FT Comment – 13 May 2011
Higher inflation and lower growth: the Bank of England’s latest economic forecasts, delivered one day before the UK coalition government’s first anniversary, cannot have been a terribly welcome gift. Like any well brought-up recipient of a hideous hand-knitted cardigan, George Osborne, the chancellor of the exchequer, smiled through gritted teeth and pronounced himself well pleased. Faced with this troubled economy, what should the coalition do next?
Politically, I have no idea: the British are not used to coalitions government, and they have not looked kindly on its junior partners. Having handcuffed himself to David Cameron, the Liberal Democrat leader Nick Clegg has found the prime minister walking safely on the political pavement while he trudges sadly through the gutter, splattered by the muck of every controversy. It seems only a matter of time before the leader of the Lib Dems is flattened by a metaphorical bus.
The macroeconomic situation is scarcely more promising. There is a bright spot: in spite of rapidly rising national debt, international investors have been far more forgiving than former Lib Dem voters. They think Mr Osborne and his successors will pay their debts. They are probably right – although Ireland began this crisis with far higher growth and with less government debt and has shown that trouble can come calling with surprising speed.
Mr Osborne claims some credit for this international confidence and is right to do so, since he looks determined to adjust government spending to suit the UK’s detumescent economy. The Lib Dems also appear willing to take a bullet in defence of the austerity plans.
Ed Balls, shadow chancellor, claims that such austerity is a macroeconomic disaster, and the government should stimulate the economy by keeping spending up. Politically, Mr Balls sounds plausible: his plan to halve the deficit within four years seems responsible to the ordinary voter. But since we would expect the deficit to be approximately halved simply by the process of gradual economic recovery, the implication is that if Mr Balls had his way, the government would spend an entire parliament doing almost nothing to restrain spending. Even recognising a case for stimulus spending this year, this is recklessness.
Most economists would accept that there are circumstances in which government spending can stimulate an economy. There is less unanimity about whether the UK fits those circumstances so well as to make a continued splurge necessary. Even Mr Osborne’s austerity package calls for public sector net borrowing of 6.2 per cent of gross domestic product in 2012-13; we’re a long way from paying off the nation’s credit card, as the chancellor so irritatingly terms his project.
Unemployment is high and output is well below pre-crisis levels, suggesting that there may be some slack that government should take up. And yet the UK is an open economy with a floating exchange rate, an inflation problem and interest rate rises on the horizon. It is perfectly possible that a government attempt at stimulus would be largely exported to others, or offset by tighter money.
Mr Balls is an ambivalent figure in this debate. He is now a powerful voice for counter-cyclical spending – and yet his record as Gordon Brown’s right-hand man is one of pro-cyclical policy, running large deficits in the middle of an economic boom and a financial bubble. The most generous reading of this record is that counter-cyclical fiscal policy is easier to demand than to deliver.
And Mr Osborne? His own plans are hardly beyond criticism. Somehow, he has managed to launch deep cuts in departmental spending – what most people regard as public services – with only modest plans to cut overall government spending. Partly this is the result of a greater burden of debt service; partly it has been a rising pension bill. Demographics will not help the UK’s long-term fiscal stability – but neither will the coalition’s proud “triple-lock” on the state pension, which is doomed to increase costs. The “we’re all in this together” line does not seem to apply to pensioners.
From a macroeconomic perspective, Mr Osborne would have done better to make larger cuts, later. That would also have made administrative sense: with more notice, lower spending could have been delivered with less vandalism.
The calculus seems to be purely political: if not now, then never. And there is something contagious about that idea, because the whole government seems to be in an awful hurry to deliver its reforms. The irony is that a reform programme that is all about pluralism and local adaptation is being pushed through like a Soviet five-year plan. Whether cutting the deficit or reorganising the NHS, the government should learn to make haste a little more slowly.
Commissar Osborne grits his teeth
13th May, 2011
FT Comment – 13 May 2011