OSBORNE’S CREDIT RATING DOWNGRADED TO JUNK
If there has been a worse Chancellor of the Exchequer in my lifetime than George Osborne I am struggling to put a name to him. In less than three years in the job he has snuffed out an embryonic recovery, created one recession of his own with another apparently on the way, put himself on course to miss his own fiscal targets, re-toxified the Conservative brand with the most inept budget on record and been roundly booed by the nation in front of an astonished world at the Paralympics. Now his disastrous policies have cost Britain its prized ‘AAA’ credit rating with forecasters predicting continued stagnation to the end of the decade.
Remember, preserving the nation’s credibility with the ratings agencies was the entire rationale for the Government’s rush to austerity in the summer of 2010. The loss of it means that Osborne is now in default, his political credit rating reduced to ‘junk’ status. Even the Chancellor’s expectations of himself seem miserably low for someone touted as the next Prime Minister only a year ago. According to one newspaper report, he has been reduced to telling friends: “My main aim this year is to avoid fucking up the budget”.
Is that all we have to look forward to after five years of economic torment? Don’t we deserve something better? How about a concerted effort to kickstart growth? Or some attempt to stop living standards falling off a cliff? Or any kind of light at the end of the tunnel at all? Apparently not. The most we can hope for is that Osborne will recover enough poise to stop slipping on his own banana skins. What a wretched prospectus.
The Chancellor and his few remaining allies insist that he is the victim of circumstance, that the economic conditions he inherited were much worse than feared and the road to recovery far longer and harder as a result. But it simply won’t fly. The country’s plight, trapped in an economic dead-zone, is the result of bad policy incompetently executed. It arises directly from mistakes made by the Chancellor himself.
Osborne staked his reputation on the idea of “expansionary fiscal contraction” as the key to recovery. Starting from the ideological premise that the public sector crowds out more efficient private investment and initiative, it assumed that lower public spending would, in and of itself, stimulate economic activity. The theory is nonsense, of course, but there have been examples of countries managing to expand their economies in times of sharp fiscal consolidation. The exponents of expansionary fiscal contraction point to Canada and Sweden in the early 1990’s. What they don’t tell you is that in both cases expansion was made possible due to strong growth in the US and Europe respectively that allowed Canada and Sweden to export their way out of difficulty.
It is therefore possible that Osborne might have got away with ‘austerity in one country’ had he been able to surf the wave of continued stimulus spending across Europe and the developed world more generally to compensate for spending cuts and weak demand at home. Cynical as it would have been to free-ride on the Keynesianism of others, it would at least have amounted to a logical strategy. Unfortunately, as soon as they were installed in office, Osborne and Cameron couldn’t resist preaching the gospel of austerity on the international summit circuit and then returning home to boast about how they were leading the world. The damage has been immense. Instead of the rebalancing towards exports we were promised, the UK continues to rack up record trade deficits despite a 25% devaluation of sterling.
If Osborne’s credibility is now at rock bottom, Ed Balls deserves a gold-plated ‘AAA’ rating. Everything he has said about what would happen to the economy since his 2010 Bloomberg speech has turned out to be right. Indeed, I wonder why he doesn’t just quit politics and make a mint for himself playing the markets as the new George Soros. Seriously though, this does raise an interesting dilemma for Labour. One idea often suggested as a way of strengthening the party’s economic credentials is to give the Office of Budgetary Responsibility (OBR) enforcement powers over the fiscal plans of the next Labour government. This would mean Chancellor Balls, who has been consistently right for three years, taking orders from an OBR that has been consistently and often spectacularly wrong in everything it has said since it was set up by Osborne. It may even happen, proving that politics is a crazy business.
And what of the Liberal Democrats? Everything that has happened since May 2010 has shown how right they were to warn about the dangers of cutting too far too fast during the election campaign and how wrong they were to change their minds afterwards. Thanks to Vince Cable and his trusty outrider, Lord Oakeshott, they have probably maintained enough distance between themselves and Osborne’s approach to make a definitive break credible on grounds of principle. But the longer they leave it, the harder it will be to pull off convincingly. If the Liberal Democrats win the Eastleigh by-election this week, perhaps their fear of facing the electorate will start to ease and the odds of an early general election will increase somewhat. Let’s hope so, because the country can’t afford two more wasted years under George Osborne.