Forget deficits and growth. The chancellor’s policies are as much to do with politics as economics. It’s a credibility issue
What sort of a problem did George Osborne have when he took office in 2010? His friends say he had a deficit problem: the government was spending far more than it was taking in in taxes, forcing annual borrowing to record levels. His common-sense solution: raise taxes (which he did immediately) and slash spending (he is working on that).
His critics say he had a growth problem: the nation had been shoved into a deep recession by the banking crisis, and deficit spending should have been a major part of the policy mix to reignite growth quickly.
One reason the debate seems so intractable is that the deficit problem and the growth problem were two sides of the same coin, yet the policies needed to solve them seemed utterly contradictory.
But here’s another way to see the chancellor’s plight: he had a credibility problem. Most people agree that in the medium term, spending cuts or tax rises would have been necessary to keep the UK’s debt under control. Many people believe that doing this during a deep recession makes that recession deeper.
So Osborne’s austerity policies look poorly timed. He should have postponed his plans, which could have boosted growth appreciably while making very little difference to the overall debt picture.
Here’s a quick wish list of policies that Osborne should have introduced. First, a gradual VAT escalator: rather than immediately whacking up VAT to 20%, he could have started at 15% and added one percentage point a year. This would have had a nice stimulus side effect – expecting VAT to rise steadily, people would have spent money sooner.
Second, he should have brought infrastructure spending forward rather than postponing it. Not only does the ‘stitch in time’ principle apply to infrastructure, but building during the recession would have cost less and provided additional stimulus. Waiting until the boom merely crowds out private investment without reducing the overall debt.
Third, there’s long-term spending restraint on major items such as pensions and the NHS. The chancellor consistently prefers small, short-term, messy spending cuts – such as the partial withdrawal of Child Benefit – instead of reforms that put the country on a firm financial footing.
What possible defence does he have? Only that announcing, ‘Lord, give me austerity – but not yet’ would not have been credible.
Politicians are always promising to make prudent-but-painful decisions at some future date – climate change targets ‘by 2050’ are a favourite. So is pension reform – the fiscal challenges were quite apparent 25 years ago, but nobody wanted to be the politician to raise the pension age. Decisions about Heathrow and new electicity capacity have also often been kicked down the road by our political masters.
The chancellor is not immune – he’s repeatedly postponed increases in fuel duty; when the moment comes to raise the price of driving, ‘later’ always seems like the right option.
Osborne’s plight, then, was that the logic of economics conflicted with the lessons of history. Economics told him to spend in 2010 and promise to introduce austerity once the economy had recovered; history suggested that nobody would have believed him. And applying the squeeze as the 2015 election approached would be too much to ask of any politician.
As we await the Autumn Statement, let’s reflect on how we conduct fiscal policy in the UK: we now have not one, but two circus showpieces at which the chancellor must continually surprise the public and catch the imagination of headline writers.
It is hardly a surprise that tough promises are constantly unravelling. At a time when we’ve rarely had greater need of long-term thinking in economic policy, our politics have never been further from delivering it.
Tim Harford is a Financial Times columnist and the author of a new book, The Undercover Economist Strikes Back
This opinion piece was first published in the November issue of Public Finance magazine
