It is time for some genuine radicalism from George Osborne
IT was typically cunning of Ed Balls, the shadow chancellor, to call for a grand coalition on the economy yesterday. Cunning – but utterly wrong. George Osborne has failed lamentably – but that doesn’t mean Ed Balls is right, or that we need to ditch political debate in return for a disastrous neo-Keynesian consensus.
The unfortunate, quasi-taboo reality is that there is already too much unity between the front benches on the economy, despite all the bluster. The coalition has failed to make a decisive break with the failed policies of the Gordon Brown era, and that is the single biggest reason for the UK’s appalling economic performance. As of Balls, he would borrow even more – but while this would send foreign investors into a state of panic, it wouldn’t be that much worse than the £140bn or so Osborne is on course to add to the national debt this year, and would make very little difference to aggregate demand.
We need far more radical policies to liberate the supply-side of Britain’s economy and to make it more profitable and safer for firms to hire and invest. Gordon Brown and his economic eminence grise Balls relied far too much on monetary policy when they were in power: they assumed that as long as interest rates were low and the consumer price index measure of inflation wasn’t rising too much, all would be well. Osborne is also relying too heavily on monetary policy, albeit in a much more activist way: he puts far too much faith in quantitative easing and credit easing to kick-start growth.
Both men got it wrong: monetary policy can boost growth in an emergency if used sparingly; but normally it is at best neutral and at worst disastrous. Under Brown, the latter ended up being true. Real growth only materialises when people invent new ways of doing things more efficiently, work harder or more productively and invest in new IT and machinery, all assuming a realistic cost of capital. Permanently running monetary policy on an emergency footing eventually robs it of any potency and also injects ever-greater distortions into the economy.
The 0.7 per cent contraction in the second quarter left the economy down 0.8 per cent year on year and 4.5 per cent below the pre-recession peak. GDP is now 0.3 per cent below the level seen during the second quarter of 2010, when the coalition government came to power. Some of the last quarter’s woes were caused by the extra holiday, and like many others, I doubt the situation is quite as bad as the official figures suggest. There is a fundamental inconsistency between labour market data which suggests that the total amount of hours worked in the economy is up strongly and the atrocious output data. But even if the economy were merely stagnating rather than collapsing it would still be an appalling failure.
The coalition needs to make a dramatic U-turn. It needs to allow the private sector to build more airport capacity, starting as soon as possible. It needs to allow the construction of more homes. It needs to implement in full the Beecroft report on the labour market. Spending cuts so far total only a little over one per cent in real terms; spending has actually started to go up again, demolishing Balls’ claim that the double-dip is being caused by excessive cuts.
An emergency Budget is required in the Autumn. Future spending cuts need to be brought forward, with matching reductions to capital and income taxes, focused on boosting incentives to work and invest. Britain needs less consensus economics, greater radicalism and above all a renewed sense of urgency from our inexcusably complacent chancellor.