Osborne & His Austerity Program Have Been A Total Failure, Not A Partial One.
October 12, 2014
by Martin Odoni
The United Kingdom has had a little over a year of economic growth. The Conservative Party has spent that spell in the throes of loud and nauseating self-congratulation, the loudest and ‘nauseating-est’ being reserved for the Chancellor Of The Exchequer, George Osborne.
As I detailed previously, Osborne’s program for repairing the economy after the banking crisis of 2008 has been composed of self-defeating policies collectively titled ‘Austerity’. Realistically, this label is just an early-Twentieth-Century title for old-style Conservative Party abandonment of the poor and needy. The term is used to make it sound like a wise and sound approach to managing the economy, rather than what it really is – pandering to the greed of people who already have more than they are ever likely to need in their entire lifetimes.
Now let us be very clear about this, Osborne’s Austerity policies have been an abject failure in terms of repairing the economy. None of them have done any detectable good at all for anyone, except those aforementioned people who are already very well-off and, on a personal level, were little-affected by the ‘Credit Crunch’ anyway.
But inevitably this assertion will lead many to ask why, if the policy platform has been such a hash, have we had a year or so of growth, with unemployment coming down?
Well, quite simply, the growth has happened in spite of Osborne’s tomfoolery, not because of it, and the unemployment figures have only come down by what has become a vile standard tactic among successive Governments going back some thirty-five years – figure-fiddling.
The recent spurt of growth in Gross Domestic Product (GDP), which by the way should never be taken as an overall measure of how well an economy is doing, only as a measure of the amount of activity there is, has partly happened automatically, partly happened as a result of a policy Osborne enacted that runs completely contrary to Austerity – without being much-commented-on in those terms – and partly happened as a result of a phenomenon that Conservatives usually express distaste for.
Firstly, let us view the automatic aspect. Quite simply, any market economy in recession will expand again eventually. The point when this becomes inevitable is, as it were, the point when everything has hit ‘rock-bottom’. This is usually when the vacant resources of industry have been inactive for so long, and demand for them has therefore declined so precipitously, that the price for accessing and making use of them has plummeted too. At economic ‘rock-bottom’, the prices for enough of these resources become so low that even the most greedy and cowardly investors will feel it is worth putting that bit of money in to get things moving again, as almost any feedback to come from the investment will be profitable.
Hitting ‘rock-bottom’, let me stress, is not a necessary part of the process of recovery, it is merely the point, if it is reached, where a re-expansion will happen anyway, irrespective of how much else is going wrong. The problem with Osborne’s Austerity approach is that it took so much stimulus out of the British economy that hitting ‘rock-bottom’ was the only way a re-expansion would begin. His policies in fact needlessly delayed a recovery in GDP by some three years, by slashing services to the poorest, inflicting widescale, unnecessary misery, while handicapping the whole system. Without wage-supplements from the Government for low-paid workers, or income for many of those out-of-work, capital movement around the economy was persistently slowed down from mid-2010 until late in 2013. Given that modern Britain is, for better or worse, a consumer economy where sales by businesses to the public are the lubricant that keeps the wheels turning, depriving literally millions of potential consumers/customers of access to money was always going to do harm to far more people than just the – largely-mythical – ‘scrounger-class’ that Tories have spent centuries blaming for the ills of society.
Secondly, let us look at the policy that Osborne enacted that, while still very wrong in the long term, at least helped trigger some stimulus in the economy in 2013, even though it ran completely contrary to the ideology of Austerity. In the spring-summer of 2013, he announced the start of what, at first, sounds like quite a generous program of funds to give to the general public. It is called the ‘Help-To-Buy’ scheme, and involves giving people, who are in the market to purchase a house, a proportion of the funding with which to do so.
Now, the proportion in question – no more than 20% and usually far lower – is in fact not that generous at all, given how ridiculously inflated house prices have been allowed to become since the Margaret Thatcher Government of the 1980’s gave the Financial Services Sector dangerous amounts of unchecked power – it created the toxic lending culture that eventually caused the crash of 2008, with the Financial Sector using house-prices as the collateral for many of the really big loans sold to the public. Encouraging poor people to invest in a house while prices remain so ludicrously high is irresponsible, as they will still be forced to take out a very large mortgage that they will probably never be able to pay off fully. It is likely to cause a repeat crash, and given that real-terms wages for the majority have been frozen, or have even declined, over the last couple of years, that crash could conceivably happen very soon.
But whatever the reality of that, and whatever merits or evils one might see in the policy, there is a more pertinent point in the context of this essay; Help-To-Buy is, quite simply, the antithesis of Austerity. The fundamental principle of Austerity is supposed to be that, insofar as it is possible to do so, the Government has to stop spending money, in the rather naive belief that this will make the economy work more efficiently and make it possible to pay off the nation’s debts (even though those debts are, in a manner-of-speaking, paid off ‘automatically’ by the Central Bank when they fall due, through a process of Quantitative Easing, irrespective of what general economic activity is happening). Regardless of whether it is right or wrong to make the attempt, any Government implementing Austerity must cut any service or investment that it thinks is unnecessary, while also avoiding starting up any new spending programs as well.
Whether we regard Austerity as a good idea or a bad idea, the simple reality is that Help-To-Buy is the complete opposite of that. It is a new spending program introduced by George Osborne at the Treasury. It should be seen as a tacit admission by the Government, in fact, that its Austerity ideas have failed disastrously.
The reason the scheme helped the economy to start growing is that, when the scheme was formally announced, it immediately caused fresh interest in the housing market. With the potential for some new customers trying to get onto the property ladder, house prices began to go up again, and with property values climbing, this in turn made the idea of using a house as collateral against a loan look more attractive to the financial services sector once more, and so lending started to increase again. (It is also worth noting that an increase in house-prices means that, even with the Help-To-Buy support, house-buyers are unlikely to be any better off than they would have been before, as the extra money the Government gives them is offset by the increase in the total they have to pay to the seller.) Therefore, in the short term at least, more people had (borrowed) money in their pockets and could start spending a bit more freely, and so the retail sector managed to get some sales back, hence there was at least some fresh growth at last. This appears to have been the main ‘trigger’ moment for the current growth in the nation’s GDP.
But that growth is largely based around borrowed money and rising house prices, just as the growth before the crash had been. And see where that led to – a collective banking ‘choke’, when too many borrowers at once found they just did not have enough income to pay back their loans. This remains a severe danger, as there has been very little growth in non-service sectors. Manufacturing, energy, and Primary (resource-procurement such as wood and coal) sectors remain sluggish and are not doing recognisably better than they did when the Coalition Government was elected, and that means they are unlikely to start employing more people soon, and so borrowers are unlikely to get the improved income they need in order to keep making their repayments. So the services sector cannot keep such a ‘recovery’ going indefinitely, not when it is fuelled by debt. Without the rest of the economy waking up, growth can only last until these private debts need to be paid back in full. When many people are taking out loans because their frozen wage-packets are not enough to live on in the first place, we can be sure that they will not be able to pay the money back in its entirety, or anything like it. So when enough of them suddenly default, we can be confident that the banks will be back exactly where they were in 2008. And so will the rest of us.
Only when Primary and Secondary industries are back to some kind of health will we be able to talk about a genuine ‘recovery’. This is what economists talk about when they refer to the current ‘recovery’ as being ‘unbalanced’. It has been the slowest ‘recovery’ in modern British history, and also the most one-dimensional. Re-balancing it so that other sectors can get into gear and take up some of the strain before there is another banking ‘choke’ is likely to require some direct Governmental investment, perhaps even direct Governmental control to force things to start moving, sooner or later. But it seems unlikely that the Conservatives could ever stomach doing that, as it runs contrary to their dogma against Government’ ‘interference’ in the market.
The third factor, the one that Tories – and even more so UKIP – have no taste for, is immigration. GDP is not a measure of how well-off the country is, but simply of how much economic activity there is within its borders. The population of the UK, in spite of all its financial woes throughout, has gone up by approximately 1.3 million over the last four years – see this table from the Office Of National Statistics (requires a spreadsheet viewer). As well as many of these incoming people bringing skills that many natives lack, their arrival has also meant that businesses within the country have had more customers and therefore, somewhat sluggishly, more sales. This, as it were, ‘default’ increase has been part of the GDP growth. (It may also explain why, for all their obvious disdain for foreigners, the Tories can never quite bring themselves to introduce the closed-borders policies that they would so clearly like.)
In fact, for much of the first couple of years of the Coalition, without the net influx of people from abroad, the economy would almost certainly have slid back into recession, instead of merely flat-lining as it did for so long. Now that Help-To-Buy has given more of the native population some borrowed income, the immigrant factor has helped to make GDP grow.
Please remember this next time you hear that odious lounge-lizard, Nigel Farage, leader of UKIP, grumbling about Britain being ‘full’ and how it is ‘time to pull up the drawbridge’. If it had happened when he first made such demands, Britain might have gone into a full-on economic depression.
This is not to say that indefinite immigration would be a good thing, but for several years, it was probably the only thing that kept the British economy from freezing up completely.
So, those are the three factors that have driven what just about passes for the ‘economic recovery’ of the last year – the rather measly achievement of establishing a bit of growth. That growth has happened in spite of Austerity, which has not played a role in of any of the three factors, regardless of the sudden chorus of unswerving praise that Osborne is receiving for stubbornly clinging to it. The reduction in unemployment has largely been achieved by simply redefining ‘unemployment’ as “people claiming Jobseeker’s Allowance” rather than “people not in work” while also making JSA and other benefits cynically difficult to obtain, and by forcing people into low-paid, insecure, non-productive temporary work while pretending it is full-time work. This is another example of an unbalanced recovery, as such insecure jobs can easily tip over into widescale job-loss within days, while the poor wages again contribute to the latest private debt ‘time-bomb’, of which Osborne has started the countdown.
If we want to measure Osborne’s success or otherwise, we should keep in mind two of the goals he himself set when he first became Chancellor Of The Exchequer. He even said, quite explicitly, that his success or failure should be measured against one of them.
The first of these was to have the National Deficit wiped out by the end of this term of Parliament. It is highly debatable whether wiping out the National Deficit and running a surplus is ever a good idea – I strongly recommend studying Alex Little’s outstanding blog for a better understanding of why a Deficit is not a particularly bad thing at all (it is simply the name we give to any private sector slack that is taken up by the Government) – but either way, that was the goal Osborne (and Cameron) set, and not only is he poised to have failed by May next year, he is set to miss his target by many scales. The recent proud mantra from Tory spokesmen has been that Osborne has cut the deficit by a third, when, if he had been successful, it would be all-but-gone by now.
Osborne’s boasts about cutting the deficit by a third are the equivalent of trying to walk from Land’s End to John O’Groats, giving up somewhere between Bristol and Birmingham, and proclaiming the venture to be a great success because you got pretty close to Kidderminster.
The second measure was Osborne’s ‘deal-breaker’ for staying in office, the target on which he staked his reputation. He guaranteed that he would keep Britain’s ‘AAA’ status as a ‘safe’ credit option for lenders to loan money to. That status went out of the window back in February 2013, and yet somehow, almost everybody in the media has quickly forgotten this. (To be fair, the rating was restored in June this year by several agencies, but not by all of them.)
By his own stated objectives, never mind the standards demanded by genuine experts, Osborne has failed completely. He has been such a disaster as a Chancellor that, merely by having a spell of unstable growth while on his watch, it has come as such a relief that large numbers of commentators actually view that as a fine achievement in itself. But it is no such thing. There was a spell of renewed growth during the last few months of Alistair Darling’s spell as Chancellor at the end of the last Labour Government, when several investment programs he had set up started to generate fresh activity in the aftermath of the banking crisis. The growth stopped almost as soon as Osborne started his cutting exercises at Number 11.
It is actually not difficult at all for any Chancellor Of The Exchequer to generate a crude spell of growth in one form or another in almost any circumstances, and, far from being a tremendous achievement, it is surely the absolute bare minimum to be expected of any Chancellor, without which he simply should not have been put there in the first place. Any less and he is merely an angler who never catches even a single fish.
And the terrible thing is, Osborne was sat on the riverbank for three years, the un-baited hook of Austerity bobbing on the surface of the water, without plucking anything from the depths except old boots. In 2013, he finally realised he needed to invest in bait, and even though it was a cheap and unappealing bait that he used, it was just enough to lure a few minnows to gnaw on the line. His Conservative colleagues are now telling us what a lavish banquet these minnows make.
Not starving to death, it seems, has become a luxury in Britain. At least when you are poor.