Balls: Osborne is putting politics over economics

In a much hyped speech at the LSE tthis morning – and in response to George Osborne’s Mansion House speech tonight – Ed Balls will argue that the chancellor is putting politics before economics. Balls will say:

“It is easy for politicians to convince themselves that short-term trends don’t matter as long as they believe the long-term prize remains within their grasp.

“With the most recent quarter’s growth rate positive again – albeit only making up the contraction at the end of last year – George Osborne must be tempted to try to batten down the hatches; rely on his supporters to talk him up; try to pin the blame on Labour, by blatantly re-writing history; and hope that everyone forgets the damage done along the way.

“But as well as being hugely irresponsible, this strategy misses the point entirely.

“I have been consistent in saying that a double-dip recession was never the most likely outcome – although it does seem that over last 6 months we have missed it by a whisker.

“But the test for the economy is not whether we avoid a double-dip recession, but how much pain is inflicted along the way in lost growth and lost jobs.

“Because it isn’t the fluctuating quarterly growth figures that really hurt; it’s all the ground that we’ve lost over the past year – and are continuing to lose every day and look set to continue to lose.

“While the American, German and French economies have already recovered to their pre-crisis levels of output, we in Britain are still 4% below that level.

“And compared to the OBR’s forecast before George Osborne’s first Budget, their latest forecasts imply that by the end of next year we will be £5.6bn worse off as a country. The cost of that slower growth is equivalent to a loss of income of over £300 for every family.

“If UK growth came in 0.5 percentage points below trend in every year of this Parliament, our country would be £58bn worse off in 2015 – that’s £3,300 for every family.

“And the OBR has warned that we should expect unemployment to be up to 200,000 higher over the coming years than expected just a few months ago.

“So the test for the Treasury isn’t just whether they can post better growth rates – we all know the economy will return to stronger growth eventually – it’s whether they can make up all this lost ground in jobs and living standards.

“On the Today programme a few months ago, Evan Davis put to me the view that with the underlying trend growth rate of the economy fixed, whether tax rises and spending cuts come now or later is really only a matter of timing: that the overall amount the structural deficit will need to be reduced by will remain the same; that given the rate of growth, the overall amount of spending cuts or tax rises will also remain the same; and so, given that it is just a matter of pain now or pain later, why not get the pain over with quickly?

“But – and this is the crucial point – this isn’t just about growth postponed versus pain deferred. Months – or years – of slow growth isn’t something that will be quickly repaired. It risks leaving a permanent dent in our nation’s prosperity – relative to how prosperous we might have been and how prosperous we are relative to other countries.

“Because economic history also teaches us that economies don’t simply bounce back to where they would have been.

“Who now doubts that the depth of the recession of the early 1980s had long-term and permanent effects?

“Manufacturing jobs and companies lost – never to return.

“Small businesses gone bankrupt – losing skills, ideas, networks and potential.
“Capital investment plans first postponed, eventually dropped and never resurrected.

“And most importantly of all, adults and young people out of work for months, which turned into years and left a permanent scarring effect on their skills, their health, and their ability and willingness to ever work again.

“How many people in this room would feel confident about their job prospects if you’d been out of work for over a year and had to compete against other candidates with an unbroken employment record?

“So the claim that the current debate about the pace of cuts is simply deferring pain misses the point.

“The risk is that George Osborne will wreak long-term, as well as short-term, damage on the British economy by creating a vicious circle of permanently lower business investment, lower income and lower employment, which in turn requires bigger tax increases and deeper spending cuts to get the deficit down.

“All at a time too when people are already suffering up and down our country – north and south. Life is already tough enough if you’re unemployed – and we need to help those people into work.

“It’s also tough for all those who have worked all their lives but for whom flat wages, the fear of unemployment, higher fuel and food prices and growing debt means they’re seriously worrying about their futures – and those of their children – for the first time. As Ed Miliband has said, this is a threat to the Promise of Britain – the promise that the next generation will be better off than the last.

“And it’s difficult too for pensioners dependent on fixed incomes, as well as for young people wondering what prospects they will have.

“But there is a further reason why this matters. We all know that the financial crisis exposed the vulnerability of banks and the over-reliance of the British economy and tax receipts on financial services. But it also accelerated the rise of India and China as our competitors – not just in low-cost manufacturing; but in top-class design, education and attracting international investment.

“And we can’t afford to be left behind. We need to rebuild our banking and financial sectors – and do so by rewarding investment and sustainable growth, not short-term risk-taking.

“We need a modern industrial policy that provides incentives for technological and scientific innovation. And we must ensure every company takes their responsibilities seriously and every employee gets the chance to up skill.

“The Government boasted of a ‘big bang’ Budget for growth. But all we saw was backtracking on large-scale infrastructure projects, the abolition of the RDAs and the scrapping of skills programmes.

“And the longer we spend with no or slow growth, the longer the road to recovery becomes, the greater the pain that will have to be endured and the further we fall behind. So the current economic drift really does matter.”

“Politically, I can see why George Osborne says there is no other way. If his plan works, he can claim Labour failed to face up to the tough decisions. And if it fails, he can claim Labour wouldn’t have made any difference.

“But on the first charge, I would say that: setting out tough fiscal rules just before the 1997 election and sticking to Tory spending plans for the first two years; delivering Bank of England independence; ensuring that in 1999 all the proceeds from the 3G mobile license sale were used to repay the national debt; and resisting UK membership of the Euro – they all show that I’m not someone who shirks tough decisions.

“And I am making the case for a slower and more balanced approach not because I am a deficit denier, but because this is the tough – but cautious and credible – thing to do.

“The path that our economy is being taken down is the wrong one, as the evidence is increasingly suggesting. It could prove very damaging for growth, for jobs, for public services, for living standards, for the deficit and for interest rates too. At the very least, it looks set to be a path of slower growth and higher unemployment than would have been the case.

“There is an alternative. It is more credible than the current plan, not less. And it is not too late to change course. But George Osborne must put the national interest first and stop trying to score cheap political points by blaming Labour for all his problems.

“I do not believe blaming Labour is a viable economic or political strategy. And neither is waiting. Keeping your fingers crossed and stubbornly ignoring the economic evidence is no way to make economic policy.

“But by doing so, George Osborne risks joining the ranks of Chancellors, Finance Ministers and economists who should have known better, but allowed political imperatives to trump economic realities.

“When I hear George Osborne refuse even to countenance a Plan B, I do not believe this is economic judgement at work – but a political gamble with the nation’s economy from a Chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes; but around a fixed political strategy to win an election in 2015.

“George Osborne cannot say he has not been warned. We are now set on a path of slower growth and higher unemployment than was forecast just a year ago this week.

“But he has a choice. And as long as he is prepared to start putting economics over politics, it is not too late to change course.”