25 Jul 2012

“It could be a lot worse…”: Osborne’s five GDP shuffles

Let’s be very clear. The GDP number was abysmal. It was more closely expected internally at the Treasury and the Bank of England. The City economists clearly did not listen to the Bank of England’s May bulletin which pointed out that the Jubilee Bank Holiday shuffle could cost 0.5 per cent of growth in Q2. The rain was not great for the economy either.

However, there was no excuses such as this from the Chancellor in a round of TV interviews including myself. He hasn’t really sought to excuse negative GDP figures in the last quarter either by blaming the eurozone (although the prime minister did).

The Chancellor has refined his message in some telling ways:

1. “…as difficult as Britain’s economic problems are, they could be a lot worse if we didn’t command the confidence of Britain’s ability to pay its way in the world.” Mr Osborne to me today.

A vital change in tone. Really the coalition should have argued this from the beginning. It is their main argument. The economic slump is like an insurance premium that the country pays to avoid the very worst outcome of a disastrous sovereign debt run. But there is a reasonable disagreement to be had over whether the premium is too high, or the risk being insured against rather remote. The reality is, that two years on, the UK economy is now 0.3 per cent smaller than that inherited by the coalition. So in his two years as Chancellor George Osborne has shrunk the economy.

For context the June 2010 Budget that set out the coalition deficit reduction plan, presumed an economy 5 per cent larger in this same time. The key question for me: “does the government believe that a shrinking economy is a price worth paying for deficit reduction?” I asked the chancellor this today. He could have said “yes”, and actually that is what would have been the most honest answer, but he didn’t, he said “we’re doing everything possible to get econ growing.” Watch the interview above to see his full answer.

2. No excuses, he blamed “deep rooted economic problems” including “private & public sector debt…”

The politically-minded might see this entirely as a dig at Labour. But even staunch Gordon Brown supporters would surely recognise that the hangover from the private sector debt bubble was always going to involve a painful half-decade or decade of deleveraging. Under the Labour government the biggest credit bubble the world has ever seen was inflated. It then kept a burst balloon artificially inflated to prevent a catastrophe in 08/09. The coalition is trying to allow the air out of this balloon, and this outweighs relatively small differences in fiscal policy between the coalition and the opposition as a drag on growth.

3. Osborne: “Deep problems” include “fact that our economy was orientated more towards European continent than towards the Chinas and Indias”

This is a new line from the chancellor. It is rather interesting. He’s saying this now instead of saying, “we’ve been dragged down by the eurozone” perhaps mindful of the fact that it is impossible for the eurozone to drag the UK down, more than it appears to be dragging itself down (the eurozone is not in recession). Perhaps it is also attractive to those Conservatives currently flocking to UKIP. It works better for the Chancellor’s new mantra of difficult long term transformation rather than short term debt fixes. As he told me: “changing these things takes time, but we are tackling the deficit, we are exporting more to China”.

4. “We’ve got to do more on infrastructure”: I ask him why he’s cutting investment capital spending. He says Labour would cut even more.

That awkward moment when George Osborne chides Labour for not spending enough. This, even as the government is halving investment spending in cash terms from £50bn to £24.5bn, obviously even more in real terms. Indeed it is rather telling that in the past fortnight, we broadcast economics editors have twice been summoned to giant public funded construction sites. When I pressed him on public investment cuts, he boasted: “We’re now spending more on roads and rail than this country was spending in the boom years”. (Hang on, I thought we were nearly bankrupt). Osborne wants more infrastructure and less benefit spending. At first he thought the private sector would just fund £250bn of much-needed UK infrastructure if he kept interest rates down. Now he is offering widespread government guarantees. I discussed this in my previous post on “Contingent Keynesianism”. If this doesn’t work, then expect a U-turn, more spending, backed by the IMF by the next Budget.

5. “Credit ratings are for credit ratings agencies. I’m determined people have confidence in our ability to pay our debts”.

This was George Osborne’s response to my suggestion that Britain will lose its AAA rating on growth fears. It no longer seems that the AAA is the be all and end all for Government policy, from this answer. Two of the three major agencies have Britain on the downgrade shortlist. In that time the economy has got significantly worse. Indeed my last thought is that perhaps the best thing that could happen to Britain would be an imminent downgrade. Only then could we have a full and proper debate about how to get the economy motoring again, through supply and demand measures.

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