This may well turn out to be the low point in the political fortunes of George Osborne. Of course the loss of Moody’s AAA means nothing whatsoever. Not for the first time, his opposite number Ed Balls gets it right:
“It would be a big mistake to get carried away with what Moody's or any other credit rating agency says. Tonight's verdict does not change the fact that the credit rating agencies have made major misjudgments over recent years, not least in giving top ratings to US sub-prime mortgages before the global financial crash. But what matters is the economic reality that the credit rating agencies are responding to. Moody's themselves say the main driver of their decision is the weak growth in Britain's economy.”
For more details on the ratings agencies, see Jonathan Portes here.
For the Chancellor, from now on things may start to get better, if only because they have become so bad. The UK may just avoid a triple dip recession, and may even grow at more than the snails pace predicted by forecasters. Any growth will be talked up as if it is a new dawn, and people will want to forget the last few years as quickly as they can. This may even be enough to see a Conservative government elected in 2015. In that case, George Osborne as politician will be vindicated. But this blog is about economics (mainly). As far as macroeconomics is concerned, nothing that will come can repair the damage that has been done over the last two and a half years. Hence the finality of my title.
It would be foolish to argue that all of the UK’s economic woes are down to its Chancellor. The financial crisis has generated some particular problems for the UK, which most Chancellors of the Exchequer would have struggled with. What George Osborne did with his austerity programme was the equivalent of putting a sick patient on a starvation diet accompanied by cold showers. The UK economy without accelerated austerity would still have been in poor shape, but under George Osborne it has been a disaster.
It is perhaps telling that the best we can say for the record of the last two and a half years is that maybe the statisticians have got the numbers wrong. Maybe more of nominal GDP growth is real and less is inflation. Without such a major rewrite of the data, the record is dismal. Effectively no growth, during a period in which we would normally expect a significant recovery, a recovery that had already begun before he took over. Those who say that the employment numbers are not so bad completely miss the point (journalists please note): if the numbers are right it seems that productivity and the supply side of the UK economy have also stalled in the last few years, implying that the loss of output could even be permanent. A temporary loss of output (and the increase in unemployment or lower real wages that goes with it) is bad enough, but to permanently reduce output forever is some achievement. For once, the word disaster is not an exaggeration.
What about that terrible legacy the previous government had given him, which he never fails to mention? Absolute nonsense. The record of the previous government was far from perfect, but they did not create a horrible mess that he had to put right. What about the debt crisis? The panic of 2010 might have justified promises of future austerity, perhaps with immediate action which demonstrated intent in ways that did least harm to aggregate demand. When I was asked by one of his advisors what this might involve, I suggested temporarily raising estate taxes (death duties) - what better way to show you are deadly serious about reducing the deficit than doing something that had big political costs for you, yet with a relatively small impact on demand. Yet for a Chancellor where politics is key, what we got instead was front loaded austerity, which even Nick Clegg has recently acknowledged was in areas that did maximum damage to the economy.
After the panic of 2010 was over, when it became clear that the debt crisis was really a Eurozone crisis and UK long term interest rates declined with the fortunes of the economy, we should have had a major change of policy. There were many possibilities besides conventional stimulus, such as balanced budget fiscal expansion, or changes to the monetary policy regime. But these would all have involved political costs, so instead we had short term tinkering coupled with the prospect of more austerity beyond the next election.
Can he blame the advice of others? Sure there was bad advice from some influential quarters, but there were also plenty (a majority, indeed) of reputable economists who correctly warned of the dangers the policy involved. So austerity was always a gamble - a gamble that the UK economy was strong enough to be able to offset the undoubted negative impact of accelerated austerity. It was not.
So what was the prize that led to this gamble? Again it had little to do with macroeconomic policy. As Paul Krugman has pointed out many times, the ‘debt problem’ is seen by many on the right as a useful cover to reduce the size of the state. Seen through this lens, the details of the austerity programme make much more sense. A focus on demand ‘rich’ items like investment, local authority spending and welfare, and avoiding temporary increases in taxes that have a much lighter demand impact? - because the aim is to permanently reduce the size of the state. George Osborne was prepared to take a gamble with the economy for political ends.
Of course all Chancellors are politicians. Most would take small liberties with the macoeconomics to gain political advantage: for example before 1997 by delaying raising interest rates until after the party conference, or after 1997 by being a little too optimistic about tax receipts to minimise unpopular tax increases. However in most cases these are the equivalent of minor indiscretions, which do not fundamentally alter the fortunes of the economy. The centrepiece of Osborne’s strategy was accelerated austerity for political ends, and it stopped the recovery dead.
So my final verdict on George Osborne? He is a political tactician, who time and again has put party political gain ahead of the economic interests of the economy. We see this in many ‘small’ things, like the contents of his last budget and Autumn statement, to more important things, like his support for policy on immigration or Europe. It is defined by both what he has not done (total inaction on monetary policy, when - unlike the US and Europe - he has considerable power), as well as what he has done (accelerated austerity). The politics may still come good for him, but the damage to the UK economy his action and inaction has caused is final.