George Osborne's speech on the economy: seven ways he rewrote history

Flying Pig

There is one aspect of George Osborne's speech on Monday that rings true.

Keynesian economists missed the upturn in the economy that has spurred growth this year to the highest in Europe.

Blinded by the obviously harmful effects of government cuts and the broader austerity agenda, Keynesians were predicting a triple-dip recession and prolonged pain for the UK economy. Monetarists, on the other hand, were watching the money supply and confidently predicting that an expansion in funds swirling round the financial system was going to kickstart growth.

In other words, the sheer weight of money from the Bank of England – the £375bn of quantitative easing, the £80bn Funding for Lending scheme and then the propsect of £130bn from Help to Buy – not only provided money directly from a reliable source, but also cut the cost of funding on the wholesale markets. With banks almost ovewhelmed with sources of funds to lend, it only took for the worst of the austerity to work its way through and the eurozone crisis to abate for a pent up demand among still wealthy consumers to stage a recovery.

He coins the term "fiscalist analysis" and says those who indulge in it missed the vital signs.

That may be true, but everything else about Osborne's speech is marked by a brazen and disingenuous attempt to win the intellectual argument by re-writing history.

1. His decision to align with other European leaders in calling for an austerity-first policy destroyed millions of jobs in the UK and across the continent when a co-ordinated investment of public funds would have restored confidence, created jobs and bolstered government balance sheets faster by generating extra income rather than cutting costs through deeper cuts.

2. His emphasis on monetary policy has allowed market forces to direct funds into the same old parts of the economy as before the crash. Banks are lending to homeowners with the safest credit records and based on a government subsidy. The cash released is spent on the high street. Cautious businesses are either unwilling to lend or still rebuffed. Either way, the much vaunted recovery led by business investment has yet to happen.

3. Osborne's views on financial regulation and the part it played in the banking crash are valid. Labour was in awe of the banking community. But so was everyone else in the policymaking sphere and the chancellor's views might easily be considered revisionist given his party's support for further banking de-regulation in the noughties.

4. He says the fiscal multipliers didn't work in the UK as predicted and cites the International Monetary Fund in his support. Yet it was the fund's chief economist, Olivier Blanchard, admittedly working almost in a freelance capacity, who said the government's cuts hurt more than they helped and he should ease up. The IMF was a supporter of Plan B. In his speech they were fellow travellers.

5. He says the economy is re-balancing when the high street is back to its peak and manufacturing and construction remain well below. Services, manufacturing and construction are all growing now, but he did little to support the latter two in his first three years in office, which explains the lag.

6. Osborne says "according to a recent global survey – our regulatory reforms have made the UK the best place in the world to invest in infrastructure". This statement seems odd when the last week the UK just fell from 4th to 28th in the infrastructure category of the World Economic Forum's global competitiveness index.

7. Contrary to the message in his speech, the recovery is also connected to the chancellor easing the squeeze from public spending cuts.

Capital Economics' chief UK economist, Vicky Redwood, said soon after he finished talking that he was wrong to say that with the pace of fiscal consolidation unchanged, the recovery would not now be recovering had austerity been to blame.

"In fact, the squeeze has eased a bit this year. And we have argued before that, even though the economic weakness has not been primarily due to the fiscal squeeze, the chancellor did not necessarily do the right thing by sticking doggedly to his plans.

"Regardless of the cause of the weakness, there was a case for taking a more pragmatic approach to fiscal tightening as unexpected shocks hit the economy. Given the uncertainty about how the bond markets would have reacted to any Plan B, we will simply never know whether the economy would be in a better situation now or not," she said.

Powered by article was written by Phillip Inman, economics correspondent, for on Monday 9th September 2013 13.53 Europe/London © Guardian News and Media Limited 2010


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