The strong economy: how Brexit dishonesty began

The first quarter growth figures for the UK are terrible, with GDP per head falling slightly, and they are consistent with an underlying economy which is very weak. As you can see from the chart below, quarter on previous year’s quarter growth in GDP per head was reasonable in 2014, but has been falling since. The economy has been suffering from Brexit uncertainty and the Brexit induced falls in real wages, and as I guessed immediately after the referendum the temporary boost to competitiveness has not been enough to offset this. (More discussion here.) [1]

UK GDP per head quarter on previous year’s quarter growth: source ONS

As Will Hutton says, in any other world there would be national soul searching. But the reaction of the Chancellor to the latest data is that it "reflects some impact from the exceptional weather that we experienced last month, but our economy is strong and we have made significant progress". The Chancellor says the economy is strong when GDP per head, the best measure of average prosperity we have, is falling. And the ONS said the weather had a relatively small impact.

This kind of Orwellian description of the economy (weak is strong) is something that I first noticed in the run up to the 2015 election. The first three years of the Coalition government were terrible in economic terms, and the government did not try to pretend otherwise. Everyone was expecting a recovery and it didn’t come. But that opened the way for dishonesty to emerge from 2013, as the economy began growing again.

UK growth in 2013 and 2014 was really no more than a return to normal growth, but it was enough for both the government and journalists to talk about a recovery, even though there are strong reasons for reserving the term recovery for growth that returns us to a pre-recession trend level of output. The idea that 2013 vindicated austerity was truely Orwellian: no economics student anywhere would get away with such a statement. The government started talking about a strong economy during that period.

The strong economy line became the Conservative’s key claim in the 2015 general election. The economy was pretty well their only strong point among voters, but that did not make the claim true. In reality we had the worst ‘recovery’ in centuries: it was not really a recovery at all because we did not move any closer to pre-crisis trends. Yet parts of the media - what I called mediamacro - accepted the strong economy line, and largely ignored an unprecedented fall in real wages and the associated decline in productivity growth the likes of which we have never seen before. For that reason I argued that the Conservatives won the election because of mediamacro.

When we see Brexiters repeat nonsense about borders between the EU and Switzerland, tell lies about how the EU stops trade with Africa and how they will spend the Brexit dividend they are simply continuing where Cameron and Osborne left off in describing the economy as strong. What Conservative politicians have learned is that the BBC in particular does not have either the expertise or the will to call Conservative politicians out on doublespeak. The more unscrupulous the politician the more they have exploited that weakness in our democracy.

[1] The response of Brexiters is to keep saying its not as bad as the government’s pre-referendum short term forecast. For some reason its a line that reminds me of this.

Controlling the past

In his novel 1984 George Orwell wrote: “Who controls the past controls the future: who controls the present controls the past.” We are not quite in this Orwellian world yet, which means attempts to rewrite history can at least be contested. A few days ago the UK Prime Minister in Brussels said this. [3]

“When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”

In other words if only those lazy Greeks had taken the difficult decisions that the UK took, they too could be like the UK today.

This is such as travesty of the truth, as well as a huge insult to the Greek people, that it is difficult to know where to begin. Let’s start with the simple statement of fact. According to OECD data, the 2010 government deficit in Greece was 11%, and in the UK 9.5%. The Prime Minister is normally well briefed enough not to tell outright lies. But look at this chart you can see why the statement ‘virtually in the same boat’ is complete nonsense.

General government financial balances, % GDP: source OECD Economic Outlook

  

The real travesty however is in the implication that somehow Greece failed to take the ‘difficult decisions’ that the UK took. ‘Difficult decisions’ is code for austerity. A good measure of austerity is the underlying primary balance. According to the OECD, the UK underlying primary balance was -7% in 2009, and it fell to -3.5% in 2014: a fiscal contraction worth 3.5% of GDP. In Greece it was -12.1% in 2009, and was turned into a surplus of 7.6% by 2014: a fiscal contraction worth 19.7% of GDP! So Greece had far more austerity, which is of course why Greek GDP has fallen by 25% over the same period. A far more accurate statement would be that the UK started taking the same ‘difficult decisions’ as Greece took, albeit in a much milder form, but realised the folly of this and stopped. Greece did not get that choice. And I have not even mentioned the small matter of being in or out of a currency union. 

From the Prime Minister, let’s move to Janan Ganesh, FT columnist and Osborne biographer. He says that Osborne’s secret weapon is his “monstrously incompetent adversaries”. If only the Labour party had “owned up to its profligacy in office during the previous decade” it would have more authority in the macroeconomic debate today. I have written a great deal on this, but actually you can get the key points from the chart above. If you have a target for government debt which is 40% of annual GDP, and nominal annual growth is around 4%, you want to aim for a deficit of 1.6% of GDP. Labour clearly exceeded that, which is why the debt to GDP ratio drifted up from 30% of GDP in FY 2000 to 37% in FY 2007 (OBR figures).

A mistake? Yes, particularly in hindsight. Profligacy - absolute nonsense. The debt to GDP ratio in FY 2007 was below the level Labour inherited, which does not sound like a profligate government to me. Nor does a deficit in 2007 that is only about 1% above a long run sustainable level signal profligacy.

What blew the deficit was the recession. Ganesh acknowledges that, but says “there was no excuse at all for pretending that a recession was never going to happen “. This is pure hindsight stuff. In 2007, the consensus was that the UK was close to balance in terms of the output gap. It is only subsequently that some have tried to suggest, rather unconvincingly, that 2007 was really a global boom. So Labour was not pretending anything.

But why this urge for Labour to apologise for what is a relatively minor misdemeanour which had no major consequences. [1] Because it plays to the Conservative narrative: their version of history where Labour was responsible for the mess that the Conservatives had to clean up. Labour has been forced by mediamacro to buy into the deficit reduction narrative enough as it is: asking for more is just self-serving political nonsense.

As I explained here, it is really important for the coalition parties to sustain this narrative, because without it Osborne’s record looks pretty awful. When people realise that this poor record was not an inevitable result of ‘Labour profligacy’ or any other mess Osborne inherited, and that to focus on reducing debt was a choice rather than a necessity, then the responsibility becomes clear, and support for yet more sharp austerity quickly disappears. [2]

As for the phrase ‘monstrously incompetent’, I really wonder what world Ganesh lives in. When I look back at Chancellors of the past, I see few candidates for this label, and Brown and Darling are not among them. However what term would you use for a Chancellor that freely chose a policy of premature austerity, and as a result lost every UK adult and child resources worth at least £1,500? That unforced error does sound like something worth owning up to. 

[1] The worst that can be said is that, had Labour kept debt at 30% of GDP, they might have felt less constrained in 2009 and undertaken greater countercyclical fiscal action. But George Osborne argued against the countercyclical fiscal actions Labour did take in 2009! 

[2] That is of course an unsubstantiated conjecture, and the following is not meant to be evidence, because its a small and unrepresentative sample. In a previous post I mentioned a debate that Prospect magazine organised between myself and Oliver Kamm. I hadn’t realised until someone pointed it out (along with a rather biased editorial in that same issue), but readers get a chance to vote after reading this debate on whether ‘austerity is right for Britain’. At time of writing, we had 17% voting Yes and 83% voting No.

[3] HT Ari Andricopoulos