After a rollercoaster week for Britain’s chancellor, his eighth budget has been approved. George Osborne will be breathing a sigh of relief. After proudly announcing his budget on March 16, things began to unravel just 48 hours later, thanks in part to the shock resignation of the work and pensions secretary, Iain Duncan Smith.
The furore over plans to cut disability benefits brought about a farcical backtrack on the issue and an effective rewrite of large parts of the Budget. This script could have easily formed part of an episode of the political satire The Thick of It.
The reality, however, is that the chancellor has presided over countless failures, from missed targets to growth downgrades. Worries over how Osborne will now fill the £4.4 billion gap that has resulted from the U-turn on welfare cuts are overblown. The UK economy remains in a poor state, despite and indeed arguably because of his budgets and much vaunted long-term economic plan.
Two of Osborne’s notable failures are his fetish for a budget surplus and his seeming unwillingness to invest and spur growth.
Osborne has set himself the target of achieving a budget surplus by 2019-20. This target, in truth, has no basis whatsoever in economic theory. It is a fiction invented by the chancellor that, along with connected rhetoric of “living within our means”, is part of a naked attempt to reduce the size of the state. It constitutes an attack on the principles of collective interest and mutual support that have underpinned the welfare state in the UK from 1945 onwards.
In his latest budget the chancellor loosened fiscal policy – for example, he announced several tax giveaways favouring higher earners. This pragmatism partly reflected the slowdown in growth. But the result is that Osborne faces having to make deeper cuts in the future to meet his budget surplus target. This translates into even more austerity coupled with poorer public services. One wonders why he needs to adopt such a strict budget surplus target when the realities of the economy suggest that a looser fiscal stance would be more appropriate. Perhaps ideology is ruling economic policy?
The truth is that the budget surplus target is neither needed nor justified. Osborne, in short, would do better to target other objectives such as that of full employment. His fiscal mandate is ultimately a distraction from the real policy interventions needed to revive the fortunes of the UK economy.
Route to recovery
Osborne’s second major failure relates to the routes he is using to bring about an economic recovery. In his view of the world, cuts in the budget deficit and the return to a budget surplus will be matched by a revival in the fortunes of the private sector, via higher investment or high exports (or ideally both). Growth in the private sector, he hopes, will fill the gap left by the public sector.
This view is wrong on several counts. First, it fails to see how the state can lead in the growth process – not just by investing in vital infrastructure, but also by supporting the private sector through, for example, an industrial strategy. The fact that the government has cut capital expenditure is a real concern here and highlights the contradictions in the government’s own growth strategy.
Second, there is the fact that the UK is reliant on a budget deficit to offset imbalances in other parts of the economy. With the continuation of the trade deficit and the continued sluggishness of business investment, the budget deficit has provided a vital prop to the UK economy by adding to aggregate demand.
The growth of the UK economy, in recent years, has come mainly from households running deficits. This is not sustainable. The government, through its use of the budget deficit, has a role to play in re-balancing growth away from consumption and towards investment. This it can do through increasing spending on capital investment projects. It can look to offset, in this case, the failure of private business to use its own excess funds to invest and export more.
But none of this is happening. Instead, we face the reality of the UK government sticking to an arbitrary budget surplus target that will restrict growth and lead to a more unbalanced and precarious economy.
Osborne’s failure, in essence, stems from his lack of understanding of basic economics. What he fails to grasp is that the government has a vital and essential role to play in supporting aggregate demand when other parts of the economy are spending too little. We should worry less about the government spending too much and focus on policies that revive investment and exports.
***This article was published at the Conversation (see here). It replaces an earlier blog post called "Budget reflections: Bad economic policies underpinned by bad economics"