Why it’s hurting but not working

broken-toolsOne of our favourite economists at English Economic (yes, one or two are all right) is Oxford University’s Simon Wren-Lewis. Simon has been one of the most trenchant critics of Britain’s Tory government within mainstream economics, and his clear and straightforward arguments generally go unanswered by government supporters. Simon is also one of the few academic economists to make a concerted effort to reach out to non-economists, both through his Mainly Macro blog (which caters for both economists and the rest of us) and his campaign against “media macro” – the distortion and misinformation in the mainstream media which does so much to promote right-wing economic ideas and always seems to favour the interests of the rich and powerful.

One of the most important questions Simon has been tackling recently is why all the extraordinary measures taken in the UK and the Eurozone in recent years have failed to get the economy moving. Put very simply, there are two ways for the authorities to stimulate the economy quickly (in what economists call the “short-run”), so we can see some economic growth and start getting pay rises again. The government can either spend money itself or it can encourage other people to spend money. Either way, someone somewhere has to start putting some money down.

Read the full article on English Economic.

Photo: Jessica Taylor/UK Parliament/Creative Commons 2.0

Budget 2016: austerity has done itself in

GEORGE OSBORNE HAS turned his budgets into a kind of game show, where he flings statistics and targets around and we have to work out which ones are true, which are guesswork and which are just downright porkies. Every few months, he comes back with another set of teasers. It’s a sort of political Would I Lie to You?, except Osborne’s jokes aren’t as funny as Rob Brydon’s.

For all his showmanship and political craft, Osborne can’t escape the reality that six years of austerity have delivered neither prosperity nor any reduction in government debt. Osborne still claims it will happen – some time way off in the future – but he says that every year.

Austerity has done itself in. Like the abstract “free market” Osborne has so much faith in, austerity is an idea that devours itself. It has delivered so little growth it has failed to meet its sole objective: reducing government debt by eliminating the deficit. Even Osborne doesn’t believe in it any more, which is why he effectively abandoned austerity yesterday and rushed to borrow another £38.4bn over the next three years – before savagely cutting back again in 2019. The problem is that he doesn’t have a clue what else to do.

The Chancellor has only himself to blame. He set the fanciful targets, he made the silly rules. Osborne has now broken two of his three “golden rules” within three months of setting them. Far from reducing the government’s pile of debt every year as promised, Osborne admitted yesterday it will actually rise this year. The slowing economy and stagnating wages had already done for his cap on welfare spending. And not even Osborne can really believe in the ferrago of coincidence and convenience which would be necessary for him meet his third rule, eliminating the deficit by 2020. The independent Institute of Fiscal Studies puts his chances of success at no better than fifty-fifty. Many other commentators put them a lot lower lower than that.

I wouldn’t mind, but these are the iron rules which Osborne, in his rush to embarrass Labour, said the government must live by – at least in “normal” times. Yet he has thrown them over at the first time of asking. He can’t have it both ways. Either the British economy is doing well, as he claims, and he must live by his rules. Or it isn’t, in which case he only has to look in the mirror to see the one who should be embarrassed.

The OBR twisted the knife in Osborne’s back, sharply downgrading its forecasts for economic growth into the forseeable future. Worse, the OBR has now discovered that the £27bn in extra tax receipts it “found” down the back of the Treasury sofa last November – which Osborne used to fund his U-turn on working tax credits – has turned into a £56bn black hole. “The sofa has swallowed roughly two pounds this time for every one that it yielded last time,” said OBR director Robert Chote – presumably trying very hard not to giggle.

Osborne tried to blame the sharp deterioration in his financial position on a “dangerous cocktail” of global economic threats. That won’t wash. Osborne’s own Budget Red Book shows that the expected global slowdown accounts for well under half the reduction in expected UK growth – most of which comes from a big downgrading of forecasts for the UK’s productivity performance – overdue recognition from the OBR of one our most persistent and serious economic problems.

Osborne’s eye-catching announcements – the sugar tax, forcing all schools to become “academies” under Whitehall control and incoherent plans for further devolution to local councils – were diversionary tactics. In reality, this was a desperately thin budget. There were some modest tax cuts, mostly benefiting the well-off and corporations, more cuts to support for the disabled, some sensible measures to encourage savings, plus some further unspecified cuts to Whitehall spending, left hanging in the air like a bad smell until just before the next election. In short, a pretty typical Tory budget for “normal” times. This was a budget for the economy George Osborne would like to be running, rather than the one he’s spent six years ruining.

On our big economic problems – dismal productivity, low wages, the housing crisis – he offered almost nothing. In six years Osborne has failed to come up with a single meaningful initiative to improve productivity, which almost everyone recognises as the root cause of many of Britian’s economic woes. One housing group even welcomed Osborne’s inaction on housing – on the grounds that everything he’s tried before has made matters worse.

Osborne can’t do anything about these problems because they require active government, and doing things like strengthening trade unions and building more social housing, which are ideological anathema to the Tory MPs and activists he needs to appease to get his feet into David Cameron’s shoes. So, with austerity now a busted flush and constrained by the need not ruffle feathers before June’s EU referendum, Osborne was left with nothing much. That’s why he had to mount a smash and grab raid on other departments’ to-do lists to find something to put in his red box.

Economically, this was a budget from a Chancellor at the end of the road, a Chancellor who has missed every significant target he has set himself, a Chancellor who really wants to be doing something else. In ten months, Osborne has gone from hero to almost zero in the Tory party (how he must now regret turning down David Cameron’s offer of a different job after the 2015 election). But it’s Osborne’s constant complusion to put politics ahead of economics which has put him there.

Photo: Jessica Taylor/UK Parliament/Creative Commons 2.0 (cropped).