Opinion: Is the Chancellor ready to listen to the best economic brains in the Cabinet?

Having just left one party conference, where I was able to deliver my message on the shortcomings of the Coalition Government’s strategy to revive the UK economy and to promote my alternative take on the official Lib Dem approach to party policy development, in advance of the next General Election, (see Facing the Future ), I am now waiting to hear what George Osborne has to say at the Tory party conference in Manchester, in just a few days’ time.

Labour really is – as Alistair Campbell has recently put it – the third most interesting party in the UK. The most interesting party is led by Nick Clegg; that’s because the Liberal Democrats really can help change the UK’s economic policy for the better. In order to do so they have to persuade their Conservative partners in government. And there is a powerful incentive for them to try: being at the heart of government is a great opportunity, which will not come again, unless the Lib Dems show that they can use it.

Little is going right for Mr Osborne at the moment. He must be finding it difficult to maintain his stance on the Coalition’s official, accelerated deficit reduction, line. It must be particularly difficult whenever he meets and discusses strategy with the real economic heavyweights in the Cabinet, Vince Cable and Chris Huhne. It must be even more difficult when he listens to what his old friend, Christine Legarde, has to say about the parlous state of the European economy and the need for coordinated international action.

While Vince and Chris have to be careful about what they say in public they cannot fail to be aware of just how out of touch and dogmatic the official Treasury view now appears.

Independent economists know that the UK’s Chancellor can, if he wants to, make much greater use of the flexibility that is available to UK economic policy-makers. They know, for example, that it is possible for a Chancellor to encourage the Monetary Policy Committee (MPC) to do the right thing. It is also possible for a self-confident Chancellor to show that he can get a grip, in circumstances that neither he nor his political opponents anticipated.

Twelve months ago George Osborne genuinely believed he had good reason to expect the UK economy to bounce back; to return to something like its pre 2007 trend rate of growth by 2013 or 14. But Coalition budget plans no longer add up and expectations and economic forecasts for the UK economy have had to be radically revised. The International Monetary Fund, the Office of Budget Responsibility and National Institute of Economic and Social Research, all have the same message for the Chancellor: ‘Your brand of austerity is not working’.

The political message to Mr Osborne is, if anything, worse. As things stand millions of voters are likely go to the polls in 2015 – after experiencing years of worsening economic conditions – certain of one thing: the Conservatives (and their Liberal Democrat partners) are to blame. Of course there are alternatives, which would enable the Coalition to avoid ploughing on regardless.

What options does Mr Osborne have?

He can explain – as his Coalition partners do, whenever they are given a chance – that intelligent economic policy-making is necessarily adaptable and flexible. Policy has to be flexible for the very good reason that even the best economic forecasters regularly get it wrong. The UK economy is, for example, exposed to shifts in the international economic environment over which ministers have little or no control.

And the UK government really can borrow more – in its own and everyone else’s best interests – if tax revenues fall below expectations and the government outlay on benefits is higher than anticipated. It’s obvious that Britain needs an intelligent economic pilot – not an automatic pilot.

While conventional – and even some unconventional – monetary policy has been beached, monetary policy can still play an important part in helping to revive the UK economy. Members of the MPC – take a look at the Committee’s minutes if you doubt it – recognise that they have a critical role to play and that they could play an even more important role. Encouraging them to play their full part in assisting economic recovery – on the way to price stability – isn’t just a sensible thing to do, it is essential when the fiscal authorities adopt a self denying ordinance.

Now that the UK Government has a direct stake in some of Britain’s biggest and strategically most important banks and the MPC is contemplating another round of quantitative easing (QE), it is time to take what the Bank of England’s Chief Economist, Spencer Dale, has been saying publicly very seriously: “At the risk of stating the bleeding obvious, we need the banks to be working, for our economy to grow and prosper” AND “The UK has been caught in the fall-out from […] external developments”.

Merlin – the Government deal with the banks on lending – hasn’t worked nearly as well as the UK authorities had hoped. There is scope for a much bolder QE strategy, a strategy that injects capital into the balance sheets of small and medium sized enterprises. I agree with Richard Lambert that: “The need to protect the Bank [of England’s] independence should not be allowed to prevent closer collaboration between the monetary and fiscal authorities [at a] time of [great] national need”.

I’m sure that Heather Stewart of the Observer is right to urge Mr Osborne to take a leaf out of Jim Flaherty’s book. Flaherty, the Canadian finance minister, explained – just a few days ago in Washington – that: “if the global situation deteriorates we will be pragmatic…[we] have the flexibility to respond as appropriate”.

* Ed Randall lectures on politics, economics and public policy at Goldsmiths, University of London. He is the author of ‘How and How Not to Face the Future’ – a response to the Lib Dem policy paper ‘Facing the Future’.

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9 Comments

  • Vince Cable predicted the recovery from this crash would take the best part of a decade. The current economic situation seems to fit with his prediction. I’m amazed you consider Huhne one of the best economic brains considering how fantastically wrong he was on the Euro.

  • Charles,

    Vince has said and written a great many different things over the years. He is not alone in having made gloomy statements about both the severity, depth and longevity of the recession. He has certainly said different things at different points in the political cycle – like many of his colleagues in the political realm.

    Not so long ago (2009) he wrote: “A vast amount of economic firepower is now being deployed to counter the global recession…[it has prompted] many commentators to believe the crisis will lead to recovery in a couple of years at most. Even if the analysis is wrong, optimism is valuable as a source of consumer and business confidence, and should not be blithely dismissed.”

    I don’t think, reading between the lines, he was entirely convinced by the analysis at that time. Nevertheless, I hope and believe (in the light of what he had to say at the Lib Dem conference) that Vince is someone who is capable of changing his mind (as he did when the Lib Dems entered the Coalition and were read the riot act by MK). I believe that a process of reflection, in government, is now driving a re-evaulation of the wisdom of ‘accelerated fiscal consolidation.’ It would be in almost everyone’s best interest if it were.

    You may be reconciled to a recovery that takes the best part of a decade (eight or nine years?). Liberal Democrats, who understand the economic arguments, shouldn’t be. Hutton, Portes, Wolf and Chang, in the UK, and Krugman, Galbraith, Stiglitz and Koo, in other parts of the world, all commend economic policies which can – in my view at least – aid (rather than obstruct) recovery.

    Yes, I do consider Chris Huhne to be one of the best economic brains in the Cabinet. The fact that he didn’t appreciate or anticipate the extent of Greece’s fiscal irresponsibility and dishonesty or the degree to which US and European banks would engage in irresponsible trades, which have added to the woes of the Eurozone, makes him a member of a very large club; it includes almost all of the world’s leading economic thinkers.

    The position that UK politicians and economists took at the beginning of this century, on entering the Euro, is not, so far as I am concerned, the key issue when it comes to assessing their credentials as economic analysts and commentators. So far as I am aware there wasn’t a single British economist, between 1998 and 2005, who based their views, for or against UK entry into the Eurozone, on the possible impact of a collapse in derivatives markets in New York and London.

    I do appreciate that for a large number of Eurosceptics judgements about the Euro, rather than the economic arguments and logic underpinning them, is what really matters.

  • jedibeeftrix – enough said.

    I suggest you ask David and Danny what they think about the qualities and abilities of their good friends Vince and Chris.

  • Liberal Eye,

    Thanks for your response.

    Yes…the party will have to rock the boat, BUT its leading figures in the Government (who are in a very different position to those on the backbenches in the HoC and bloggers operating well away from Westminster) have to do so very skilfully and without, if they can, making a great display of their dissent, which would needlessly destabilise the Government.

    Rock the boat too violently and you can end up sinking the boat – rock it gently and you may not be noticed. Events are helping and – if my analysis is correct – will continue to concentrate the minds of ministers (Conservative as well as Liberal Democrat).

    At the link you gave you argued that: “Britain’s ills stem from a lack of liberalism in government over many decades, a deficiency that has been particularly acute in the 30 years since Thatcher came to power. Now is the time to put that right and the place to start is developing a clear cognitive policy that encapsulates the sort of liberal values that our forebears would recognize.”

    While I think I understand what you mean by ‘cognitive policy’ I prefer somewhat different language, as you may have seen from reading my alternative take on Facing the Future.

    In the course of the last few years there has been a good deal of the kind of heavy lifting that is required to refashion and revive liberalism. With Labour all at sea and George Osborne’s simplistic messaging, about dealing with the ‘national credit card’, there should be a growing willingness to show TINA the door and welcome TARA in.

    Liberals should be far more concerned (IMHO) about the nature of the state and much less concerned about its size (measured, for example, in terms of the share of GDP it ‘manages’). Intelligent government sets out to make some things very difficult [gambling other people’s pension pots, in pursuit of huge bonuses, with little or no downside risk for the gamblers] and other things easier [developing new General Purpose Technologies, which make it possible to produce and distribute energy more efficiently].

    I have a great deal of sympathy with your observation that its time to change the economic paradigm. I am convinced that Vince Cable and Chris Huhne both understand that very well. What is frustrating – for a great many liberals and I’ve no doubt Cable and Huhne – is that initiatives such as the Green Investment Bank will take such a long time to come on stream.

    There Are opportunities (TARA – Real Alternatives), which call for forms of collaboration between the UK monetary authorities, the government and creative people of many different kinds, which could be made to appeal to Britons who label themselves Liberal Democrat, Conservative and Social Democrat, and who understand that we are living through a Great Reset (to borrow Richard Florida’s term) .

  • That leaves – amongst other things – people like you and me…collaborating and communicating in the best ways we can. I don’t think we are anywhere near doing so as effectively and efficiently as we might…but I have hopes and some thoughts about how to do so and I think others I have come across share them.

    I am aware of a growing number of Liberal Democrats who have been thinking hard and understand the limitations of existing party policy and the current policy making approach. They may not refer to TARA but want to engage with others in the party. There is a well of support for what you refer to as ‘cognitive policy’.

    We have the good fortune to be members of a party that is more open than its rivals to debate and democratic policy development.

    If a good deal of the intellectual heavy lifting has been done a lot more heavy lifting – within the party – remains to be done.

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