Common Weal Policy look at recent comments from the OECD and IMF arguing for public investment rather than austerity for the UK economy. There are few economists left who would defend Osborne’s economic “lunacy”, but the Chancellor has bigger fish to fry – he’s trying to become Prime Minister…
WHO actually agrees with George Osborne anymore? The man most likely to be the next Prime Minister of the United Kingdom is set on achieving a budget surplus by 2020 by cutting public expenditure in the face of seemingly just about every leading economic expert and organisation on the planet.
Last week, the OECD were emphatic – the global economy is facing headwinds that require a huge boost in public investment across all developed nations, preferably through a co-ordinated strategy. They were clear that quantitative easing – a fancy word for giving free fiat money to banks – was not enough, with chief economist Catherine Mann stating that the UK was one of the countries where growth prospects were reducing and current fiscal policy was “contractionary”.
Mann added that with historically low interest rates (negative in many countries) public borrowing to invest in infrastructure was a no brainer, stating in a very polite way that continuing to suck money out of the economy through austerity was idiotic.
She said: “With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability.”
The IMF joined in today [25 February] with a report specifically on the UK’s economic outlook, again very diplomatically stating that Osborne has to change course: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.”
The message was clear enough for anyone who wants to hear it: enough of the austerity, George, there’s absolutely no concern with public finances, what you should be worried about is the private sector tanking.
The OECD and IMF are no leftists. Previously, they have been cheerleaders of Osbornomics, but, like the rest of the world, they have woken up to the madness of austerity. Barely an economist can be found anymore (who is not in the pay of organisations with a vested interest in reducing the size of the public sector) that thinks more cuts is the answer in Britain.
“Barely an economist can be found anymore (who is not in the pay of organisations with a vested interest in reducing the size of the public sector) that thinks more cuts is the answer in Britain.”
The Treasury are putting their fingers in their ears. They refused to respond to a request for comment from The Guardian on the IMF’s new report. Their obstinacy is perfectly explainable: with their iron-clad commitment to a budget surplus by 2020 they have boxed themselves into a position whereby, regardless of wider economic circumstances, changing tack would mean a major climb down.
In the Spending Review last November, Osborne was able to ease up on the pace of austerity (reversing planned tax credit cuts) due to highly ambitious estimates of wage rises from the OBR ( now proven to be in the pocket of the Treasury ) which would increase tax receipts. Those estimates were criticised at the time by some economists and now look farcical.
Either yet more cuts or tax rises will be needed to meet Osborne’s arbitrary deadline for a budget surplus – both policies suck supply and demand out of the economy (unless the tax rises are on the very richest, which they are unlikely to be with this Chancellor), exactly the approaches the IMF and OECD are warning against.
“‘Government’s shouldn’t run deficits’; ‘the UK’s debt is unsustainably high’; ‘borrowing is always risky’; ‘we are burdening future generations with huge debts’ – all commonly held fallacies bought into by politicians across the West that collapse under the slightest critique.”
The economic illiteracy is evidence of the fact that a whole series of neoliberal golden rules developed after the financial crash that the centre-left bought into far too easily.
‘Government’s shouldn’t run deficits’; ‘the UK’s debt is unsustainably high’; ‘borrowing is always risky’; ‘we are burdening future generations with huge debts’ – all commonly held fallacies bought into by politicians across the West that collapse under the slightest critique.
Economies operate through what economists call ‘sectoral balances’ – if you reduce the amount of debt in the public sector, it has a knock on effect on the amount of debt in the private sector, in individuals budgets and in the trade deficit between the nation in question and the rest of the world. The graph below shows clearly what trajectory Britain is on.
On 1 December last year RBS only passed a Bank of England ‘stress test’ because of prior action days before the announcement to boost cash reserves to meet the 3% leverage ratio threshold. That’s despite billions being pumped in by the public purse to keep the bank afloat. Yet Osborne continues to sell it off, more concerned about a small and manageable deficit in the public sector.
Of course, the UK’s debt would have never ballooned in the first place if it wasn’t for the collapse of the banking sector in 2008. Nothing Osborne has done since has made Britain’s financial sector less vulnerable to economic shocks – the UK’s economy has become even more over-reliant on the City of London since then.
“It’s not head honchos at RBS I’m concerned about – I’m concerned about the people who are paying the likes of RBS for their mortgage repayments, many of whose real wages are still below their pre-crash peak in the longest decline in earnings since records began.”
RBS itself warned investors to “sell everything” in January as the economy sits on the precipice once more. But it’s not head honchos at RBS I’m concerned about – I’m concerned about the people who are paying the likes of RBS for their mortgage repayments, many of whose real wages are still below their pre-crash peak in the longest decline in earnings since records began . In December last year it was reported that personal debt in the UK was now at PS40bn – In 2010 that figure was a PS67bn surplus.
Such is the Orwellian doublethink that allows a man with Osborne’s track record to be considered economically competent. The graph below shows what happened when he came in to office and started implementing austerity: the economy, which had just begun growing after the crash, flat-lined from mid-2010 when Cameron and Osborne entered Downing Street, only increasing again when austerity eased up in the second half of the last parliament.
Yet more austerity in global circumstances that are turning increasingly towards the desperate need for increased investment would be sheer lunacy. But don’t put it past our Chancellor, after all he’s trying to become Prime Minister; there’s more important things than our economic security at stake.