The chancellor's claims about growth in today's Spending Review were very overblown. And instead of rebalancing the economy he is risking a debt-fuelled expansion
In his spending round speech today, George Osborne reiterated his claim that the UK economy is moving from ‘rescue to recovery’; a clear sign that he wants to shift the focus away from spending cuts and towards economic growth. No doubt, he is hoping at the next general election to take credit for any recovery that takes place over the next two years.
What he did not point out, unsurprisingly, is that the economy was already recovering when he became chancellor. Over the year to the second quarter of 2010, real GDP in the UK increased by 2.1 per cent. But in the subsequent two and three-quarter years it has grown by just 1.7 per cent. We won’t know the real GDP figure for the second quarter of this year for another month, but it is likely that growth in the three years that George Osborne has been chancellor will be roughly the same as it was in the one year before he took office.
This substantial decline in growth is not all the result of his economic policies. The UK economy has been buffeted by some severe headwinds over the last three years. In addition to tax increases and spending cuts, there have been the euro zone crisis, high commodity prices and continued declines in bank lending to business. But Osborne’s theory that fiscal austerity would be expansionary because it would allow for an easier monetary policy has been disproved. Put simply, by 2010 there was no longer scope to ease monetary policy sufficiently to offset the impact of fiscal austerity.
This is something that those who believe Mark Carney’s arrival as Governor of the Bank of England will lead to innovative monetary measures to boost the economy appear to have forgotten. Central bankers don’t have secrets from one another. If Carney has some magic cure for the economy, he would have shared it with Mervyn King and others long ago.
The need to secure a sustained economic recovery before the election has caused the Chancellor to abandon his previous idealism about the nature of that recovery. No longer does he talk about the dangers of a debt-fuelled expansion and call for the recovery to be led by a ‘march of the makers’. Rebalancing the economy towards exports and investment is no longer a priority. Any growth will do.
This was made clear in the budget when the Chancellor announced his Help to Buy scheme. This amounts to pump-priming the mortgage market and encouraging another increase in household debt. The Office for Budget Responsibility now expects household debt to increase, relative to disposable income, over the next five years.
The Chancellor’s announcement today of additional capital spending for 2015-16 and a commitment to higher spending through to 2020 is welcome, but it will come too late to support the economy over the next two years. Today was another missed opportunity to address the real crisis facing the country in the short-term: one of growth.
Tony Dolphin is chief economist at the IPPR
