In defence of Osborne
By Kathleen Brooks. The opinions expressed are her own.
The title of this piece may sound like a political rant. It is not. I am probably the least political person you could meet. I am part of the generation where political apathy looms large – you won’t find me interrupting a UKIP member live on TV. In fact, my defence of Osborne is not only from his foes, but also from himself. If that hasn’t turned you off, then read on.
As we lead up to the Budget on March 20, Osborne is coming under intense pressure to do something to save the UK’s economy from a triple-dip recession. And this pressure isn’t just coming from business leaders and the opposition Labour party, it is also coming from fellow Tories, who want to have some chance of winning the next election. It could also be coming from within – Osborne’s approval ratings are dreadful, if they don’t pick up soon he could face the axe.
But this would be the wrong thing to do. You may say that our dreadful growth is the result of a lack of fiscal strategy, but this would be wrong. The trouble is that the economic strategy Osborne has adopted takes a long time to bear fruit and is fairly anti-growth, at least for the first few years. The opposite – continue to spend – shows a fundamental lack of strategy. It is a return to the old way of doing things, which may have been good while it lasted, but it can’t go on forever.
Osborne came to the Treasury with a clear strategy in 2010 – the focus was always finances rather than growth. If the UK wants to thrive in the long-term then we need sustainable public services and public spending cannot grow like it did under the previous administration. This was the path he chose, and he has stuck to it.
Public sector net borrowing may have exploded since the financial crisis when the government had to bail out the banks, but the pace of growth in public sector net borrowing started to rise at a rapid pace back in 2002-03 when it jumped to 1.9 percent of GDP from 0.2 percent the year before. This is where the real problems began. The economy got used to using its credit card, so when disaster struck in 2008/09, and the country found itself borrowing more than ever, the limit to our overdraft started to loom large.
The argument that our borrowing costs are low so we should continue to borrow, is uncomfortable for Osborne. As he has grasped, interest rates are low until they are not and then economic disaster becomes a real possibility. Just ask Spain and Italy, or Greece and Portugal. The consequences of being reliant on living on debt when interest rates are volatile and rising is not the place you want to be. Look at Italy, it has a 120 percent debt-to-GDP ratio and every time it auction’s debt Rome must be crossing its fingers and toes that interest rates don’t edge up too much. This is not the situation the UK wants to find itself in.
Osborne has (so far) stuck to his fiscal guns albeit at the expense of growth. The economy has to adjust, not just to becoming an export base (that is unlikely to happen), but to a place where the public sector plays less of a role. Osborne’s stubbornness may have cost us our triple A credit rating, but it is also helping to keep our future public debt levels stable. Compared to Italy, the UK’s debt-to-GDP ratio is expected to be 74.7% this year, and to start falling in 2017-18.
If Osborne loosens the fiscal screws at this budget he would do better to give a modest tax cut. This would help the private and public sector in equal measure and help consumers to feel a bit more cheery. A rise in spending could be a powerful boost to the economy through VAT tax receipts and helping to create a few new jobs.
Some will argue that this defence of Osborne is pretty thin. Indeed, there is a lot more to write about weak growth and the threats to the British economy’s standing in the world. But his pledge to get the country to live within its means is laudable. I doubt he will have another term as Chancellor as fiscal consolidation is painful and not nearly as sexy as being able to splash the cash, but it is sensible. And because of that, Osborne should stick to being Mr Sensible at this week’s budget, instead of bowing to external and internal pressures.