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The chancellor is for turning after all. And, whisper it, he's switching to Keynes The chancellor is for turning after all. And, whisper it, he's switching to Keynes
(6 months later)
The early consensus was that the budget was a political success if an economic non-event. Austerity continues, softened by politically astute help for "aspirational" home-buyers, families paying for child care and beer drinkers. However, this was the moment when George Osborne, now firmly established as Britain's most unsuccessful post-war chancellor, ran up the white flag. Faced with the slowest recovery for more than a century, an economy that refuses to rebalance and every prediction of improvement bringing disappointment, he is compelled to put aside the conservative recipes that don't work – and begin to experiment with non-conservative ones that might.The early consensus was that the budget was a political success if an economic non-event. Austerity continues, softened by politically astute help for "aspirational" home-buyers, families paying for child care and beer drinkers. However, this was the moment when George Osborne, now firmly established as Britain's most unsuccessful post-war chancellor, ran up the white flag. Faced with the slowest recovery for more than a century, an economy that refuses to rebalance and every prediction of improvement bringing disappointment, he is compelled to put aside the conservative recipes that don't work – and begin to experiment with non-conservative ones that might.
The great conservative dominance of economic thinking that has prevailed since the stagflation of the 1970s is passing. Mr Osborne must pretend otherwise; anything else would be political suicide. The mantra is that austerity must continue to rule, and that to incur more debt in an attempt to bring debt down is absurd.The great conservative dominance of economic thinking that has prevailed since the stagflation of the 1970s is passing. Mr Osborne must pretend otherwise; anything else would be political suicide. The mantra is that austerity must continue to rule, and that to incur more debt in an attempt to bring debt down is absurd.
But don't be fooled. Behind the smokescreen of a further cut in corporation tax – of second or third order importance in stimulating investment, as Osborne must know – our Tory chancellor, skillfully led by the business secretary Vince Cable, is living with a much higher budget deficit than he ever planned. And he is now championing the most vigorous industrial, banking and financial strategy for a generation. Quite right, too. But this has nothing to do with Thatcherite conservatism – and everything to do with a Keynesian view of how a capitalist economy functions.But don't be fooled. Behind the smokescreen of a further cut in corporation tax – of second or third order importance in stimulating investment, as Osborne must know – our Tory chancellor, skillfully led by the business secretary Vince Cable, is living with a much higher budget deficit than he ever planned. And he is now championing the most vigorous industrial, banking and financial strategy for a generation. Quite right, too. But this has nothing to do with Thatcherite conservatism – and everything to do with a Keynesian view of how a capitalist economy functions.
The transition from one policy paradigm to another is always a ragged affair; some ideas survive because they strike a visceral emotional chord. But economic policy is unforgiving: all that counts is what works. In this respect, the chancellor who most closely resembles Osborne is Denis Healey. He lived through the stagflation of the 1970s, gamely trying to keep one policy paradigm alive – using incomes policies to support a bastard Keynesianism – while having to make concessions to the new wave of economic thinking. Monetary targeting and the first scrapping of exchange and capital controls did not begin with Mrs Thatcher but with Healey, who felt compelled to try ideas that might work – even while he swore blind that his policy was not changing.The transition from one policy paradigm to another is always a ragged affair; some ideas survive because they strike a visceral emotional chord. But economic policy is unforgiving: all that counts is what works. In this respect, the chancellor who most closely resembles Osborne is Denis Healey. He lived through the stagflation of the 1970s, gamely trying to keep one policy paradigm alive – using incomes policies to support a bastard Keynesianism – while having to make concessions to the new wave of economic thinking. Monetary targeting and the first scrapping of exchange and capital controls did not begin with Mrs Thatcher but with Healey, who felt compelled to try ideas that might work – even while he swore blind that his policy was not changing.
So it is with George Osborne. His confidence has visibly collapsed. I have followed budget speeches for more than 35 years, but no chancellor has felt it necessary to incorporate so many wheezes – at least eight attached to individual or groups of Tory MPs – to appease so many of his backbenchers. But then no other chancellor has been so politically needy. Incredibly, much of the press – the laddie is not for turning – came unexpectedly to his rescue.So it is with George Osborne. His confidence has visibly collapsed. I have followed budget speeches for more than 35 years, but no chancellor has felt it necessary to incorporate so many wheezes – at least eight attached to individual or groups of Tory MPs – to appease so many of his backbenchers. But then no other chancellor has been so politically needy. Incredibly, much of the press – the laddie is not for turning – came unexpectedly to his rescue.
But this man has turned. So feeble has Britain's economic performance been and so weak are our tax receipts that public borrowing will end up around £120bn last year, this year and next, says the Office of Budget Responsibility – wildly off track. Less a Thatcherite not for turning, more turning a blind eye, doing little about it except trying to hide it by fudges, claims of efficiency savings and moving spending between years. Indeed, in 2014/15 the "laddie" will be borrowing £70bn more than he planned in his first budget in June 2010 – and crucially plans to do nothing about it until the years afterwards.But this man has turned. So feeble has Britain's economic performance been and so weak are our tax receipts that public borrowing will end up around £120bn last year, this year and next, says the Office of Budget Responsibility – wildly off track. Less a Thatcherite not for turning, more turning a blind eye, doing little about it except trying to hide it by fudges, claims of efficiency savings and moving spending between years. Indeed, in 2014/15 the "laddie" will be borrowing £70bn more than he planned in his first budget in June 2010 – and crucially plans to do nothing about it until the years afterwards.
Then, we are led to believe, there will be a further assault on spending after the 2015 general election – deficit reduction when the economy should be more firmly on a recovery track, the better to take the hit. This would be sounder economics than doing so in the wake of the financial crisis as Osborne initially, and wrongly, tried. But nobody sane believes in further cuts on top of the self-defeating squeeze already in train – not even George. Indeed, Paul Johnson, director of the Institute for Fiscal Studies, helpfully draws attention to a small line the treasury smuggled into the budget papers: the deficit after the election could, it reads, be lowered by tax increases – a racing certainty whichever party wins.Then, we are led to believe, there will be a further assault on spending after the 2015 general election – deficit reduction when the economy should be more firmly on a recovery track, the better to take the hit. This would be sounder economics than doing so in the wake of the financial crisis as Osborne initially, and wrongly, tried. But nobody sane believes in further cuts on top of the self-defeating squeeze already in train – not even George. Indeed, Paul Johnson, director of the Institute for Fiscal Studies, helpfully draws attention to a small line the treasury smuggled into the budget papers: the deficit after the election could, it reads, be lowered by tax increases – a racing certainty whichever party wins.
This more measured approach to deficit reduction, along with a recognition that more of the burden must and will be assumed by higher taxation, is right, if unacknowledged. But for clearer evidence of tectonic plates moving, visit the Department for Business website. You can read the celebrations of the government's new industrial strategy. In particular, "Lifting off: Implementing the strategic vision for UK Aerospace", complete with a £2bn spending commitment over seven years and an Aerospace Technology Institute, announced in the budget. It contains a collector's item: a foreword from Mr Osborne matching even Peter Mandelson in his commitment to intelligent strategic support for business.This more measured approach to deficit reduction, along with a recognition that more of the burden must and will be assumed by higher taxation, is right, if unacknowledged. But for clearer evidence of tectonic plates moving, visit the Department for Business website. You can read the celebrations of the government's new industrial strategy. In particular, "Lifting off: Implementing the strategic vision for UK Aerospace", complete with a £2bn spending commitment over seven years and an Aerospace Technology Institute, announced in the budget. It contains a collector's item: a foreword from Mr Osborne matching even Peter Mandelson in his commitment to intelligent strategic support for business.
It is a good document, as is the strategy for the new business bank on the same website, which sets out the many non-conservative interventions to make the financial system function and banks lend. There is also the creation of the Heseltinian single growth pot from which local government can bid to generate jobs and growth. "Help to Buy" has attracted criticism as being a soft version of Roosevelt's Fannie Mae and Freddie Mac – using the public balance sheet to guarantee mortgage borrowing and housebuilding – but this use of public guarantees captures the essence of smart Keynesianism. It worked well in 1930s America. Trying it in 2010s Britain cannot be dismissed.It is a good document, as is the strategy for the new business bank on the same website, which sets out the many non-conservative interventions to make the financial system function and banks lend. There is also the creation of the Heseltinian single growth pot from which local government can bid to generate jobs and growth. "Help to Buy" has attracted criticism as being a soft version of Roosevelt's Fannie Mae and Freddie Mac – using the public balance sheet to guarantee mortgage borrowing and housebuilding – but this use of public guarantees captures the essence of smart Keynesianism. It worked well in 1930s America. Trying it in 2010s Britain cannot be dismissed.
Indeed, Keynes would have welcomed another plate shift – the Review of the Monetary Policy Framework – with its acceptance that in today's circumstances monetary policy cannot only be about inflation. It has to be about growth, too, requiring the Bank to signal its interest rate intentions for years ahead and adopting intermediate indicators – such as the rate of growth and inflation together – to inform its actions. Monetarism and inflation targets can rest in peace. It is a quiet Keynesian triumph.Indeed, Keynes would have welcomed another plate shift – the Review of the Monetary Policy Framework – with its acceptance that in today's circumstances monetary policy cannot only be about inflation. It has to be about growth, too, requiring the Bank to signal its interest rate intentions for years ahead and adopting intermediate indicators – such as the rate of growth and inflation together – to inform its actions. Monetarism and inflation targets can rest in peace. It is a quiet Keynesian triumph.
Some visceral Toryism remains – the assault on the disadvantaged, the emasculation of the British social settlement and labour market flexibility taken to the point where it means quasi-slavery, as Lord O'Donnell remarked in the Lords surrendering employment rights for £2,000 of shares. But reality and necessity are forcing change. Britain will have to reform the basic unit of its capitalism, the public limited company. It will also have to take a much more radical approach to its financial, banking and innovation system. We need proper stakeholder capitalism, in a coherent framework. Poor George Osborne has to disguise, fudge and obfuscate as he tries to keep alive the notion that all that counts is debt and deficits. To reap the benefits from what he is doing, Osborne has to be able to say it publicly, but that would kill him politically. Paradigm shifts need new governments to own and proclaim them. It is Labour's opportunity, and duty, to build on what the government is doing, but with the conviction and energy this government cannot offer.Some visceral Toryism remains – the assault on the disadvantaged, the emasculation of the British social settlement and labour market flexibility taken to the point where it means quasi-slavery, as Lord O'Donnell remarked in the Lords surrendering employment rights for £2,000 of shares. But reality and necessity are forcing change. Britain will have to reform the basic unit of its capitalism, the public limited company. It will also have to take a much more radical approach to its financial, banking and innovation system. We need proper stakeholder capitalism, in a coherent framework. Poor George Osborne has to disguise, fudge and obfuscate as he tries to keep alive the notion that all that counts is debt and deficits. To reap the benefits from what he is doing, Osborne has to be able to say it publicly, but that would kill him politically. Paradigm shifts need new governments to own and proclaim them. It is Labour's opportunity, and duty, to build on what the government is doing, but with the conviction and energy this government cannot offer.
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