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If the Chancellor doesn’t radically change course – he’s a fool

July 25, 2012 2:30 pm

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Keynes once said (or perhaps said), “When the facts change I change my mind. What do you do, sir?” And that’s the thing about complex modern economies, the facts do change. It’s only a fool that fails to change their position as a consequence. Today, following a dismal GDP growth figure of -0.7% for the last quarter, it is clear that the facts have changed and if the Chancellor doesn’t radically change course well, then, he’s a fool.

The question for the Prime Minister today is whether his Chancellor is capable of changing course. If he is not then for sake of the economy, George Osborne should not and cannot remain in Number 11 Downing Street.

All of the engines growth have stalled. Essentially, Osborne’s gamble in 2010 was three-fold. Firstly, he would accept some lower growth in the short-term as the price of lowering the deficit (he was never explicit about this but it can’t have been missed). Then powered by a lower exchange rate, investment funds would shift towards business investment and export-driven industries. Moreover, confidence in a policy of sound money and fiscal restraint would drive recovery and after a few quarters, GDP would start to pick up. Essentially, he thought the economy would follow the pathway of the post-ERM exit recovery in the early to mid-1990s.

It hasn’t worked out that way but yet the policy hasn’t shifted. None of his schemes to increase investment have as yet worked. The rapid reduction of public capital investment in infrastructure and the like has had a devastating impact on the economy. This has been compounded by the desperate situation in the Eurozone – our main export market. Commodity prices haven’t helped either but that is not the main cause of the problems we face.

There are four sources of potential growth: exports, Government expenditure, households and private businesses. Households are economically insecure and heavily indebted. Private business has no confidence. Our export markets are in a dire state. Fiscal restraint has eliminated Government as a driver of growth. Essentially the UK economy is a jet with all of its engines stalled. I don’t need to spell out what happens if one or more of these engines is not reignited.

But isn’t the Government deficit unsustainable? Yes, it is but in the short-term there is actually room for manoeuvre. Jonathan Portes of NIESR has been arguing for quite some time that very low interest rates were not in jeopardy if the UK Government decided to borrow more in the short-term. He has won that argument conclusively – in a floating exchange rate environment with control over your money supply you have more flexibility over your fiscal policy. When your economy has just shrunk by 0.7% in a quarter it is time to use some of that flexibility.

Basically, holders of pound sterling – many UK pension and investment funds amongst them – are fairly locked in given the other global investment opportunities and exchange rate risk. It’s easy to get your capital out of Greece, Italy, and Spain as we have seen – hence negative interest rates on German Bunds. Moreover, there aren’t many AAA investment opportunities in the UK other than Government bonds. Strangely, Eurozone risk and lack of confidence in the UK economy have worked in favour of a more active fiscal policy . The inflation risk is minor in the short-term given spare capacity – assuming our productive base is not too damaged.

That doesn’t give unlimited scope to fiscal activism. There may be an inflexion point that hasn’t yet been spotted or a currency crisis if things are seen to go too far. Also, the flipside of low growth-low yield is the return of higher yields as growth returns. The UK is still going to have a heck of a lot of interest to pay on the debts after growth returns. So it makes sense to invest in a way that is time limited, brings forward investment that is needed anyway and adds to the productive potential of the economy. As the SMF has suggested this could be further augmented by shifting government spending form ‘low multiplier’ activity – eg pension relief at the higher rate – to ‘high multiplier’ investment.

A sensible growth plan would mix borrowing for investment with this shift to more productive public expenditure. It would make sense to widen our notion of ‘investment’ to include housing, skills and youth unemployment programmes as well as infrastructure. All of these areas have a positive economic impact beyond the immediate spend. There is one major programme that could pull all these elements together: a massive programme of construction.

Quantitative or credit easing could be used to capitalise house and commercial builders with corporate bonds as collateral. A fiscal boost could be added to build 100,000s of social and council homes. Planning laws would have to be reformed by emergency legislation – including a review of Green Belt where it doesn’t meet high environmental standards or serve its original purpose of creating a buffer around major conurbations. New housing should be powered by low-energy power sources with underwritten investment for power companies to facilitate that. 1000s of the young unemployed and older skilled workers should receive rapid skills training in construction followed by the guarantee of a job. New schools should be brought forward where needed as part of the construction effort.

This boost to the UK’s housing supply and economy would be for a defined period to really get things moving. In the 1930s, the UK economy actually recovered as a result of both leaving the Gold Standard and a major house building programme following a policy of cheap money. In the 1950s, Harold MacMillan as Housing Minister moved every impediment to get house-building over 300,000 per year for the early years of that decade – including through a New Towns Act which accelerated the process through additional funding. What’s so difficult now?

What’s difficult is that we have a failed Chancellor who has run out of ideas but lacks the vision and determination to reverse his failure. The biggest economic decision that can now be taken is his removal. That is not down to him. He is now waiting for luck to descend upon him. That’s not a policy. That’s desperation.

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  • John Slinger

    Very, very well said Anthony. You are right on many fronts. On QE, I agree and have been saying similar things for some time, by calling for whay I term Citizens’ QE - 
    http://slingerblog.blogspot.co.uk/2011/10/sunday-times-publishes-my-letter-on-qe.html http://slingerblog.blogspot.co.uk/2011/09/guardian-publishes-my-letter-calling.html and http://slingerblog.blogspot.co.uk/2011/10/what-is-needed-is-not-more-qe-for-banks.html…and as for house building, you even, rightly, mention the dreaded phrase ‘green belt’. I couldn’t agree more. We should certainly consider building on the green belt, and the new city I had the privilege of seeing in the West Bank (Rawabi City) show how this can be done using a fraction (0.013% of the green belt). See my Huffington Post blog here http://slingerblog.blogspot.co.uk/2012/04/my-huffongton-post-uk-blog-on-housing.html

    John Slinger
    Chair – Pragmatic Radicalism
    @johnslinger 

    • treborc

       The West bank, is that near Cardiff.

  • http://twitter.com/bencobley Ben Cobley

    Generally quite sensible stuff but this ‘review of Green Belt where it doesn’t meet high environmental
    standards or serve its original purpose of creating a buffer around
    major conurbations’ sounds very strange – in fact it sounds like an attempt to find some language to justify laying down yet more concrete on precious green space.

    How much more concrete do we need before we get wherever it is we are trying to go? And where is that place? (It sounds like somewhere we will need all that extra airport capacity to get the hell out of)

    • Alexwilliamz

      Strange how the is always room found for out of town retail parks I reckon they take up about the same amount of space as a small housing estate. So clearly there are non greenbelt sites clearly near enough to where people want to live out there. The retailer could then move back into the town and city centres to fill up all those empty shops??
      Obviously might need some incentives like 3hrs free parking, and some improved vehicle access, cue some construction jobs into the bargain, improve our town centres and  build some homes.

    • Quiet_Sceptic

      How else would you propose we house a rising population?

      If we don’t want to expand our towns and cities then we shouldn’t really have allowed such large increases in population.

  • Tubeworm

    Anyone for a full-blown devaluation perchance?

  • 1earthmother2

    After nearly setting light to panic over petrol,Francis Maude then declared he wanted to turn the UK into a tax haven.We are an island after all,or a combination of islands.Lord Green,the government minister, probably agrees but is hard to track down, as would the other advisor Sir Philip Green.I have no doubt Sir Adrian Beecroft wants that too.A No Tax economy like Estonia.

  • Billsilver

    No doubt he might call you a fool too?
    A little less rudeness I think, and maybe less self-promotion by John Slinger.
    We’re already going through the non-ignition stage and so we will have a period of flat economic performance. Get used to it. There are millions around the world who have nothing, and so our having a little less is of no real importance. We have just become used to greed and the pursuit of possessions.
    In the larger vision – if you have such a thing – do you really think that continual growth and therefore consumption of the world’s resources is sustainable? Of course it isn’t.
    So where is your sensible well-thought-out proposal for the next twenty years?

  • AnotherOldBoy

    “Households are economically insecure and heavily indebted. Private business has no confidence. Our export markets are in a dire state.”

    Quite!

    The reason why households are economically insecure and heavily indebted is that they were encouraged to live above their means by a promise of “no more boom and bust” and a housing bubble.  Now they are faced with high debts and assets of falling or uncertain value.

    Private business has limited confidence because the Eurozone is in a mess.

    And the Eurozone makes up just under half of our export markets.

    But it’s much more fun blaming George Osborne.

    I like the idea of ending higher-rate relief on pension contributions. That would have the neat effect of taking money out of the private sector (where pension funds are invested) and give it to the government to waste.

    The problem with a house-building programme like the 30s and 50s is that we now have a massive structural deficit run up by the last, lunatic government and a level of continuing government borrowing whcih is truly terrifying.

    What we do need is more cuts in government spending to fund tax cuts.  And less regulation of business.  But there are not the solutions offered by Messrs Miliband and Balls, who are as hapless and dangerous as ever.

    • Topper

      “What we do need is more cuts in government spending to fund tax cuts. And less regulation of business. But there are not the solutions offered by Messrs Miliband and Balls, who are as hapless and dangerous as ever.”

      Or by George Osborne… unless you happen to be a top-rate taxpayer of course!

    • Henry The V Sign

      I only pray to the Lord God Almighty that the Chancellor will listen to your sage counsel before it it too late. I have little doubt that after reading your wise words on this Labour blog he will be spurred into action. While men like you exits abroad this land Albion shall endure.

    • robertcp

      Cuts in government spending to fund tax cuts would make very little, if any, difference.   I am pretty sceptical about deregulation as well.  People were talking about that when I was a civil servant in the early 90s.

  • Amber Star

    Nothing as dramatic as a huge public works program is needed. Osborne need only say that there will be no more public sector redundancies; nor will any more public sector work be transferred to the private sector. All public sector workers to be paid, at minimum, a living wage.

    Next, clamp down on obvious tax evasion & uncap council spending for the specific purpose of all council workers being paid a living wage.

    That’s all that’s needed. Job & wage security in the public sector will have the knock-on effect of generating confidence in the private sector.

    • Timb0

      I think that’s really interesting. Public Sector workers typically don’t hang onto their money. Their historically lower wages are offset by higher levels of job and pension security. What they are paid rapidly recycles into the economy – most of my public sector colleagues essentially live hand to mouth.

      • https://mikestallard.virtualgallery.com/ Mike Stallard

        I assume that you are not on Suffolk County Council then as a high profile Civil Servant……

      • Hugh

        “historically lower”

        But presently higher (as they have been for years now).

        “Public Sector workers typically don’t hang onto their money.”

        Could you please provide the research showing that public sector workers have a lower savings rate than private sector workers.

  • Malcolm Rasala

    Pleeease! He is a fool. What more evidence do we need? He is an economic illiterate. What do we want the longest double dip recession in 100 years to prove it? Is not 50 years enough?. This guy is doing serious damage to our country, the lives and businesses of our nation. Someone in the Labour seniority has to come out and say this very very strongly. Labour front benchers seem to largely want to shy away from hard mode criticism. Why?
    Are they a bunch of pansies? What do you think Conservative Party beasts would be saying
    if this was all happening under a Labour government? Pleeease lets have some real politics here. Don’t you want to win?

  • Daniel Speight

    Osborne is a fool, unless that is he is getting exactly what he wants. Maybe he an Cameron see this as the way of destroying what they refer to as ‘big government’. Maybe they will think it worth it if by 2015 they have unravelled every step forward made by social democracy since the end of the war. Maybe they can start Britain on its way to privatised health and shut down the social benefit system. Would it have been worth it to  them if they achieved that?

    • treborc1

       We are hearing the Tories are demanding Cable is sacked , the Liberals are demanding Osborne will go, it looks as if the blame game is in full effect, I suspect meetings will take place over the next 24 hours between Clegg and Cameron to see if the coalition can be saved and I really doubt Clegg with have enough influence in his party.

      Should be very interesting.

    • aracataca

      Quite Daniel. This is all about driving down living standards and not about driving down the deficit which of course is rising. Cheaper workforce=bigger profits. bigger bonuses etc. £8.75 million cash pay off to  Jerry del Missier the bloke who fiddled LIBOR at Barclays being the latest example.  Proof that crime pays?

  • Bill Lockhart

    “Low-energy power sources”

    What are they, then?

    • Hugh

       Wind, solar – that sort of thing. Neither of them produce much energy.

      • https://mikestallard.virtualgallery.com/ Mike Stallard

        Doesn’t he mean fracking?

        • treborc

           Fracking hell, actually over thirty licences  down by me have been given for fracking as the Welsh Government thinks it would be a money earner for them

  • Daniel Speight

    Is it just me or has anyone else noticed how quiet those who were recently advising Labour to name their specific cuts in answer to the Tory cuts have gone? Is it from embarrassment I wonder? I’m thinking about those followers of Sainsbury financed Progress and the TV pundits like the two Andrews, Neil and Marr. Maybe it’s also time to drop banker’s nephew Alistair Darling from your list of economic gurus.

    Come on lads and lasses, you were noisy enough when you thought you were embarrassing Ed Miliband and Ed Balls. Why are you so quiet now?

  • https://mikestallard.virtualgallery.com/ Mike Stallard

    “more productive public expenditure. It would make sense to widen our notion of ‘investment’ to include housing, skills and youth unemployment programmes as well as infrastructure. ”

    I want to point out the difference between left and right here.
    The above quote tells it from the left’s point of view. I suppose that it is, on here, just plain common sense that it should be the government that “kick starts” the economy. The deficit will be removed by an increase in productivity which, of course, can be taxed.

    From the point of view of those of us who are on the right, the opposite ought to be happening. A radical cut in government expenditure – civil service, regulations, hand-outs – might lead a the tax simplification (653 pages of complication in the last budget alone) and even tax reduction. 

    The right believes – and the left does’t seem to believe – that the economy is a tiger being deliberately held back by the government. To someone on the right, the mess that is Europe is deliberately created by Socialist Principles.

    • Anthony Painter

      In normal times it may be a left-right question. But actually in this case it’s an economic question and capital investment is more economically valuable than tax cuts at this stage in the context of looking to drive growth.

      • Hugh

         ”capital investment is more economically valuable than tax cuts at this stage”

        Why? Evidence I’ve seen is that tax cuts prompt signficantly more growth than government spending. The idea that tax cuts would simply mean people pay back all their debts and save rather flies in the face of consumer behaviour over the past 15 years or so. People just aren’t that responsible.

        • Anthony Painter

          The key words are *capital investment* – it has a higher multiplier than tax cuts. So the issue is not tax cuts v spending. It’s tax cuts v a time-bounded increase in government supported/funded investment including a major house building programme.

          • PeterBarnard

            Anthony, Labour’s last budget in 2010 took the axe to public sector capital expenditure : by 2014/15, public sector capex would have been reduced by 40% in real terms, ie after application of the GDP deflators between 2009/10 and 2014/15. In that respect, Labour was virtually identical to the Coalition. When governments have to “save money,” the first thing they do is to slash capital expenditure.

            What we are now seeing is, I’m afraid, a massive destruction of confidence as the Coalition has put massive fear into everyone and Mr Osborne is living testament to J K Galbraith’s remark that “few can believe that suffering, especially by others, is in vain. Anything that is disagreeable must surely have beneficial economic effects.”

            Unfortunately, I don’t think that Mr Osborne is for turning. It will need a new Chancellor to change the current psychology of fear.

          • Hugh

             ”What we are now seeing is, I’m afraid, a massive destruction of confidence as the Coalition has put massive fear into everyone”

            I’d actually agree with that to an extent: you can make arguments for both big cuts and for stimulus spending, but it’s hard to see the logic of what the coalition has actually implemented, which seems to be rhetorical austerity.

            As truly an heir to Blair Cameron seems to have been searching for the third way, neither increasing spending, nor cutting particularly significantly, but talking about the latter an awful lot. Maybe it’s the inevitable result of coalition politics.

          • PeterBarnard

            I have to disagree, Hugh, that the Coalition so far hasn’t reduced expenditure. According to HM Treasury (Public Expenditure Statistical Analyses 2012) net procurement of goods and services has fallen from £151 bn in 2009/10 to £141 bn in 2011/12 ; capital expenditure has fallen from £47 bn to £40 bn {all at 2011/12 prices}.

            Total Managed Expenditure minus debt interest payments minus social protection (the bulk of which is transfer payments) has fallen from £437 bn to £405 bn.

          • https://mikestallard.virtualgallery.com/ Mike Stallard

            I have carefully examined my own biases and point of view. I personally am still a rightist and I still want a much smaller state even at the risk of handing my country over to corporations many of which come from overseas.
            I wonder, honestly, if anyone on this blog has done the same?
            Can nobody see that the State also has enormous drawbacks in an imperfect world? It really does’t work very well.

          • PeterBarnard

            In any endeavour put together by human beings, errors, mistakes and the occasional catastrophe will occur. That applies whether the endeavour is publicly owned or privately owned.

            I suggest that you find yourself a time-machine and transport yourself back to the middle of the 19C when we had virtually no state with the concomitant public services.

            Just keep your fingers crossed that you don’t find yourself on the wrong side of the railway tracks …

          • Hugh

             But aren’t you suggesting redefining capital investment? Do  youth unemployment programmes and housing also a multiplier effect greater than tax cuts?

  • JC

    I see you are aware of the length of time it generally takes to get planning permission, and imagine that you had an interest in the changes that the Tories proposed. My experience so far is that it takes 3 years if your land is on the local plan, and much longer, if at all, when it’s not. The legal and associated costs are also quite high.

    I believe that the proposed changes would have reduced both the costs and the time taken, thus reducing the cost of housing to all. It would, however, also reduce the value of existing housing stock. It seems to have sunk without trace because of general opposition.

  • Pingback: Housing: the economic stimulus of choice | Red Brick

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