Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday 23 February 2013

The final verdict on George Osborne as Chancellor

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.


  1. You claimed that most economists were arguing against austerity.Hardly,unless their concerns were crowded out by the tory supporting media.The first budget was planned to strip demand from the economy and limit growth. It was sold as a withdrawal of the credit card for ukplc. At the margins the vulnerable are paying.

    1. My claim is based on the fact that both before and during the 2010 elections, more academic economists signed letters supporting Labour's gradual reduction in the deficit than signed in support of the Conservative's austerity plans.

  2. Well said professor.

    I think you are too kind to Osborne, if he were a political tactician he would know that it is impossible for him to win an election unless the economy is growing.

    "Sure there was bad advice from some influential quarters"

    Do you have any thoughts on the state of economics in the UK? In 2010, many economists were cheerleaders for "austerity", led by Mervyn King and also Tim Besley, Goodhart, Bootle, Pissarides, Rogoff, Sargent and Vickers who all signed a letter that argued:

    "In order to minimise this risk and support a sustainable recovery, the next Government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 Pre-Budget Report."

    It is clear they were wrong.

    Osborne is a mere politician, with little or no training in economics, he can hardly be expected to get these calls right. Whereas the economists above were some of the most highly respected economists in UK. Have any of these economists shown any contrition for their mistakes?

    A million extra people unemployed, 10s of millions of workers receiving real terms wage cuts, hundreds of suicides.

    Are King, Besley, Goodhart, Bootle, Pissarides, Rogoff, Sargent, Vickers et al. going to be held to account for the terrible advice they gave?

    1. Anonymous, can you explain why it is clear the advice was wrong? Is it not a bit like global warming, i.e. we know there is a problem, but no one is sure how to handle it, and the way that would seem to be most effective is completely impractical (cease all use of fossil fuels immediately)? One problem faced by economists is that they don't know until after the event what time lags will be, and also what the unintended consequences of any policy action will be.

      It would be equally as convincing to argue that Osborne has been too weak, and not cut hard enough, but were I to do so I would at least provide some evidence in support of this view.

  3. If you move into the field of politics (with economics or with anything else) things ultimately will be ruled by the laws of politics.
    The fact that people like yourself got so easily outsmarted (and big time) by a historian shows you are simply very poor in that sport.

    1. What a strange comment from Rik:

      "The fact that people like yourself got so easily outsmarted (and big time) by a historian shows you are simply very poor in that sport."

      Simon Wren-Lewis has not been outsmarted by George Osborne.

      1) Osborne's stewardship of the economy has not been "smart" in any meaningful sense of that word. If Rik wants to argue that Osborne has been politically smart then that is up to Rik, but I don't believe that someone, as Simon Wren-Lewis says, "who time and again has put party political gain ahead of the economic interests of the economy" is smart in any context -- deluded, maybe, not smart.

      2) Osborne *is* the Chancellor of the Exchequer, not Simon Wren-Lewis. The coalition has a majority in parliament which allows Osborne to do as he will. Simon Wren-Lewis does not have that power.

      3) Osborne is not a professional economist but as Chancellor he of all people -- along with Danny Alexander, David Cameron, and Nick Clegg -- should be able to evaluate the advice given by professional economists. Instead, the public statements of Osborne and co about the macroeconomy -- "We're repairing the mess the last Labour government left us in", "There is no money left", "We've maxed out the credit card", "We've been living beyond our means", "We cannot get out of a debt crisis by more borrowing" -- are so wrong (ludicrously wrong) that they highlight that the people who should be offering leadership during a period of global recession are clueless about which economic policies are in the best interests of the people of the UK.

      Simon Reynolds

    2. are you the same Rik who was arguing for EZ austerity in the FT Alphville columns? That was'nt a winning policy either

  4. The Tories are making no intelligent effort to develop the economy. All they are concerned with is the interests of the wealthy at everyone else's expense. It's criminal.

  5. We are faced with a choice: either this coalition is accident prone, dim, and careless; or they are expressing the economic needs and preferences of particularly interest groups that are gaining important benefits from economic stagnation. These include declining wage costs, free supply of forced labour, cheap money from the BoE, a government that will defend the City against EU regulation and so on.

    We may have our damning final verdicts but in other parts of the Kingdom the evaluation of Osborne might be more generous.

    Maybe we should get back to studying "political economy"?

  6. Simon, agreement and slight dissent from me on bits of what you say. Most importantly, I agree with your reading of Osborne's entire tenure having been built on an enormous gamble - that front-loading the UK economy with 'Plan A' and Austerity might work and the electorate would reward him (him, not Cameron mind)

    Incidentally, we seem to have stopped references to 'Plan A'... wonder if 'Austerity' will now go the same way?

    Where we differ is on your observation that 'the politics may still come good for him' (perhaps dependent on what odds you offer). My judgement is that the metro-London elites of UK politics and economics have way under-appreciated the coming socio-economic consequences of some of the UK Coalition Govt's policies. This is especially the case with the 'bedroom tax' and associated welfare so-called reforms - where if ever there was socio-economic catastrophe foreseeable it is this one.

    Another example is the fools’ paradise the UK economy seems to be going through with the seeming paradox of Great Recession and yet rising employment. This paradox is maybe actually an indication of the long-term structural hole the economy may be in - if one looks at the nature of many the 'new' jobs (and the hidden unemployment of so-called self-employment, insecure contract working etc)

    The impact of all this will be significantly 'economic' and Osborne will not escape blame. His 'get out of jail card? For me that is if Cameron's superficiality and inconsistency finally emboldens his right wing and something of a putsch gets under way with calls for a compromise candidate - something I suspect that Osborne has shown some diligent tactics on so far as his personal positioning goes. And my final judgement on his politics is not that he is a good tactician (strategy non-existent. Rather he is a consummate opportunist -that only works if the opportunities come your way and time is now running out for him on that.

    1. Too true but noticeable in that " metro-London elites of UK politics and economics" is of course the BBC whose coverage of the UK's current economic woes remain almost non-existent except perhaps Today - the so-called flagship. The rest of the coverage is light weight, little, impressionistic, personal to a selected group of city boys; PM is appalling - it hardly covers any economic issues whatsoever. There is no real analysis on the BBC just the odd quacking of Preston or Flanders. BBC TV and Radio 5 is just tabloid level banter.

  7. The professor is right and I have said it all along. The great plan was simultaneously to reduce the size of the state and to lower wages as much as they could get away with. Then come election time roll out a feeble growth strategy, perhaps including the much talked about National Investment Bank, ( which the official biographer of Keynes stated was necessary if the public suspect the Tories of profligacy and boy was he spot on there when he said it a couple of years ago ) but by which time as, the professor states, maybe too late in terms of the damage Osbourne has already done to wreck the UK economy.
    The results are exactly as the Nobel Prize and Keynesian economists have predicted all along.
    It also cements the irrefutable evidence that inequality and the widening of the gap between rich and poor which shot through the roof under Thatcher and sky-rocketed under Major is still the main objective and political strategy of The Conservative Party today.
    With Thatcher and Major it was the scrapping of industry and manufacturing that ruined the real economy and increased inequality where Tesco is now the biggest employer in the country. With Cameron the only thing left for them to attack as a political entity is the Welfare State and the poor.
    We really cannot go any lower than this.

  8. "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."

    If this passage is correct, it is not clear that the slow recovery is Osborne's fault (at least, not due to austerity). If we have had a permanent reduction in supply, then most new-Keynesian models would suggest there is nothing that countercyclical policy can do (fiscal or monetary) to raise output back to its previous trend permanently. Please correct me if I'm wrong.

    An exception would be if fiscal austerity (which we normally think of as hurting demand) somehow hurt supply permanently. But this seems unlikely. The employment figures don't suggest that large numbers of workers have become discouraged as in the 1980s. There has been a drop in public sector investment, but the effect on the public capital stock is likely to be small.

  9. Perhaps Osborne can take some comfort from comments like the ones above, which accuse him of excessive austerity and profligacy simultaneously.

    The main thing I get out of the yelling at Osborne is that we have all suddenly become very clever on the subject of sovereign fiat currencies. The fact is that the public - at least those capable of understanding - have had a very thorough education on the subject of fiat currency and the absence of default risk, but - at least outside academia - that education has happened in the past four years.

    Prior to about 2010, the public, and most "public intellectuals" bought into the stuff about "national credit cards" and "running out of money", and so, I would assert, did many investors. So I think that a credible defence for Osborne to mount would be to say "Look, at the state of knowledge circa 2010, my concern was to produce policies that would be a credible defence against a panic in Sterling investors, whether or not I personally believed such a panic to be justified."

    And then Osborne can also quite credibly argue that growth isn't the only measure by which an economy can be evaluated, and going for growth in a way that led to an investor panic and the collapse of the Gilts market would also not have been all that smart.

    We've all read the MMT stuff - which has serious dangers of its own - and we are all suffering from a bad case of 20-20 hind-sight, but if we are to be intellectually honest, we have to note that in 2010 Osborne didn't know everything we know in 2013.

    It's early days for Osborne, and we should remember that there were periods when Maggie looked like one of the worst, rather than one of the best PMs, and that she also got yelled at for austerity, yet ended up setting the stage for a very long expansion, and in her spare time she radically reformed the Labour Party to the point that they even started to talk sense on occasion.

  10. @ jon livesey25 February 2013 16:45

    As a non economist "public" it falls to me to state the obvious: Margaret Thatcher was the worst Prime Minister I have ever known. It was Margaret Thatchers 1986 de-regulation of the banks and finance which directly led to the 2007 crash and the economic disaster we find our selves in. Her selfish free market economics have created an unbalanced economy in which we build nothing and our manufacturing base is decimated. It directly led to a situation where the UK was too reliant on Banking and Insurance and subsequent Governments could do nothing at that time to change direction for fear of Political disaster. Banks were too big to fail. Since the Financial Crash occurred we can now see that these free market ideas are a disaster for the UK. We must act quickly and boldly to re-balance of economy. Starting with Investment in education and infrastructure to create a dynamic growing economy. George Osbourne has not delivered and cannot for at heart he is a failed free market Thatcherite.

  11. Can you please be more clear on why UK had more to do in terms of monetary policy than US? Apart from the US enormous advantages (medium of exchange and store of value), US has also a more discretionary setup than UK.

  12. It is almost laughable that opinions are expressed as if they are evidenced statements; one is allowed opinions, but please recognise them for what they are. Mrs Thatcher's de-regulation of the financial sector had very little to do with the 2007 crash; that was much more closely instigated by the light-touch regulation of Gordon Brown's chancellorship - but even then it was not a party political thing. It was human nature to believe that the "wealth" created by credit was genuine wealth, which we had built up through the fruits of our labours. The resulting combination of human greed evinced by the financial sector and human credulity experienced by the rest of us led us to the inevitable crash; the aftermath for the UK is that, as the financial sector winds down its more ludicrous operations, and gets back to its core business offering - supporting investment in real businesses - there will be lengthy structural issues that will be years in the resolving. Infrastructure spending is unlikely to bridge that gap; it may buy a bit of time, but what if the extra borrowing to achieve it pushes rates to 5% (which is what is being charged to some house buyers)? The BoE (read taxpayer) will be sitting on a huge loss on its gilts, and more tax revenue will go on servicing debt, leaving less for other services. Everybody - particularly the trained economists - should stop writing about wish-lists, and write about the hard facts. We don't have real austerity, so that is not the problem. What we do have is an economy based on something that no longer exists - trading assets amongst ourselves to create the illusion of income. We now need to move the economy back to something more genuinely productive, and while I can see the attraction of saying big words like "education" and "infrastructure", I am afraid I cannot agree if the infrastructure means a high speed rail line that reduces a 3.5 hour journey to 3 hours, or where education means providing further academic education for youngsters instead of the real skills need for the businesses yet to be started by entrepreneurs. Don't forget, big companies shed jobs, they do not provide jobs growth.


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