Opinion: The trouble with George – you can’t argue on economics with such a political Chancellor

Now that the flurry of graphs, snapshot analyses, spin-heavy briefings and counter-briefings is dying down, how to judge George Osborne’s Autumn Statement in the cold winter light?

For me it is a microcosm of Osborne’s time in No. 11 – a smattering of politically calculated and superficially populist measures, masking a dangerously thin grasp of what an economically successful Chancellorship looks like. Moreover, his claim that his mini-budget is fair because it is fiscally neutral doesn’t hold much water.

Leave aside the sneaky transfer of the Bank of England’s surplus from quantitative easing into the Exchequer’s coffers – at least George was honest enough to publish borrowing figures with and without them. Osborne has gone further, counting his chickens from the 4G spectrum auction income before they’ve hatched, assuming it will raise £3.5bn (£2bn more than Ofcom’s reserve price). He also visits the “magic money tree” of “efficiency savings” and slices a further 1% off departmental budgets – only then are the books remotely balanced.

There’s more: the certainty of ‘saving’ £3.7bn from annually managed expenditure by capping benefit rises to 1% per year is fiscally balanced by the hoped-for extra revenue from anti-avoidance measures and reforms to tax-free pension allowances.

No, leave these quibbles aside. Ask whether, assuming the announcements do in fact raise as much from revenue and real-terms benefit cuts as they give away in tax threshold increases and cuts to corporation tax, can they be considered fair? Can they even be considered economically sound? I suggest not.

Uprating benefits by significantly less than inflation hits the vulnerable – and not just the shirking curtain-twitchers but the deserving strivers too. It directly hits their ability to make ends meet, to put food on the table, to pay the rent and energy bills. Crucially, those who miss out through these changes have already missed out for years because of stagnating incomes, rising childcare costs and joblessness – hence their meagre or non-existent earnings are topped up, albeit inadequately from next April, by the state. Instead of taking the time to fix our deep-rooted economic dysfunction, Osborne has kept calm and carried on cutting – offering the scant consolation of the richest having to pay more tax on their pensions.

So no, the measures aren’t fair even if they are fiscally neutral – the marginal utility someone on the breadline has for £1 of income, whether from benefits or work, is so much higher than that for someone fortunate enough to be putting away £30k a year for a pension that it’s barely credible the Chancellor thinks we’re still “all in this together.”

Are the measures at least economically sound – will the pain be worth it? Dubious at best, given the sheer stupidity of cutting the spending power of those whose marginal propensity to spend is highest. Yes, we Lib Dems tried our best to sooth the pain through the balm of tax threshold increases and some welcome incentives to invest in capital – but overall we have signed off on a regressive package, with the threat of much, much worse to come in next year’s CSR in the absence of a new economic narrative. That’s entirely deliberate – this was the opening salvo in the 2015 general election, not a strategy to revive our ailing economy.

The party political consequences of this statement cannot be over-stated – from elephant traps laid for Labour on benefit uprating, to the toxicity of the very same for Liberal Democrats, Osborne’s chicanery leaves Westminster in a pickle, and the economy in just as big a hole as before.

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

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  • Tom Richards 10th Dec '12 - 1:24pm

    I presume then that you’re in favour of higher borrowing? Otherwise, unfortunately, it’s difficult to see how Osborne can make the savings required without touching welfare, especially given that health is ringfenced. The IFS calculates that even a real terms freeze in welfare spending would imply an average further annual budget cut of 6% to every other department every year to keep track on deficit reduction targets. Which is, plainly, a lot (and, of course, many of those who are benefiting from that departmental spending are the most vulnerable as well).

    Worth noting as well that the Government (rightly) disproprotionately spends most of its money on low income households. Once you get up to the 5th, 6th, 7th income deciles, there’s actually relatively little you can claw back unless you start chipping away at universal things (NHS, Education and so on). And as a result of previous Governments, there are a bunch of ridiculous tax breaks for the very rich. So, unfortunately, if you take the IMF’s view that fiscal consolidation should be done 80-20 spending cuts to tax rises, then you’re inevitably going to have to hit the top and the bottom hardest. Which is going to be painful, and, frankly, not something anyone (at least re the bottom) wants to do. But it’s what this Autumn Statement did, and it’s difficult to see what other option there is unless you want to increase borrowing.

    My general point is what would your alternative be? Would you borrow more? And if not, where would you cut/what taxes would you raise

    (Incidentally I’m not necessarily unsympathetic to your views at all! I’m just not sure what they mean in practice)

  • Tom Richards 10th Dec '12 - 3:54pm


    Thanks for taking the time to write back. Actually, I think what the Government is doing now isn’t so far off the deficit reduction averaging suggested – theoretically they could have stuck to their target to eliminate the deficit by 2015 (although it have required some pretty swingeing cuts/tax rises), and instead they’ve essentially abandoned that target – so there does seem to be some flexibility there. I agree (as I think almost all LDs do) that increased taxes on property and wealth are a good thing – but on most estimates, they’ll struggle to raise enough cash to cover the cost of welfare, let alone finance large scale capital/infrastructure investments as you’re apparently suggesting.

    Re specific proposals in the SLF report, they all look good (and actually I think some of them are already being implemented in one way or another by the gov’t – congrats!)

    I think if you want to keep welfare cuts in line with inflation, unfortunately you’re realistically either going to have to de-ringfence the NHS budget or borrow more money. Or (and this is a view I have some sympathy with), you can do a one off stimulus worthy of the name – outlined very nicely here by Andrew Portes (who is far better qualified than I to describe it):


  • Tom Richards 10th Dec '12 - 3:56pm

    *Jonathon* Portes, always get that name mixed up for some reason!

  • Bill le Breton 10th Dec '12 - 4:45pm

    Tom and Prateek, first things first, we have to change the Bank of England’s mission to one delivering growth in nominal gross domestic product (the combined measure of real growth and inflation). We cannot wait for a new Governor, in the hope that he will persuade the Chancellor of its merits. That is the job of the Liberal Democrats in the Coalition.

    The Bank can deliver growth in aggregate demand by monetary policy alone if necessary by means of further monetary stimulus, given instructions to do so by the Quad.

    (Tom, if any significant fiscal stimulus takes place while the Bank is still targeting a two year forecast for inflation of 1.8%, which is how it is presently interpreting its target, the Bank will tighten monetary policy and the fiscal stimulus will come to naught – and merely increase debt.)

    It is clear from Vince Cable’s Observer interview over the weekend that this is his preference – a change to an NGDP level target and a firm instruction to the MPC to deliver growth. http://finance.yahoo.com/news/britains-business-minister-sees-risk-195230723.html

    This is of course exactly what the opposition Liberal Democrats (no relations) in Japan are presently campaigning for in their election. The numbers of eminent economists calling for NGDP targeting grows by the day – from Skidelsky I am told, to Martin Wolfe to Wren-Lewis (and, Tom, even Jonathan Portes, on this site not long ago wrote that he was by no means opposed to it).

    Reading between the lines in the Cable interview and from reports of the inter-party negotiations over the Autumn Statement, it would seem that he has not yet won the argument for this among the Clegg, Laws and Alexander economic axis.

    Until 2010, Vince was our Shadow Chancellor. His move to BIS may well have diluted his impact on economic policy within our leadership. That is to be regretted. He should be running Liberal Democrat economic policy now.

    The debate should come out into the open, so that the Liberal Democrats can hear and come to support his policy, four years into a lost decade that Coalition economic policy now maintains will last at least until 2018.

  • Bill,

    I think the Observer article by Vince Cable is arguing for a continuation of a loose monetary policy and more unorthodox fiscal policy measures for QE, such as financing housing association bonds.

    The Economist article a couple of years backUnderstanding NGDP targeting noted that NGDP was not a particularly new idea and that Central Banks routinely monitored the measure. The main criticism was that Central Banks had been far too slow in reacting to a collapsing money supply. Had they been using NGDP as a target (as oppossed to projected inflation) monetary looseing could have been undertaken much earlier to head off the precipitious fall in demand and employment that we continue to experience.

    It seems clear by now that simply pumping more money into the banking system by continuing expansion of QE via purchases of government bonds prevants a deflationary spiral taking hold, but will not of itself address the deficiency of demand in the economy. Increasing the supply of money alone will not generate a resurgence of business and consumer demand for Credit , even when an output gap persists, unless and until confidence is restored. It is the proverbial ‘pushing on a string’ long after the horse has bolted. If it did the OBR growth forecasts (and their attendant forecasts for increasing levels of consumer credit) of recent years would have been much closer to the mark.

    A QE supported fiscal expansion, starting with major housing and infrastructure programs , of sufficient size to close the output gap and generate continuing work for a million souls is what is required. Only then can we expect to see the return of consumer and business confidence to pre-2008 levels with the attendant appetite for responsible levels of consumer credit that goes with.

    The Economist article concludes:

    “Perhaps there are people making extraordinary claims for NGDP targeting. In general, I think that most of its supporters consider it to be part of the evolution of monetary economics toward a greater understanding of how the central bank can best achieve macroeconomic stability. I don’t consider NGDP targeting to be a panacea or a holy grail. I simply think it’s likely to perform better as a policy goal than inflation over the long run, and much better in the rare but very costly economic disaster. And I tend to believe that the idea has grown in popularity not because of unreasonable claims made on its behalf, but because of the strength of the arguments in favour of it.”

  • Bill le Breton 11th Dec '12 - 8:59am

    Joe, it is more important to see areas of agreement than disagreement.

    How the monetary stimulus is introduced into the system is a second order decision. Like you I would favour an element that produced some infrastructure improvements. But there will be important people who would bulk at that and I think that if this is the ‘price’ of achieving a change to the Bank of England’s mandate and a clear instruction to the MPC to produce growth in aggregate demand, I would pay it.

    This is as much about changing the psychology as of changing the economic policy. The communication of the change, it’s explanation and the confident tone of a new approach, sweeping away the timidity and the pessimism is crucial.

    The real lesson is how the FDR administration/brains trust handled Executive Order 6102 http://en.wikipedia.org/wiki/Executive_Order_6102 which led to a period of sustained growth.

    Overnight it changed expectations, produced confidence in all economic agents and led to a period of record growth – just what we need.

    I believe there is now a better than 50:50 chance of this becoming Liberal Democrat policy. Party activists need to become literate in market monetarism and there is no better place to start than this: http://www.adamsmith.org/sites/default/files/resources/ASI_NGDP_WEB.pdf

  • Bill,

    I am with you on supporting a move to NGDP targeting. I just think there is a greater chance of adopting this as Libdem policy if we focus on what monetary policy targets can realistically achive and jettison what the economist article terms !extraordinary claims for NGDP targeting.’

    Sweeping away timidity and pessimism is good. Throwing caution, experience and level-headed thinking to the wind is not.

    I agree with the conclusion of the Economist article ‘that the idea has grown in popularity not because of unreasonable claims made on its behalf, but because of the strength of the arguments in favour of it ‘

    Scott Sumner in concluding his paper for the Adam Smith Institute sums up the case for NGDP well, while at the same time not claiming that it is a Panacea for all our ills.

    Stable NGDP expectations would help stabilize asset markets and wage rates, which would improve the overall performance of the UK economy. It would not eliminate all price level fluctuations, nor will it prevent all business cycles.But it would help maintain policy credibility when the headline inflation rate moves outside the target zone. Most importantly, it can produce reasonably low average inflation rates, and also prevent real shocks in one sector from causing unnecessary harm to the broader economy.

  • Bill le Breton 11th Dec '12 - 4:42pm

    Needs to be part of a package Joe, but without it all else is in vain. As the Prime Minister said this time last year “We want monetary activism and we want it now”. [I paraphrase] Trouble is he or his Chancellor didn’t bother to pass the message on to the MPC. Our job is to a) hold him to his word on monetary policy and b) negotiate the fiscal (infrastructure) deal. http://www.forexlive.com/blog/2010/10/11/uk-cameron-backs-monetary-activism-fiscal-conservatism/

  • Understood Bill,

    but I do not accept the PM’s view “that monetary policy should act to offset weakness rather than fiscal policy”, or “that actually it’s monetary policy that is a better lever in terms of trying to make sure that the economy is progressing and demand is growing.”

    I concur with Prateek Buch in the article above that we have at present is “not a strategy to revive our ailing economy.”

    The Bank of England has been effictively, even if not explicitly, setting monetary policy to target NGDP for quite some time before the financial crisis and after a slow start since. No monetary action has been undertaken to constrain short-term inflation for several years while the longer term inflation outlook remains subdued not withstanding 375 billion of QE to date.

    As Jonathan Portes has argued succintly on his blog: Chris Giles: evidence based analysis, but not so the conclusions

    “If monetary policy alone was indeed enough in practice, we wouldn’t be where we are now, with unemployment in the UK a million higher than the official estimate of the natural rate, and no prospect of it coming down in the immediate future. Any demand management policy that delivers that outcome is not one that policymakers should regard as remotely adequate.”

    I also have some reservations with Scott Sumner comments in his paper that “… it is natural to assign the responsibility for adequate NGDP growth to the central bank, and let fiscal policymakers worry about long run savings/investment imbalances. Indeed if the monetary authority is targeting NGDP expectations, fiscal stimulus is a sort of “fifth wheel,” which adds nothing to stabilization policy.”

    Jonathan Portes has recently posted on this site:The Independent View.

    In response to a comment you made on his piece, Portes has said “… I do have considerable sympathy with the case for nominal GDP targeting advanced by Chris Giles in the FT yesterday.”

    As Prateek concludes the economy [is] in just as big a hole as before and I am afraid that with a damaged banking system that impairs the transmission of monetary policy and the persistence of a liquidity trap, no amount of expectations management by the MPC or Chancellor will address the fundamental weaknesses in the real economy.

  • Bill le Breton 12th Dec '12 - 9:14am

    Joe, Market monetarism and the campaign for NGDP level targeting works through the management of expectations. Although the Bank of England may have been quietly targeting NGDP prior to the 2007/08 crisis it: a) didn’t make this explicit, and b) clearly abandoned this in 2007/8 and consigned the UK (as a currency issuer) to an unnecessarily long and lingering recession.

    Even today, Mr King denies targeting NGDP. (And NGDP figures over the last 3 years do not suggest that he has been target anything other than the medium term forecast for inflation – and at below 2% for that matter).

    The good news is that Mark Carney (our next Governor of the Bank of England), in the last few hours speaking generally or even for the situation in Canada has said, “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.” After inflation picks up, note!

    “To ‘tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.”

    Note also that the single target covering both inflation and unemployment (which he often calls ‘welfare’) is nominal gross domestic product. Which is why he then goes on to add:

    If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

    This is where the UK is. And, as I have said here for a very long time now, the Liberal Democrats should be campaigning for a new target – NGDP LT set at 5% and a communications campaign directed and changing the expectations of all agents within the UK economy.

    The economic policy is now nearly in place – several years later than necessary – it must be accompanied by a campaigning comms policy to alter expectations and remove the curse of pessimism manacling the political class.

    Again I say, what an opportunity for LIberal Democrats … but I fear by the time we pin our colours to this mast – the ship will be in another harbour.

  • Bill,

    We both support a change on the BofE’s mandate from inflation targeting to Nominal GDP targeting for entirely different reasons.

    You advocate the position of Market Monetarism as expounded by Scott Sumner and others. They favour more audacity in the monetary realm. Tight money caused the Great Recession, they argue, and easy money can end it. They do not think the government can or should rescue the economy, because they believe the Central bank can. Market monetarists, diametrically see exaggerated fear of inflation as an obstacle to economic recovery. Market monetarists argue that fiscal stimulus should be redundant, because a central bank can always revive spending—if it sets its mind to it. They do not fret about the side effects of the activism they seek, which can misdirect capital, inflate bubbles and seduce people into over-borrowing.

    You have previously commented that “the behaviour of the Bank surely suggests that it is already being guided by NGDP rather than the price level” Until the crisis, Bank of England monetary policy appears to have been remarkably successful in keeping nominal GDP growth close to 5 per cent. It almost appears to be the target the Bank was following UK nominal GDP

    Maintaining this target did not, however, do anything to curtail the house price bubble, the explosion in private sector debt levels or the stagnation of real wages in the decade preceding the crash. Nor can it be expected to do so in the future as Scott Sumner explains in his Adam Smith Institute paper.

    My view is that Keynesian fiscal policy is the key to economic recovery. Building 300,000 homes a year will employ a million people directly (according to Tim Leunig’s formula of 3.5 jobs per house built). Funding and building the national infrastructure program requires a commitment of 500 billion pounds over the next ten 10 years. I am persuaded by Jonathan Portes argument that there has never been a better a time to secure low cost capital to undertake these projects and that interest rates will stay low in a period of low growth, regardless of temporary spikes in the debt to gdp ratio necessitated by long-term capital investment.

    I favour the idea of NGDP targeting as a means of ensuring that monetary policy does not work to blunt the effect of fiscal stimulus undertaken by the government. As the new governor says “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.”

    I am unconvinced by the Market Monetarist argument that the BofE can effectively stimulate demand in the economy by management of expectations. The banks use the same tools for NGDP targeting as they do for inflation targeting i.e. interest rates or QE at the lower bound.

    The stimulus argument for QE relies on affecting financial asset prices. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll make a better return on that purchase. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is there is not enough demand, there’s not enough people coming and demanding their products. And if people feel that their financial situation is better because their pension pot looks better or their house is worth more, they are more willing to go out and spend, and that’s going to provide the demand that firms need in order to be willing to hire and to invest, or so the argument goes.

    Even if this argument was shown to be valid during a time of widespread deleveraging, the distributional implications of this ought to be troubling for Liberal Democrats. Boosting equity valuations to get out of a balance sheet recession that has disproportionately borne down on the middle class and poor is not just inefficient—it further exacerbates and entrenches inequality. In the UK. There is a very top-heavy concentration of Land/Housing and Equities wealth in the top income decile. Does our best hope for recovery rely on making the richest section of society wealthier and then pray that they will spend some of their newfound gains in ways that create jobs and ignore the marginal propensity to spend? I think not – QE financing of Housing and infrastructure bonds and increased public sector bond issues, with a clear focus on economic Return on Investment and job creation is a far preferable route in my opinion.

  • Liberal Eye 12th Dec '12 - 7:27pm

    The thing to understand about austerity is that it’s not an economic policy – it’s a political programme to break social democracy; that it breaks the social contract is a feature, not a bug.

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