The deficit isn’t the real problem. The crisis is in productivity

http://www.theguardian.com/business/2014/dec/14/deficit-problem-crisis-productivity-george-osborne

Version 0 of 1.

When British governments are in trouble, their first line of defence is to attack the BBC – an institution valued all over the world, but not always in Westminster. Having had what he plainly regarded as a successful day delivering his autumn statement the other week, George Osborne sounded as though he had woken up with a hangover when he lost his cool on the Today programme and complained bitterly about the BBC’s coverage.

I found it pretty strange at the time, and still do. The BBC and the media generally have cravenly swallowed the chancellor’s line that the most important issue facing the nation is The Deficit. I have lost count of the number of references to this residual economic statistic that for decades hardly rated a mention in the press.

The fact of the matter is that the budget deficit is not the most important issue. But the coalition, which has ensnared the country in its homemade austerity trap, has done a brilliant job until now in bringing out the masochistic streak in the British character, and persuading people that all these budget cuts are necessary.

The most important issue is the poor performance of the nation’s productivity, which, far from being improved, has almost certainly been exacerbated by the constant emphasis on the putative need for austerity.

We needed austerity after the second world war because the country was broke. In 2010, notwithstanding the notorious note left by the retiring chief secretary to the Treasury, we were not broke. The note was meant to be a joke. The money had not run out then and it has not run out now. The gap between tax receipts and public expenditure has easily been financed. Obviously that cannot go on indefinitely, but European economies need time to recover from the cataclysm of the financial crisis, which was the first cause of the huge collapse in demand in 2009, with repercussions on productivity.

The second cause was the “flatlining” that followed the chancellor’s all too successful attempt to stop the burgeoning recovery in 2010 with his austerity programme. That, too, affected productivity adversely.

In reporting the horrors that may lie ahead, the BBC was only drawing on the analysis made by the independent Institute for Fiscal Studies and the government-sponsored Office for Budget Responsibility.

However, two things are abundantly clear. Neither of these institutions, while forecasting the implications of the coalition’s renewed austerity plan, believes they are realistic. Austerity fatigue has already set in; no one outside Osborne’s eccentric entourage believes that he can possibly get away with the truly savage cuts he plans – always assuming the Tories are re-elected. Why, even though the Lib Dems have signed up to the forecasts and broad policy, cracks are appearing in the ranks. It comes to something when the chief secretary to the Treasury, the Cabinet member responsible for wielding the axe, says enough is enough.

Danny Alexander’s main objection seems to be not to the size of the planned reduction in the deficit, but to its composition: that is to say – in common with shadow chancellor Ed Balls – he objects to concentrating so mercilessly on cuts, which hit the weak and poor hardest, rather than tax increases. And both balk at the plan for tax cuts aimed at the better off while the defenceless are being punished.

Now, the Labour party, as usual, is on the run from the City and the gutter press. I meet far too many disillusioned people who say “there is no difference between the parties”. In this they are hardly consoled by the way Labour appears to have signed up to so much of the deficit agenda.

Yet there is in fact a profound difference: the Tories are intent on shrinking the state for ideological reasons. Labour are reluctant cutters, and make a crucial distinction between borrowing for capital spending on hospitals, schools and infrastructure, and borrowing for current expenditure. They, too, alas, are making a fetish of the deficit, but at least they wish only to balance the current budget. By contrast, Osborne wishes to achieve a balance on current and capital spending, which by definition involves bigger cuts in essential services. Can you imagine a company in the private sector trying to pay for a huge item of capital investment in one year?

Labour need to be more imaginative. The halving of the oil price affords western economies a macroeconomic opportunity. Consider: when the oil price doubled in the 1970s it was both deflationary, in that it removed purchasing power from consumers, and inflationary, in that it pushed prices up. The halving of the oil price is reflationary: it boosts demand and should in due course have a beneficent effect on productivity. It is deflationary, in that it lowers inflation figures which, here and in the rest of Europe, are already well below target.

There is an opportunity here for a renewed growth strategy, which will in due course swell government revenues and accelerate the decline in those pesky deficits.

Oh, and by the way, most of the budget forecasts of recent years have turned out to be heavily revised. I am reminded of Denis Healey’s joke in the 1970s that he would like to do to economic forecasters what the Boston Strangler did to the reputation of door-to-door salesmen.