Osborne is Not As Austere As He Would Have Us Believe
Throughout the general election campaign, political pundits were free with their estimates of how much the Chancellor George Osborne would have to cut public spending to eliminate the deficit in the timeframe he had set. The Chancellor himself appeared to encourage this speculation, possibly calculating that the Labour Party would never be able to identify tax and spending adjustments it would make that would come close to reaching objectives he had established in the public mind as the minimum consistent with fiscal prudence. His opponents, Labour and SNP, were reduced to labelling his budgetary strategy as ‘austerity’ in the hope that voters would not like the sound of it. In the event, that ploy did not work.
In fact, the ‘austerity’ that Osborne is accused of enforcing during the Coalition years saw general government current spending rise, in real terms, by 3.8% between 2010 and 2014. This was clearly a different kind of ‘austerity’ from that imposed on Mediterranean nations imprisoned in the euro zone. To be sure, Osborne failed to satisfy voters’ voracious appetite for taxpayer-funded services, and felt obliged to make sacrifices in national security, internal and external, to provide more of these services and to quell the public clamour at least temporarily. But that did not truly amount to a policy of fiscal rigour. Further, Osborne chose to allow the ‘fiscal stabilisers’ to kick in during 2012 when it looked as though the economy might be entering a ‘double-dip’ recession. The OECD, which is now warning the UK Chancellor against excessive fiscal restraint, should note that, back then, he behaved in an impeccably neo-Keynesian manner and subsequently claimed credit for having done so.
it seems premature to forecast that a sharp reduction in the overall trajectory of UK government spending will actually be implementedAgainst this background, it seems premature to forecast that a sharp reduction in the overall trajectory of UK government spending will actually be implemented. The plans Osborne presents next month may, indeed, include fearsome-looking cuts, especially in the area of welfare benefits.
However, the experience of the Coalition years and the necessary imprecision in forecasting suggests the outcome may diverge markedly from these initial plans. In the first instance, the tax base may have embarked on a period of more rapid growth relative to GDP. Provided the economic slowdown does not turn into recession, this should outweigh the effects of slower than forecast economic growth on the fiscal balance and allow a more rapid decline in the borrowing than has been thus far projected. Perhaps one reason why Osborne is so eager to make a start on cutting the welfare budget is that he sees social and political benefits flowing from such action but is concerned to complete his programme of cuts while he can still offer justification for them in strictly economic terms.
But, on Osborne’s 2012 form, the OECD need have no fear that he will press on with ‘austerity’ if the UK economy suffers a serious loss of momentum. He was quick enough then to change fiscal course and allow far more government borrowing than he had originally envisaged when entering office. He appears to differ from the OECD currently in his judgment of the fragility of the UK economy. Whereas the OECD seems to believe the UK economy would wilt at the mere announcement of measures to tighten the budgetary position, he evidently believes it is resilient. He may even think the presentation of a plan rapidly to reduce the budget deficit would strengthen business and household spending. Osborne, not unreasonably, ignored the advice of the multinational institutions, except when they backed his policies, during the Coalition years. He is unlikely to change his approach now.
About the author
Stephen’s career spanning five decades has made him one of the most respected and unique voices in the City of London. Disclaimer regularly publishes a selection of his elegant and thoughtful essays on the global economy, which he has been writing regularly since he founded Fifth Horseman Publications in the late 1980s. As well as an economist, Stephen serves as Treasurer of the Forum for European Philosophy and was elected to the Royal Institute of Philosophy.
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