He has been desperately trying to persuade us that things could be worse, but the truth is that this week’s news is a bitter blow for George Osborne.
He has been desperately trying to persuade us that things could be worse, but the truth is that this week’s news is a bitter blow for George Osborne. Our economy only grew by 0.2 per cent this quarter, at a time when he desperately needs stronger growth to generate the tax required to finance public spending and reduce his awful budget deficit. Our chancellor may seem nonchalant but, as he knows, this pitiful growth means less money for the exchequer, and the prospect that Britain will be stuck in a permanent state of semi-stagnation. The coalition government has seemed weirdly insulated from the bleak reality. But the truth is beginning to dawn: unless the economy picks up dramatically and sustainably, the Treasury will soon have to review its long-term plans for the public finances — and that will mean even more austerity to stave off a crisis.
Don’t underestimate the potential for disaster. International insurance companies, pension funds and banks will be lending the government at least £334 million every single day this year. They wouldn’t tolerate the kind of solution advocated by Ed Balls — to borrow even more for years to come — in a context in which insolvent governments have become the new Lehman Brothers. The only other option would be for the Bank of England to start buying the government’s IOUs on a massive scale again, guaranteeing eventual disaster.
The public finances remain in a critical state. Last financial year, the coalition was forced to borrow £142.1 billion, a terrifyingly large sum of money. This year, Osborne is hoping to borrow £122 billion. At any other moment in our peacetime history, such a large budget deficit would have been universally decried as fiscal vandalism. Only in today’s bizarre, economically illiterate political climate could such an extraordinarily large overdraft be confused for draconian belt-tightening. Osborne’s relatively small £20 billion reduction in annual borrowing is merely the minimum he can realistically get away with if he is to keep Britain’s creditors at bay. The extra national debt taken on this year alone will be equivalent to £8,000 for a family of four. I’m no Keynesian — but nowhere does it say in the General Theory that the government should spend over half of national income (for the third year in a row in our case, according to the OECD), that governments should run up large budget deficits even in boom years (as was the case under Gordon Brown) and that one pound in every five spent by the state should be borrowed, even with the economy out of recession. To try to justify current levels of borrowing by appealing to Keynesianism is a travesty.
Osborne’s predictions imply that total public spending will fall by just 0.7 per cent in 2011–12 after adjusting for inflation, and by 3.4 per cent over four years. Of course, because of rocketing interest, foreign aid and EU contributions, and the fact that some government activities are being sheltered, the cuts to many departments will be much greater than the overall average. Yet even under Osborne’s increasingly shaky plans, total spending will continue to rise every single year in cash terms, and the national debt will grow by hundreds of billions of pounds by 2015.
If the monthly deficit numbers keep on overshooting, and if growth keeps on disappointing, at some point our creditors will begin to panic. Instead of seeing Britain as a relative paragon of fiscal virtue, they will once again draw comparisons between us and less disciplined economies. There will then be only one answer: admit that the UK spends far more than our shrunken, lethargic economy can afford and start taking a real axe to public spending. If Osborne wishes to avoid this, he needs to step up his deficit-reducing measures with real, pro-growth, supply-side measures, including a bonfire of red tape. The coalition promised when it was elected that Britain would once again be open for business after the tax-and-spend Labour years; a largely wasted year later, it must now deliver or face up to the consequences.
Allister Heath is editor of City A.M. and a contributing editor of The Spectator.