Opinion: George Osborne doesn’t get it… again

This should have been a budget for growth, helping the UK economy to recover from the deepest and longest depression on record. George Osborne’s announcements on childcare, investment in industrial research and of course raising the personal income tax allowance to £10,000 are welcome steps in the right direction. They are all are clear examples of Liberal Democrat influence in the Coalition, not least the flagship move on the tax threshold. These measures, however, don’t go nearly far enough to support businesses starved of credit or households facing escalating living costs and squeezed incomes – where was the action required to get the banks lending, builders building and investment flowing?

The government insists on balancing its own finances through a mixture of spending cuts and tax rises, ignoring the suppression of demand and therefore growth that this prolonged austerity creates. This balance-sheet approach to economic policy is not only self-defeating through Keynes’ famous ‘paradox of thrift,’ it distracts from the crucial work needed to fix the underlying economic problems that caused the budget deficit to balloon. A clear example is the piecemeal way in which the slashing of capital investment – acknowledged by Vince Cable and http://www.bbc.co.uk/news/uk-politics-21190108 as a grave mistake – is being reversed. Government guarantees have proven ineffective at a time of uncertainty and demand, so now we see a tiny bit of ‘extra’ capital spending, which is funded by further cuts elsewhere in a misguided attempt to remain fiscally neutral.

Further top-slicing cuts aren’t the way to fund capital funding – far from spooking bond markets and spiking interest rates, borrowing to invest would prepare the ground for tomorrow’s prosperity at a time when private investment has all-but dried up and the need for better infrastructure grows ever more urgent. Osborne’s fear of borrowing to invest (as opposed to borrowing to make up for a failed macro-policy) is most evident in his desperate attempt to reflate the house price bubble by pumping billions into sub-prime mortgages – so much for rebalancing the economy.

As Vince Cable recently set out in a lucid essay, the balance of risks has shifted since Osborne’s first budget, and government should fund large-scale investment by borrowing at the lowest rates on record. Further, it should take on the task of reforming the very roots of our political economy, moving beyond the sterile debate about borrowing into more radical territory that aids innovation, embeds fairness in the labour market and finally fixes the dysfunctional banking system.

This should have been a budget for growth, delivered by a Chancellor committed to responsible stewardship of the whole economy, not just the Treasury’s own books. Too busy moonlighting as Tory election strategist-in-chief, George is no such Chancellor, so this was no such budget.

* Prateek Buch is Director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee

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7 Comments

  • david thorpe 22nd Mar '13 - 1:53pm

    while the budget contains many very disburbing measures-it also contains billions of pounds to chase growth in exactly the sort of infantile way which the ‘the ;eft’ adviocate-this budget was neither a plan a budget nor a plan b budget-its a hiotch potch of both and all the worse for it

  • Richard Dean 22nd Mar '13 - 2:39pm

    An investor has perhaps these choices for what to do with money:

    1. invest it in some industry
    2. lend it to a government

    They might put it in a bank, but then the bank has these same two choices, subject to reserve ratios being met.

    So does “borrow to invest” really make sense? If the government borrows MORE, won’t investors invest LESS in some industry, by the same amount? Won’t it therefore have no effect at all, other than commit government to future repayments that the taxpayer would not otherwise need to make?

  • Paul Holmes 22nd Mar '13 - 3:06pm

    Good to see such a reasoned and economically literate article backed up with evidenced analysis instead of personal assertion. Keep up the good work.

  • John Broggio 22nd Mar '13 - 4:38pm

    @ Richard

    At the moment “investors” are sitting on huge piles of cash & not investing it. It makes sense for the government to spend to stimulate as outlined above & it can finance this by the stick (taxing the stagnant wealth), the carrot (borrowing & hoping to tempt some of the “investors” with stagnant wealth) or a combination of the two. It is unbelievably frustrating that £bn’s are sitting idly by on balance sheets & in bank accounts when we could be utilising this money for the good of the country as a whole and the benefit of the un(der)employed in particular.

  • Richard Dean 22nd Mar '13 - 5:51pm

    Billions do not sit on balance sheets or in banks. Balance sheets record financial objects including money that is stored elsewhere – in banks, if they are there as “Cash at bank and in hand”. Balance sheets also record other things like fixed assets – ie things that have been purchased.

    The billions in banks do not sit there. The banks have two choices:

    1. invest in stocks and shares, ie invest in industry
    2. lend to government

    so it comes back to the same result. Money is either invested in industry or it is lent to government. Any extra that the government borrows will take away from what is invested privately in industry.

    Therefore, government borrowing to invest doesn’t make any sense, except if the way that the government invests is somehow more productive than the way that investors invest in industry. Not very likely.

    Government is presently borrowing to service current expenditure, isn’t it? Its only real choices are to either decrease current expenditure, or increase income. It can increase its income by encouraging industry to produce more things that can be taxed, or it can sell a national treasure, or it can do a Cyprus – raid the population.

  • Michael O'Donnell 22nd Mar '13 - 7:26pm

    @richard

    I think I understand what you’re saying. That investors are investing (via the banks and their savings accounts), even when they aren’t investing (directly in startups etc). This then has the effect that if the government borrows it is simply using money already being invested by banks. But I think there are at least two problems with this.

    Firstly, it assumes a closed system, where government can only borrow from sources which depend on people who are investing in the UK in either sense outlined above. The government can borrow from sources which hold deposits of people who do not invest in the UK in either sense, so the government can borrow and invest in addition to investment already happening in the senses outlined above.

    Secondly, you are assuming that the investing done by banks is the kind of investment that can grow a business in a useful way. By this I mean grow a business in a way other than to inflate the share price of a company. Investment which doesn’t create jobs, like the kind of computerised gambling investment (which is what makes the banks money), isn’t as useful as government investment in infrastructure.

  • Andrew Tennant 22nd Mar '13 - 10:47pm

    @Prateek Buch
    I agree with you on the folly of government subsidies to inflated house prices and toxic lending – it seems destined to promote a repeat of the credit crunch crisis that resulted in the latest tax revenues collapse. We should be allowing prices to correct themselves and for funds to be freed up for products and services of genuine value in other sectors of industry.

    You are however, I think, overlooking the significance of the reform of business taxation – the cut in the headline corporation tax rate and employers national insurance contributions. Government taking less from business not only leaves them with better cash flow for investment and expansion, but it also encourages start ups and relocation of businesses to the UK from overseas. A smaller slice of a bigger pie is an effective way to grow our economy, and we should welcome the pragmatism aimed at making the UK more prosperous and competitive.

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