Six nations economics and the downgrade

23rd February, 2013 1:48 pm

Imagine economic policy was a six nations game. The Moody’s downgrade is essentially a crunching tackle. George Osborne decided, instead of changing course, to try to charge through the opposition front line. The results were predictable.

Had he shown more awareness of what he was faced with, he may have slipped a pass back to a team-mate in order to seek another way round the economic man wall that he faced. The time to have done so would have been last year’s budget or, at the very least, the autumn financial statement. He didn’t.

A sensible measure would have been to use the UK’s sound debt rating and low borrowing costs to borrow to invest in infrastructure and housing. He might have shifted government spending further away from current spending to capital spending too to try to garner growth. Instead, he ploughed on and a Lewis Moody style flanker has pulled him to ground.

An economic report from Citigroup yesterday illustrated graphically what has happened since the publication of George Osborne’s ‘infrastructure plan’ in 2011:

image

Not much of a plan then. Citigroup’s Michael Saunders is convinced that Osborne will finally borrow somewhere in the region of £5billion-£10billion to invest at the time of the budget in March. However, if Osborne simply gets to his feet, post Moody’s tackle, and charges again then the result will be the same. Now that the IMF has shifted its assessment of fiscal multipliers in a downturn, the economic calculations should be very different. The downside risks of overly rapid consolidation are much greater as the Chancellor has found.

Intriguingly however, the downgrade actually frees George Osborne from the self-imposed ‘plough on regardless’ strategy. Like Norman Lamont after the UK’s ejection from the ERM, one of his fundamental objectives has been removed. This actually gives him much more flexibility: you can’t lose what you’ve already lost. Monetary stimulus alone is not up to the task – £375billion of QE has failed to lift the economy into growth and is starting to have some perverse effects as asset bubble begin to swell. Better to use fiscal policy too in the short term – high multiplier capital investment which has a limited impact on the structural deficit and larger impact on growth is best.

Where does this leave Labour? For a start, the triumphalism that has greeted the downgrade is hardly edifying. So the tone is all wrong. In terms of atmospherics, Labour might actually be better realising that people know we are facing a formidable front line and getting through is going to be tough. Some acknowledgment that recovery is as tough an economic challenge as we have faced for a century might actually fit the moment better. We are right and they are wrong is really grating – especially when Labour was in charge when this long recession began.

It won’t impress anyone.

Ed Balls has made some very good calls and his tone on the Today programme was fairly measured. He was consistently right to argue that a premature deficit reduction would have a bigger impact on growth than the OBR and the Chancellor were arguing. That is judgment rather than luck – credit absolutely due.

But if possession of the ball turns over to Labour what will be the outcome? There would be more short-term growth but there would also be more debt. The biggest chunk of the additional borrowing Labour proposes would go on a VAT cut that has a relatively lower fiscal mutliplier. The risks that we face through low growth would become currency and debt risks instead. It might work out all right – just as Osborne’s plan might have worked out better in more opportune circumstances (see the nature of the UK’s or Canada’s recovery in the mid 1990s for a different model of recovery from recession). But the key is flexibility. That is what Osborne has failed to demonstrate. Labour’s message could do with a far greater dose of humility – and the flexibility argument is central to this.

We have a Shadow Chancellor but there is no Shadow economy – an alternative reality where Labour’s economic policy is assessed. Looking at parallel examples such as the US experience is hardly a satisfactory proxy for assessing the UK’s position. It’s a hint and little more than that.

In very uncertain times, replacing one certainty with another is unwise. So the political and economic critique of the Coalition comes one of over-confidence and a lack of flexibility. Dexerity is necessary in this environment. ‘We won’t fall into George Osborne’ trap’ is a much better argument both politically and economically than the current ‘we’re right and they are wrong’.

In 2015, Labour could well be in charge of economic policy once again. Imagine a run on the pound or gilts or another Eurozone crisis or a shift in Bank of England policy. Suddenly things don’t seem so easy. It would be good to get a sense that instead of just bounding towards the front-line in an Osborne-esque fashion that Labour will instead think its way through a very tricky set of fiscal, financial and economic problems. I’d much rather have Labour’s plan than George Osborne’s right now. The lesson from the downgrade though is that economic plans have a chance of back-firing in times of uncertainty. Like rugby, economic policy is a game of brute force but it also requires finesse. This matters both politically and economically.

Labour’s challenge is to recognise this.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • TomFairfax

    OK, except for one point. The economy was growing and increasing it’s rate of growth right up to May 2010. George effectively killed the recovery then, and has simply bounced from one predicted disaster to the next, as he waits for the effects to materialise, which is usually months after the trigger, thereby always trying to play catch up, whilst fulfilling a self imposed rule that has been slated by econimists before and since the election. (He might as well be kicking for and missing touch every time it’s in his hands.)

    In fact the USA’s ‘long recession’ in the later quarter of the nineteenth century is a text book example of what happens following George Osborne’s policies. But like most modern Tories he doesn’t believe in expert opinion that contradicts his bar room philosophies or that evidence to contrary is a sign of things going wrong, just that he hasn’t been doing enough of the things that patently don’t work. (The lending for homes initiative is possibly the only thing looking like working.)

    The USA in the beginning of the 20th Century could at least build on a huge impetus from newly arrived immigrants, and armaments exports from 1914 to 1918 to take it from the status of largest debtor nation to top creditor. I fancy we won’t get either type of stimulus any time soon, at least hopefully not the second, and the first is not government policy.

  • postageincluded

    Did being released from the ERM help the UK economy? A very definite Yes. Did it help the Major Government get re-elected? An absolute No.

    In fact the improvement in the economy following Black Wednesday was detrimental to the Tories, because it demonstrated conclusively that their policy of using high interest rates to maintain the value of the pound was the wrong policy – the pain had not, as promised, lead to any gain. Voters were happy to suffer in a good cause, but the voters’ realisation that they had been made to suffer for no reason condemned the Tories to 13 years in opposition.

    So for now it is absolutely vital to say that “It’s hurting, but it’s not working”. We need a very clear message that the Coalition has made most of us suffer for nothing. When that is widely understood and accepted we can move on to offer an alternative, and have some freedom to choose what that alternative is.

  • Dave Postles

    ‘Imagine a run on the pound or gilts or another Eurozone crisis or a shift in Bank of England policy.’
    The first is happening right now – another stimulus for inflation as petrol prices rise as the £ drops.

    • aracataca

      This is a good point Dave especially as Rob told us the economy will definitely recover by 2015 and referred us to a report stating that inflation would fall thus stimulating a recovery. A couple of days after this Mervyn King stated that inflation would remain ‘stubbornly high’ and with sterling sliding we can now see what he meant. Interest rates will start rising again by the end of the year in part because of the downgrade -a perfect storm is brewing.

  • jaime taurosangastre candelas

    Possibly a slightly ill-chosen title, as in the real 6 Nations the austerity-led England is leading the table and with every chance of a “Grand Slam”, with the socialist France at the bottom. But there are still matches to play, and – I hope not – chances for England to unnecessarily “foul up”.

    • rekrab

      Well, I can honestly say that I have no -bias at all over the six nation rugby league, I don’t give a fig-leaf who beats England.

      • jaime taurosangastre candelas

        • rekrab

          David Sole, the master of scrummage! if only the people would believe like that show, we could get rid of Osborne and his pathetic nonsense tomorrow.Well, Monday!

          • jaime taurosangastre candelas

            One nation rugby…

          • rekrab

            that really was something from the Welsh wizard.

          • jaime taurosangastre candelas

            Six of the players on the field here are from my old club (although much younger than me, and I don’t know them):

            In 20 years, we are going to have a fantastic international rugby scene, not just with 6+3 northern and southern hemisphere teams, but about 40, and all very good.

            anyway, in case the rugby is boring you, try some of this. The most wonderful voice, and very sadly removed from our lives by a carelessly driven speedboat.

          • rekrab

            Good luck with the rugby scene, nice ground, I’d critical view some as over weighted for the modern game however.

            Nice tune, pipes quite nice but the throw on D is flat and the pinky of the right hand should cover the low A hole while the fourth finger on the right hand should almost double bounce and lift clean on the D hole, giving the throw on D the tone required, drone sound was missing on tenor drones as the hit in was in part/timed with a lateral start. However nice on the top chanter, E.F.G and high A.

          • jaime taurosangastre candelas

            I played on that pitch, I am certain. It is the “Old Navy” Rugby Club in Valparaíso, and we played in the city on a tour, and it seems familiar. But you know rugby tours from universities – there is sometimes a drink or two, and memories blur after many years. At least we did not have to resort to cannibalism, not on that tour.

            Goodness knows about the pipers and drummers and the notes they play. I will take your word for it. They make a nice noise, as far as I am concerned.

          • rekrab

            Hee, Hee! if Jonah Lumo wants to eat you then I suggest you say, would you like some sauce on me.In all honesty I think sport is a wonderful international means of bridging a deeper bond.

            I’ll get the boys to do a Piob “Lament of the old sword” and post it one day, with full variations doublings ect.That will stretch your patience.

          • jaime taurosangastre candelas

            Ah well, the best thing the French can now do is to run up “cricket scores” against the Irish and the Scots, so that even if the “Grand Slam” is not on for England, at least the points difference will kill off any challenge. Everyone always asks “which French team will turn up, the Good, the Bad or the Ugly?”, and no one ever knows until the day, probably least of all the French themselves. But, I do not know if the French play cricket, or know that it is possible to have high scores in rugby. They have spent a century not exploring a victory margin of greater than ten points.

            “Allez, Les Bleus!”

  • leslie48

    A really good piece – the problems the UK are facing are formidable and the deficit and debt issues are not going to suddenly disappear – they are medium to long term. The big city tax receipts which helped New Labour are not coming back, the ‘ rebalancing’ to more exports and finding new markets is not going to be easy and sorting out the ‘supply side’ of providing more infrastructure such as getting the middle classes to allow house building in their precious green belt area or even high speed railways or whatever; and of course the elephant in the room we are beginning to see – too many working folk on state benefits such as tax credits which was not what the welfare state was meant for. And of course a million or so less educated or semi-skilled youngsters mainly jobless. Some Keynesian policy will help but it cannot solve some formidable problems relating to the UK state and its economy. The cuts will go on.

  • Amber_Star

    Is this Anthony’s way of saying: At least Ed Balls looks like a rugby player whereas Osborne would be left back in the changing rooms, possibly folding the towels? 😉

    • jaime taurosangastre candelas

      The Ed Balls looks far too fat to me to even be a prop, although I am sure with his underhand record in government he could easily adopt some of the “skills” props employ as part of a team effort, and not be too worried at the collateral damage.

      Osbourne however looks as though he would not survive 5 minutes in a proper match. Perhaps he should play net-ball, as my daughter does. It all seems to be relentlessly controlled by the teacher for safety reasons, when in fact you want to let the teenagers run and jump and bump and “get it out of their system”, and learn that in life you do get bumps and scratches.

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