 per cent—fears of a slow recovery or stalling have resurfaced. But the estimate does not include much data for December and is likely to be revised. I remember to my chagrin how difficult that statistical process can be in politics. When we came out of recession at the end of 2009, the first figures showed growth to be much weaker than it turned out to be.

The ONS has also noted the uncertainty of the effect of heavy snow, one unknown on top of another. My guess is that growth has slowed down from the unexpectedly high levels of spring and summer last year (growth which was more due to decisions we took in 2008 and 2009 than anything done since the election).

It is not too difficult to see why growth has slowed. The economy is not an abstract concept. It is made up of millions of people taking decisions, who are focused on the fear of things to come. It is not surprising they spend less when they know they will have less money in the future, or may lose their jobs. That fear means businesses don’t take on more staff or invest in new facilities. All of this is before most spending cuts are made.

The government hopes that if public spending is cut then the private sector will swiftly take its place. This is predicated on levels of investment and export growth rarely seen. It relies on a £100bn boost to trade not seen since 1950.

Public spending is not an end in itself but it does have a profound effect on our prospects. Properly directed public investment can enable the private sector to do more. The private sector relies on public spending—in education and transport, for example—but increasingly the government sees cutting spending as an end in itself.

There is a huge risk to the recovery from the experiment the chancellor is conducting. We are cutting spending faster and further than any other EU country, save Greece. We are not Greece.

There is no dispute that borrowing needs to come down. The question is how fast. The deficit is the result of revenues collapsing at the height of the recession. A quarter of corporate tax revenues came from the banks. Along with most other governments, we maintained spending to stop the recession turning into a depression. The risk now is that the recovery is derailed, and that if we cut too deep, our capacity to grow will be damaged. Remember what happened to our manufacturing in the early 1980s and contrast that with Germany.

I believe that a sensible course is to halve the deficit over a four-year period. If we get better than expected growth we could cut borrowing faster. Second, we need to work with other countries. The imbalances between developing and developed countries must be addressed urgently. The World Trade Talks need to be resurrected. The G20 worked at a time of crisis and it needs to start again.

Third, public spending has to support growth. Education and skills will shape our future. Siphoning off money from schools to fund “free schools” and shifting the funding of university education from the public sector is hardly encouraging. The government needs to rethink its approach on airports, and Heathrow in particular. High-speed rail is no substitute. It is nice to have but will suck resources from the rest of the network which will continue to need huge investment, particularly on commuter services. On energy and housing, some public spending is needed, as is a planning regime that gets things done. Greener energy won’t happen by itself.

Finally, we need a long hard look at where we will compete. When it comes to advanced engineering, the creative industries or financial services, what the government does will make a crucial difference. We need to be realistic about what we are good at. The recent decision by Pfizer to close its plant in Kent makes that clear.

Government cannot do it all, nor should it try to. But it can make a difference.