The government and the nation desperately require a Plan B.
If our obstinate chancellor is not prepared to own up to the need, then he should have words with his prime minister about his interest in another cabinet post and leave the door open for a more expansion-minded colleague.
Two names that come to mind are Lord Heseltine and Kenneth Clarke. Both have had to pay lip service to the chancellor's "austerity strategy", but it is obvious from the conclusions of his recent Downing Street-commissioned report on growth what Heseltine really thinks of Plan A. And Clarke knows that the way to achieve a reduction in the deficit is by encouraging the economy to grow at a decent lick – not add to private sector cutbacks with public sector ones on top. This is what he achieved during his 1993-97 chancellorship.
Alas, at 80 Heseltine would probably not want the job, and Clarke is far too unpopular with the Thatcherites who, along with Ukip, have now frightened that nice David Cameron into ditching his attempts to soften the Conservative party.
George Osborne's shamelessness knows no bounds. The ratings agencies were going to be the judge and jury of his pre-Keynesian strategy. They have given their verdict. The American academics Kenneth Rogoff and Carmen Reinhart had in theory demonstrated that borrowing and rising debt levels caused low (or no) growth, but rival academics have now demonstrated that their research was deeply flawed: the causality is the other way around.
When elaborating on his austerity strategy in the Mais Lecture of 2010, Osborne drew putative justification for his policies from the work of Rogoff and Reinhart. It is, by the way, with some amusement that one now finds the two academics proclaiming: "Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists."
The question is whether a fiscal stimulus should be withdrawn at all before a decent economic recovery is established. For all his previous fiscal sins – and they are not nearly as grievous as they have been painted – Gordon Brown realised this. The error made by policymakers in the UK and the eurozone has been, in the words of Sir Samuel Brittan, to return "to old habits" after the rescue operation of 2009-10.
Osborne has admitted, indeed boasted, that his model was Geoffrey Howe's budget of 1981, which – according to mythology – produced a dramatic recovery by cutting public spending and raising taxes. Osborne rescinded Labour's cut in VAT and began a public spending squeeze, the consequences of which are all around us – with more to come as the Treasury completes a new spending round for the year 2015-16.
The 1981 fiscal squeeze did not produce a recovery; but the economic cycle eventually turned up, helped not least by the budget strategy of easier monetary policy and an engineered fall in the pound. Then came the abolition of credit controls. Even so, unemployment went on rising until 1986.
An important difference between then and now is that we now have a banking crisis. Also – as former Treasury official Sir Tim Lankester pointed out at a seminar on 1981 last week organised by the Treasury and the Mile End Group – consumer debt was much lower then than now.
All this talk about double dip or no double dip is a red herring. The fact is the economy remains in depression, with gross domestic product some 15% below what previous trends would suggest possible.
Now, controlling and curbing the growth of public spending is in the Treasury's DNA. But this is not the time for further cuts; indeed, it is time to reverse the process by which youth programmes, school sports facilities (so much for the Olympic spirit) and many local social services are being emasculated.
The pressure for economically unnecessary, indeed socially harmful, cuts has become so intense that furious cabinet ministers in other departments are urging the prime minister to break his commitment to "ringfence" the health service.
The absurdity of the situation was vividly brought home to me by the wonderful NHS surgeon who recently operated on my left shoulder after I had tripped on a pavement: London teaching hospitals are noticing a significant increase in admissions to accident and emergency as a result of falls connected with unmended pavements and potholes.
It is the economics of the madhouse for local authorities to be in this position, thereby adding to the pressure on the NHS.
How about government grants of, say, £2m per local authority, to be spent specifically on mending all those potholes and pavements, on condition that the money has to be spent by 30 September 2014?
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