George Osborne is obsessed with the deficit – pity it’s the wrong deficit

George Osborne In Thought

The chief secretary to the Treasury is the cabinet minister responsible for controlling public expenditure and number two to the reigning chancellor.

Not everyone can be entrusted with this responsibility and chief secretaries occasionally fall out with chancellors and prime ministers. This was the case in the early 1980s, when John Biffen, once a champion of sado-monetarism, decided that enough was enough and expressed doubts about the wisdom of a further attack on public spending.

Once Biffen, a popular figure with journalists, had been described by Bernard Ingham – Margaret Thatcher’s Alastair Campbell – as “semi-detached”, his days were numbered.

Fast forward and we find the present chief secretary, Danny Alexander, is also proving to be semi-detached. He has had several run-ins, but last week he excelled himself by accusing his chancellor of being bent on the ‘“wilful destruction of important parts of our public services”.

He is, of course, quite right. Despite his affable manner on big occasions, David Cameron seems to have lost the confidence of most people I meet. But until recently, people entertained a reluctant admiration for George Osborne’s perceived political skills. No longer, it seems. His relentless attack on the public services, with promises of lots more to come, has frightened the horses and offered an opportunity for Labour. For, whatever Ed Miliband and Ed Balls may feel it necessary to say to appease the Conservative press, they are emphatically not intent on a policy of damaging public services to finance even more tax cuts for the rich.

Quite apart from the questionable morality of what he’s up to, Osborne has exposed a flank to a Labour party in need of a new line of attack.

Now it is difficult to see how Cameron or Osborne can fire the chief secretary. For one thing, he has gone along with their programme so far, and the dispute relates to policies for the next parliament. For another, Alexander is a Liberal Democrat, an important coalition partner.

However, in effect, the May election campaign has begun, and relations between the Tories and Lib Dems are likely to become increasingly fractious.

Meanwhile, Osborne has other problems. His boast that the UK’s was the fastest-growing economy in the group of seven leading industrial nations was always based on some adventurous interpretations of the comparison with the US. But the latest revisions from the Office for National Statistics have completely destroyed his claim. In the third quarter of this year, the US economy was expanding at an annual rate of 5% (in real terms, after allowing for inflation), while the UK figure was 2.6%. Even the Australian economy was expanding faster.

Furthermore, latest figures demonstrate that the balance of payments position is sensationally bad, showing a current account deficit of 6% in the third quarter. I have long argued that the chancellor has been obsessed with the wrong deficit. What matters is the balance of the economy, not the budget. The overseas trading position reflects the combination of our productive capacity, our ability to export, and our appetite for imports. Decent levels of productivity allow for respectable rates of growth which, in turn, offer the solution to concerns about budget deficits.

This has long been a neglected area of our economy and the publication of a new book by a former director of the National Economic Development Office brings back memories of when the neglect began and the rot set in.

Younger readers can be forgiven for wondering what Nedo is, or rather was. It was a well-intentioned body that brought government, industry and unions together in an effort to improve the nation’s productivity.

Nedo was wound up by the Thatcher government as part of the reaction to the perceived failure of the economic policies of the 1970s. Sir Ronald McIntosh was director of Nedo during those turbulent times. Indeed, the sprightly 95-year-old has made Turbulent Times the title of his memoirs (Biteback Publishing). It is a pity they did not come out earlier. Perhaps the present chancellor would have benefited from Sir Ronald’s advice to a previous occupant of his office: “Cuts in public expenditure are deflationary and the last thing this country needs just now is another dose of deflation ... deflationary action at home is bound to depress investment intentions.”

This is precisely what happened when Osborne embarked in 2010 on his so-called “long-term plan”. As my old friend David Kern, chief economist at the British Chambers of Commerce, says: “The stark revision in annual growth confirms that the pace of recovery is slowing. The most concerning aspect of these figures is that the current [balance of payments] deficit has risen to an unsustainably high level – owing to the fall in net investment... further efforts are needed to boost business investment and to help businesses export.”

Yes, Osborne’s strategy has been shown up for what it is: a mess. It is the season of goodwill, but I find it difficult to feel sorry for this cocky chancellor.

I recall a lunch I had with Biffen after he had been sacked by Thatcher and, some years later, she herself was in serious trouble with the party. I remarked, somewhat carelessly: “Mrs Thatcher must be suffering.” He stared for ages at his plate and replied: “Yes – but is she suffering enough?”

Powered by Guardian.co.ukThis article was written by William Keegan, for The Observer on Sunday 28th December 2014 09.00 Europe/London

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