It is hard to tell whether or not the chancellor was imbued with the Christmas spirit on Tuesday during the last set-piece Commons debate on the economy prior to the New Year, but he certainly upscaled his rhetorical seasonal gifts by claiming the only people supporting an alternative to rapid fiscal consolidation were akin to communists.
Obviously, the newly elected Socialist-led government of Denmark, who have introduced a fiscal stimulus package to boost demand in their economy and yet have bond yields lower than the UK’s will not be anywhere near his (austere) Christmas card list.
It is unlikely that the eminent economists he assumes are reds-under-the-bed, such as Paul Krugman, Joe Stiglitz, David Blanchflower, or Ha-Joon Chang, will appear on the list either, for they have all called on the chancellor to take fiscal measures to stimulate failing growth in Britain now before significant deflationary pressures set in, and the chill winds from the Eurozone reduce demand for goods and services further in the new year in our largest market.
The huge error made by the chancellor on assuming office last year was to mistake a crisis of global demand, growth, and jobs being for one purely of deficit and debt.
Driven by the theory that the public sector was always inefficient, and public and private sector growth mutually exclusive, he launched on a grand experiment of so-called expansionary fiscal contraction. He must now admit that it has been the most disastrous misuse of fiscal policy in Britain since the 1930s.
As Robert Skidelsky wrote in The Guardian last week:
“It’s the economy that determines the size of the deficit, not the deficit that determines the size of the economy.”
He has reduced an economy recovering at an annualised rate of 2.1 per cent a year at the end of the previous government’s period in office, to flatlining growth, which this autumn stands as the fifth lowest in the EU according to the European Commission, and lower than the eurozone average.
The National Institute for Economic and Social Research have said this is the slowest recovery from recession in Britain in a century.
In the Great Recession of the 1930s it took 48 months to rebuild the lost output in the economy, under this Chancellor it will be 69 months and counting, according to David Blanchflower.
Having failed to prove that slashing the public sector would lead to an increase in private sector demand or employment, the chancellor has now changed his strategy to argue that only his fiscal consolidation plan would keep interest rates low, but he is borrowing more for the costs of failure, and the international experience does not bear out the repetition of his latest mantra.
Voters with longer memories may also consider that, as the party of 15 per cent interest rates in 1990, and of a rise of five per cent in lending rates in one day had the UK not left the ERM in September 1992, the Conservatives have little basis to lecture others on monetary policy stability.
Even taking into account the rejigging of spending between revenue and capital projects announced by the government last week, the OBR has downgraded growth for the fourth time since its initial forecast in June 2010, with growth 0.8 per cent lower this year, and a whopping 1.8 per cent lower next year than its March forecasts.
But the burden is not being shouldered by the chancellor, or by the rich or powerful within society.
It is being paid by women working part-time to help support their families, it is being paid by children facing lower living standards than the past generation, and above all it is being paid by the poor, with the number of people existing in food poverty in this country approaching four million, and by the unemployed, with the number of young jobless now over a million.
The respected Fraser of Allander institute in their latest commentary (pdf) focusing on the state of the Scottish economy have said that:
“…there is still scope for some fiscal easing without damaging our fiscal credibility in the long-term.”
In Scotland, unemployment is forecast to rise to 8.9 per cent next year and to stay at that rate in 2013. And they point out that second quarter growth has moved US GDP back above its pre-recession peak output, whereas in the UK and Scotland, there is a gap of five per cent and four per cent respectively below pre-recession GDP.
As Tony Dolphin of the IPPR wrote in relation to the government’s fiscal consolidation plan and the impact on bond yields last week:
“If it had started with a plan that reduced the deficit more slowly – say over six years rather than four – yields would probably be little different from current levels now.”
What is particularly worrying is that the same austerity medicine is being applied in many other EU countries with similar results.
The Chancellor’s growth strategy is now predicated on maintaining a loose monetary policy indefinitely, with higher levels of quantitative easing he once derided as the last resort for desperate governments whose other economic policies have failed.
But as the experience of Japan in the 1990s shows, low interest rates in themselves are insufficient to generate new demand. Japan has net debt of over 200 per cent of GDP, but even lower bond yields than the UK.
As the Japanese economist Richard Koo said of austerity economics in a recent interview with Money magazine in the US:
“The Japanese made a horrendous mistake in 1997… The cutback caused a second recession… The Japanese government didn’t do enough spending in the early 1990s and added another ten years to the problem.”
The announcements in last week’s autumn statement will do little to boost aggregate demand in the economy, because no change from excessive austerity measures was made. And with demand in the Eurozone looking equally weak in the coming years, there is no short cut to higher growth through the kinds of export-led growth surge which Canada enjoyed from a booming US market in the 1990s.
The OECD have even forecast that the UK economy could slip back into recession early next year, and with borrowing until 2015/16 £111bn higher than forecast in the March Budget, this Chancellor’s policy is not only failing the test of growth and job creation, it is failing as a credible medium term deficit reduction strategy too.
The Government is ignoring four basic realities about our economy.
Firstly, that living standards for working-age families with children are being squeezed at levels last seen in the 1920s, amid slumping consumer confidence, slumping demand, and weak retail sales. Women and children are being hit the hardest by this new trend.
Lack of confidence is breeding despair about the future. Last week an Ipsos-Mori poll revealed that 35 per cent of people believe that the next generation will be worse off than they are currently, with only 23 per cent believing the opposite.
The Institute for Fiscal Studies in a major analysis of the causes behind the improvement in living standards between 1968 and 2009 said that the rising incomes of working women were a major factor in raising living standards levels in that period – accounting for 27 per cent of income growth, and overall, three quarters of the rise in household living standards came from women, with male income from work only contributing eight per cent of the rise in household incomes.
Tax credits contributed nearly a sixth of the rise, and now with tax credits being cut, and a further 310,000 public sector job losses on top of those previously announced by the Chancellor, women’s and family incomes will be under pressure again. Families will lose the extra £110 per child they had expected next April, and freezing the Working Tax Credit will cut working families’ incomes by an additional £100.
Last Thursday, the Institute for Fiscal Studies gave their verdict on the Chancellor’s squeeze on ordinary families’ living standards.
Average incomes will fall 7.4 per cent between 2009 and 2013, and based on the OBR’s figures they have calculated that families face a slump in the value of their household disposable income of three per cent this year, compared with a predicted 1.1 per cent at the time of the March Budget, and over a three year period, ordinary families face a loss of four per cent of their disposable incomes.
As the Resolution Foundation established last Wednesday, more than three quarters of the burden of the new cuts in tax credits are being faced by families in the lower half of the income scale, with the top ten percent simply facing three per cent of the burden.
How it can be fair to snatch £1.2bn in tax credits from low and middle earners by breaking the pledge to make an above-inflation link with child tax credit, while the Government has raised the Bank Balance Sheet Levy by only £300 million?
Most damning of all is the finding by the IFS that the distributional effects of the changes in benefit uprating and tax credits announced last week punish the poor – those in the lowest two income deciles are the losers, but those in the wealthiest ten per cent of the population are among the few gainers. Unsurprisingly, it is families with children that take the biggest hit.
Chris Johnes, Oxfam’s director of UK poverty, said it could push more families into poverty:
“Freezing working tax credits will penalise those who are trying to make a living by working their way out of poverty – this should be among the last places the Government looks to make savings.”
Alison Garnham, chief executive of Child Poverty Action Group said:
“Warnings of a bleak future of rising child poverty have not just been ignored, the government has actively decided to let child poverty rise. This is not the fairness we were promised and it will cost the nation dearly in years to come.”
Secondly, supply side reforms are needed to stimulate growth in manufacturing and construction, as well as to create new green collar jobs. The chancellor’s failure on growth now means that debt as a proportion of GDP may not fall by the end of this parliament, thus jeopardising his own stance on permitting the Green Investment Bank to borrow by 2015.
The OBR is also unclear to what extent the chancellor’s flagship credit easing plan will have on increasing levels of bank lending to small and medium sized businesses.
Far better for the government to set up a wider National Investment Bank, like Germany’s KfW bank, with the power to borrow as a means of kickstarting new investment in the green economy, to introduce capital allowances for infrastructure programmes, and to utilise some of the spare economic capacity which the chancellor referred to last Tuesday.
Thirdly, that mass unemployment creates massive social costs and unrest and devastates lives in ways which end up placing a higher burden on future taxpayers as the price of economic failure.
In Scotland, youth unemployment, at 21.3 per cent, stands even higher than the UK average of just over 20 per cent. Female unemployment in my constituency has risen by 16 per cent in the last year.
Keynes knew that a credible deficit reduction plan depended on jobs and growth when he said, in the midst of the Great Recession in 1933:
“Look after unemployment, and the budgets will take care of themselves.”
Good childcare is critical in improving participation rates in the labour market - the government must recognise that the Social Market Foundation were right last week to highlight the £600 annual hike in childcare costs faced by average families as a result of the government’s cut in support as a burden too far.
Fourthly, we need to build an economy where low and middle-income people share more in the proceeds of growth than they have done in the last three decades, trends which are getting worse under this government. The Resolution Foundation have discovered that just 12p in every pound of GDP generated is going into the wage packets of people in the lower half of the income scale, a fall of a quarter in the last three decades.
This Monday, the OECD revealed that the biggest jump in inequality since 1975 occurred in the UK, even taking into account the huge leap forward made between 1998 and 2005 under Labour. Without tackling chronic rates of low pay which stand as the second lowest in the OECD, inter-generational inequality and lack of opportunity will remain the British disease.
Keynes was clear that debts run up during a recession must be repaid in due course, and if the economy is guided back to the levels of trend growth Britain has experienced in the recent past, debt reduction will be a priority in distributing the proceeds of that growth, as it was for Labour in 1999.
In these extraordinary circumstances however, with the private sector and consumer spending effectively static, and the real value of average wages having declined by 3.5 per cent this year alone, it is surely right for government to use every lever of policy to generate the growth the country needs now.
That is why a cut in VAT would increase aggregate demand in the economy with all the multiplier effects in terms of additional job creation, lowering national insurance for new workers would create incentives to create new jobs particularly among the young, and a proper National Investment Bank could provide capital for businesses to invest.
The country is crying out for a fairer alternative policy to this failed Tory plan that is sucking demand from our economy and hope and life from our communities.
It deserves better leadership and a more optimistic vision of our country’s future than that offered by this downgraded chancellor of a deflationary government.
• Balls mocks “Panglossian” Osborne over Bullingdon, growth and Boris – Shamik Das, December 7th 2011
• Economic update, December 2011 – UK teeters on brink of recession – Tony Dolphin, December 5th 2011
• “We’re all in this together” – when ‘we’ means the bottom 80% – Will Straw, November 29th 2011
• UK growth – bottom of the table, wallowing with the PIGS – Daniel Elton, November 28th 2011
• One-club Osborne drives economy further into the rough – William Bain MP, October 6th 2011