George, you need a holiday

Why is it all going so wrong for George Osborne? Only 16 months ago, the poor guy entered the Treasury full of sound principles and good intentions. He would put in order the dodgy public finances inherited from Gordon Brown’s regime, stand back and let market forces do the rest. The Office for Budget Responsibility would certify that he had.

Within a short period, the benign influence of sound finance would restore confidence in the private sector; and room for it to take up the running in promoting national economic growth would be created by reining back the bloated public sector. Tory priorities and the national interest would happily cohere to lead Britain out of crisis and recession back to the sunlit uplands, the halcyon days of yore — well, not perhaps the deep recession of 1980-86 with unemployment rising above three million, nor the Lawson boom of 1987-89, nor the ‘if it is not hurting, it isn’t working’ recession of 1990-92, but you know what we mean — Thatcher in the golden age.

This narrative always contained a heavy dose of faith, faith that sharply cutting back public-sector demand would automatically stimulate a compensating — or more than compensating — increase in private sector demand by way of rising business investment and consumer expenditure. Faith is, as the Chancellor should know, a tricky commodity, being nothing more than a nice-sounding name for believing something for which there is no good reason.

The private sector has failed the Chancellor, or at least his faith in it has been disappointed. Economic theory would have warned him of this risk, after the decisive exchanges in the 1930s between A.C. Pigou and Nicholas Kaldor as to whether or not the economy has any reliable built-in tendency to revert promptly to equilibrium at a high level of unemployment following a deflationary shock.