Common Weal head of policy and research Ben Wray analyses why George Osborne’s austerity plans keep failing even on their own terms, and finds key lessons for building a alternative economic strategy in Scotland that is “contra-Osborne”
GEORGE OSBORNE has dug himself a hole borne of his own ideologically driven commitment to austerity. On BBC Radio 4 this morning , presenter John Humphreys quizzed him as to why he kept failing to miss his own targets he set himself and said were enshrined in law. The Chancellor’s feeble replies led to Humphreys asking, ‘I suppose what I’m asking is…what’s a bloke got to do in your job to get the sack?’
All of us, especially European Finance Ministers (including Mr Swinney), should learn the lessons from Osborne’s mistakes: austerity doesn’t work, not even on its own terms. Debt is rising in the UK despite the cost of debt repayments falling, due to the huge fall in tax revenue caused by an economy that has been shrunk by austerity.
The following five graphs reveal clearly why Osborne has failed, and should point to why the ‘age of austerity’ needs to be brought to an end as soon as possible, in Scotland, UK and beyond.
Graph 1: The UK’s shocking productivity
This graph from the Resolution Foundation shows the extent to which UK productivity has flagged since the economic crash in 2008: even with the Office for Budget Responsibility’s (OBR) generous projections, productivity – the amount of out per hour worked – is set to be 24 per cent lower than it’s trend was trending at pre-crash. That means, in effect, British workers are producing approximately a day’s less work per week than they were expected to be.
Prior to yesterday’s [16 March] announcement of a further decline in productivity, Britain was already further behind it’s European neighbours than it had ever been. German workers could have a four-day week and produce the same output as UK workers.
Why is productivity so bad? There’s four key factors which affect productivity:
1) Human resource: The capacities of a worker to do his or her job, affected by their skills and training, but also industrial relations, work/life balance and job satisfaction.
2) Capital infrastructure: the non-human resources workers have to do their job, from the quality of internet bandwidth to traffic congestion.
3) Technological development: The extent to which economic actors are using the most advanced technologies in their industry sector: the more advanced techology, the less labour it takes per worker to produce the same amount of goods or services.
4) Industry sectors: Interconnected with the first three, the types of industry sector which dominate the economy. While all industry sectors can improve their productivity, some tend to be inherently low productivity, eg Primark does not make profit through the productivity of its workers, but through the high-volume of sales of low-value, low-skill products. In a different way, landlords and estate agents make profit through rising rent and house prices, not through productive economic activity.
In all four cases, Osborne’s economic model discincentivises productivity: he promotes low-skill and rent-seeking sectors of the economy like high-volume retail and the private housing market; he undermines workers conditions through reducing labour rights; he invests almost nothing in the nation’s capital infrastructure and the UK’s research & development to GDP ratio is one of the lowest out of all advanced economies. Austerity is an inherently anti-productivity policy, and lower productivity inevitably leads to lower tax revenues as wages are squeezed and economic activity reduced.
Graph 2: Chronic under-investment
In order to meet the Chancellor’s arbitrary budget surplus in 2020, he is actually taken an extra PS100 million out of the capital investment budget from what he had announced in his Autumn Statement last October. Britain had among one the lowest investment to GDP ratios in the whole of the EU prior to the crisis, and as the graph above shows it has only got worse since then.
At a time when business investment is chronically low, and government borrowing is so cheap due to interest rates being at historic lows, it is inconcievable that borrowing for long-term investment is a bad idea in the current UK economy. Even the IMF and OECD have reiterated this point to Osborne, but despite his Budget being high on bluster over new infrastructure spending on railway lines and motorways, the actual figure for investment is falling while austerity continues to rise, sucking demand out of the economy, reducing tax revenue and making the UK even more reliant on the financial economy – high house prices and financial market bubbles.
Graph 3: A huge trade deficit
The current account is the amount of exports versus imports in the UK economy, and on that scale the UK is running an ever increasing trade deficit with the rest of the world. The graph shows repeated projections for rising exports in the UK but the black dotted line – the actual figures – shows the current account deficit continues to rise.
This is evidence that the UK economy has failed to re-balance its economy towards manufacturing and productive forms of economic development that drive exports, despite Osborne’s protestations, which in turn means the economy is more likely to be reliant on low-waged employment and thus, once again, lower tax revenue returns than anticipated, driving the debt to GDP ratio up.
Graph 4: Rising household debt
The OBR’s latest figures anticipate household debt to increase slower than in the November forecast, but eventually rising higher than previously anticipated in 2020/21. Rising household debt has been driven by the biggest fall in real wages since the 2008 crash for a century. The inability for people to spend money holds down economic growth which reduces government revenue, but even more worryingly rising personal debt means that a small rise in interest rates – the cost of paying debts – could force people into bankruptcy, leading to the sort of toxic cycle that triggered the 2008 crash.
Graph 5: Redistribution of wealth from poor to rich
If we know one thing about Osborne it is that whenever he has to make a financial statement, he is likely to introduce policies that increase the wealth of the rich and reduce the wealth of the poor. Inequality is not something that concerns our Chancellor. This graph from the Resolution Foundation shows how the Budget has done just that, giving tax give-aways to the better off while heaping more misery on the poor (who are already facing massive losses in income from Universal Credit).
It is hard to find an economist anywhere who does not now acknowledge that inequality is a major driver of vulnerability and insecurity in the global economy. The richest tend to put their money into places that have no positive multiplier effects for the wider economy: expensive properties, savings or tax havens. Most of us spend the money we have in the local economy, increasing employment and economic activity. Osborne doesn’t get it, but his commitment to the rich is one of the key reasons he keeps failing to meet his own economic targets.
The approach we need to take in Scotland is contra-Osborne: re-balance the economy towards productive economic development and disincentivise rent-seeking and low productivity economic practises; boost wages, increase industrial democracy and invest in skills and training; exploit cheap borrowing rates to massively increase investment in infrastructure; end austerity and increase public sector employment and wages.
Common Weal published a report earlier this month about how a National Investment Bank could help us do this. We have two more reports on the Scottish economy coming soon on an industrial policy and a public investment strategy which, in combination, will amount to a systematic strategy for an alternative economic approach to Osborne’s proven failures.