Osborne: Stealth convert to ‘Keynesian Thatcherism’
Britain’s government budget released this week is not a statement of economic policy. It is a program for winning next year’s general election.
In this sense, Chancellor of the Exchequer George Osborne’s speech was a natural development from the 2013 Budget, which launched Britain’s current economic recovery. I was one of the few analysts to perceive the remarkable transformation of the British economy that immediately resulted from last year’s budget because what Osborne did was deliberately obscured by what he said.
Osborne’s mantra last year was “you can’t cure debt with more debt.” Yet he did precisely that with his audacious plan to provide $198 billion (£120 billion) in government guarantees for additional mortgage borrowing.
After labelling his speech as a “Budget for Savers” and declaring “Britain has for decades borrowed too much and saved too little,” the most powerful fiscal measures Osborne announced were designed to reduce savings, mainly by encouraging pensioners to dip into their pension funds to finance consumption. As a result, the budget forecasts, which Osborne did not mention, predict that Britain’s savings rate will fall from 7.2 percent in 2012 to 3.3 percent by 2018.
Does this duplicity matter? Whatever one may think about Osborne’s moral principles, his policies are likely to strengthen Britain’s economy. This is true, primarily for Keynesian cyclical reasons. What John Maynard Keynes showed theoretically in the 1930s has been demonstrated in practice all over the world since 2008: The only way for a national economy to clamber out of a deep recession is for either the government or the private sector to save less and borrow more.
If the government is unable to increase its borrowing or unwilling to do this for political reasons, then the private sector must reduce savings or increase debts. This approach has been described as Keynesian Thatcherism by some enlightened conservative politicians, such as Sweden’s finance minister Anders Borg. Now, Osborne has secretly become a zealous convert.
Last year he delivered the additional borrowing — with the budget target of $198 billion (£120 billion) in new mortgage loans. Now he is offering pensioners tax incentives to run down their savings.
Combining this Keynesian Thatcherism with a commitment from the Bank of England to hold interest rates near zero until after the election and a highly efficient system of adjustable-rate mortgages that provide borrowers with the full benefit of near-zero rates, it is hardly surprising that Britain is now enjoying the strongest economic growth among the G7 countries. It will probably continue to do so at least until the election in May next year.
But what about the long-term consequences? Conventional wisdom says that borrowing binges and property booms always end in tears. Especially in Britain. This one could be even worse than usual, because the economic “rebalancing” expected and desired in Britain after the 2008 crisis — away from over-dependence on finance, entertainment and other “frothy” service industries to solidly productive manufacturing and export activities — has failed to happen.
In fact, Britain now has the biggest trade deficit, relative to gross domestic product, among the major advanced economies, as well as the largest government deficit. To pile new consumer borrowing on top of this government debt mountain is widely considered irresponsible — one reason for Osborne to cover up his conversion to Keynesian Thatcherism last year.
But there are several reasons why conventional wisdom is probably wrong about the dangers of Britain returning to its bad old habits.
First, it is far from clear that Britain’s economic structure is unhealthy. Although Britain has done worse since the 2008 economic crisis than any G7 economy (apart from Italy), in terms of GDP growth, the main reason for this poor performance may not have been structural over-dependence on services and finance. Straightforward economic modelling suggests that a more likely explanation is the government’s over-zealous and anti-Keynesian effort to reduce budget deficits too soon.
Now that the worst of this fiscal retrenchment is over, finance, business services and creative industries are again driving strong growth in employment, incomes and GDP.
This is exactly what happened before the crisis. Looking back over the past two decades, Britain has enjoyed by far the strongest growth in the G7, even after the weakness since 2008. GDP per capita grew by 52 percent from 1991 to 2013 in Britain, compared with 43 percent in the United States (the next strongest G7 economy) and just 27 percent in Germany. This suggests that Britain’s focus on finance and business services has probably been a benefit, not a handicap, over the long term.
Second, a restructuring of the economy toward manufacturing and exports may be impossible because of the logic of global free trade and the European single market — which encourages countries to specialize in sectors where they enjoy comparative advantage. Britain’s comparative advantage in finance and creative industries is as obvious as Germany’s in cars and machine tools.
Third, the economic rebalancing that Britain mostly needs is between regions, not sectors. The economy’s main structural problem is over-heating in London, combined with under-development in the North. Strengthening manufacturing may marginally help to address this, but Britain’s biggest regional divergences are in consumer purchasing power.
In this respect, Osborne’s housing subsidies will be especially helpful to the poorer regions. In London, where average house prices are roughly $580,000 (£350,000), the government’s support for 95-percent mortgages is having limited impact because middle-income families cannot qualify for mortgages anywhere near that sum. But in poorer regions, where house prices average only $250,000 (£150,000), Osborne’s program is transforming affordability.
A family with two earners, each on the national average of around $41,000 (£25,000), can easily qualify for a mortgage of about $247,000 (£150,000). But they have little chance of saving the 20 percent deposit normally required. For such families, Osborne’s 95 percent mortgages are a God send.
And Osborne is probably right to calculate that such voters will show their gratitude next May.
PHOTO (TOP): Britain’s Chancellor of the Exchequer George Osborne holds up his budget case for the cameras as he stands outside number 11 Downing Street, before delivering his budget to the House of Commons, in central London, March 19, 2014. REUTERS/Suzanne Plunkett
PHOTO (INSERT 1): Britain’s Chancellor of the Exchequer George Osborne delivers his keynote speech at the annual Conservative party conference in Manchester, northern England September 30, 2013. REUTERS/Toby Melville
PHOTO (INSERT 2): Chancellor of the Exchequer George Osborne lays a block during a visit to a Barratt Homes building site in Nuneaton, central England, March 20, 2014. REUTERS/Darren Staples