Wednesday, 16 October 2013

Memo to Chancellor: Plan A did not work, actually


UK unemployment continued to fall over the summer, which is good news. Though youth unemployment seems stuck, and one of the reasons unemployment has failed to soar is a huge wage squeeze that's hurting every household in the land, this is a better result than during 1980-81 and 191-93, during which periods many more Britons lost their jobs. So this is in part a pleasing result of hard work and pay restraint - overall.

But what this emphatically does not mean is that Chancellor George Osborne (above) and his 'Plan A' - austerity plus low interest rates - can claim vindication in the face of his many critics (including the International Monetary Fund). Mr Osborne has been doing rather a lot of this recently, despite this avowed intention not to declare economic and political victory too soon.

He'd be better off keeping his powder dry, because any such claim would be nonsense.

Point one: all recessions come to an end. We're doing better this year than we thought we might because of what you might call the 'coiled spring' effect. The Government's policies (and, even more notably, its mood music) have kept demand, and particularly investment, so low for so long now that rivers of cash were bound to flow at the first sign of an economic thaw. Macroeconomics dictates that budgetary austerity, at least on the scale presently applied, can only delay recovery; it can't cancel it altogether. And that's what we've seen: to mix our metaphors, one of those slinky stair-crawler toys, held back, and held back, and wound up, and wound up, until it's been released, to quickly rush down the steps in front of this. None of this means that the overly-harsh budgets of recent years haven't held us back. Fact: we're still below our past economic peaks, and we're still shy of where we would have been with a moderately easier policy.

Point two: Plan A was actually abandoned in favour of a more Keynesian 'Plan B' during 2011, in favour of a much easier budgetary stance, deferring all of the Chancellor's aims way into the next Parliament. Remember when Mr Osborne moved into No. 11? The declared aim was (a) to eliminate the structural deficit in this Parliament, (b) to see borrowing coming down by the next election, and thus (c) to 'save' the UK's triple-A credit rating via (d) a 'rebalancing' of the economy towards exports and manufacturing. All of these objectives failed. None of them have been achieved. It is a conclusive economic policy failure the like of which we have not seen in this country since the public spending boom of 1974-76, and the IMF crisis that followed. What's replaced it? A mortgage boom, in which the banks have been told to go out and throw their money around. Mr Osborne has told other Ministers to go out and deny this - while privately accepting that a surge in house prices is exactly what he's aiming at.

Victory? One has to wonder what defeat would look like.

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