The economy is far from out of the woods; Osborne’s ideology could still plunge us into depression

The return of the Duncan Weldon Economics Matters column

It seems a long time since I last wrote anything for LabourList in early August. A lot has happened since then – party conference season, the battle over the NHS, the fight over the Tories’ European allies and my own growing of a possibly ill-advised moustache.

Sadly the economic news is quite familiar – we’re still in recession and Osborne is still talking nonsense.

So I thought, for my first post in a while, I’d review once again where we are economically and re-affirm what worries me about Tory policy.

As I wrote in August:

“The current recession is nearing its end. Either this quarter, or most likely next (Q4), we will see GDP grow in the UK. However this growth is most likely to come from companies rebuilding inventories. Over the past 9 months there have been huge draw downs of stock across all sorts of sectors, as companies have simply halted production. With inventories so low, they will need to be rebuilt. A simple rebuilding of inventory could cause easily two quarters of positive growth.

The question is, what happens after that? This pick-up in activity will be accompanied by unemployment continuing to rise, albeit at a slower pace. Firms that are simply re-stocking are unlikely to hire many workers.

Private consumption is likely to remain weak for several years. Rising unemployment, less credit availability, higher savings from nervous individuals and higher taxes will prevent a strong retail recovery. Consumption will bump along near current levels for several years. There may be short term bounces but the trend looks clear.”

Leaving aside my slight smugness at not predicting growth in Q3 I really don’t have much to add to the above. We are at the start of a recovery – but it will be weak, fragile and fraught with peril. Economic policy next year is crucial. What has changed since early August is the emerging picture of what Tory policy will look like.

I’d identify two areas that concern me the most – one specific and one more general.

The ‘cuts agenda’ – we’ve known this was coming but Tory conference gave a clearer picture. We can argue to death (and have in the comments section of this website!) about the size of the public sector, about tax levels and about perceived waste. What really shouldn’t be a matter for debate is the timing of any fiscal tightening.

Let me be very clear – trying to balance the budget in the face of the most severe recession since the 1930s would be an act of economic incompetence on scale not witnessed in 70 years. It would cause growth to fall and the budget deficit to actually widen on higher benefit claims and less tax revenue. Less growth, more debt. Labour, the Tories and the Lib Dems are now all talking about cuts – the difference is only the Tories seem intent on starting next year.

As far the Osborne line that ‘the international markets are losing confidence in the UK’ – I’ll answer it with one fact. On the date of my last LabourList post it cost the government 3.87% to borrow money for ten years. Today, three months later, it costs only 3.62%. There is no loss of confidence internationally – Osborne is clutching at straws to justify his position.

Neo-classical nonsense – The cuts agenda is worrying and wrong but what lies behind it is perhaps more alarming – a strange, discredited reliance on neo-classical economics. I’ve blogged on this more extensively but the facts are relatively straightforward. Osborne’s plans are premised on the notion that we need, as an economy, to save more. He argues that if we save more and spend less, then more money will be available to finance investments that could drive future growth. This is an easy line to push – it makes simple sense, it is understandable in terms of personal household finances and it appeals to a ‘virtue’ of saving. Sadly it is nonsense.

Think about it. What happens to growth if people, governments and companies start spending less? Does it go up or down? In these circumstances, of much lower demand, why would any company choose to invest?

Personally, I assumed neo-classical economics was dead and buried after the last two years. It appears I was wrong, we have a Tory Shadow Chancellor talking about the public sector ‘crowding out investment’, about the virtues of ‘thrift’ and the need for ‘export-led growth’. It’s as if we’d collectively stepped into a time machine and returned to the early 1930s.

Again let’s be clear. These polices were been tried in the 1930s – they caused a depression. They are currently being tried in Ireland – they are causing depression-like falls in GDP: massive unemployment, higher budget deficits and deflation.

The economy is far from out of the woods and Osborne’s ideologically-driven cutting agenda risks undermining the fragile recovery.