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Osborne's economics

George Osborne’s speech at Conservative party conference last week contained little content but much underlying confidence. While both David Cameron and Osborne have been wary of calling the recovery before it has become sustained, they must both feel a great sense of relief that finally the UK economy appears to be growing again. Three years of flatlining did not provide an attractive platform from which to campaign.

Osborne was careful to drive home his message that Labour created a mess of high deficits and rising public sector debt that it was his job to clear up. With this argument, he was going with the grain of public opinion, which on balance still blames Labour for the borrowing. Osborne complained that Britain was made poorer by the financial crisis and stated that under Labour ‘no one prepared for boom and bust … banks get bailed out and…government budgets spiral out of control.’  Of course that is unfair – before the crisis Osborne did not call for a surplus; the impact was huge compared to any surplus a government would have been running; and would he really not have bailed out the banks that were threatening the global financial system? But that is the message nevertheless and it should come as no surprise to Labour members. The mythmaking in the speech continued – somehow it was Labour which favoured the rich and increased inequality and it was ‘the historic work of this [Conservative] party to put that right’.

In a speech with echoes of Gordon Brown (‘We are at our best …’), the chancellor announced that he would aim to run a surplus (borrowing less in a year than spending) by some point in the next parliament if the recovery was sustained. This was an attempt to emphasise an economic credibility dividing line with Labour. The extra spending cuts to pay for surpluses will come largely from further social security cuts. Osborne committed to growing capital spending (which includes government spending on infrastructure) in line with national income at the same time. In addition, his references to low taxes and people keeping ‘more of their income – tax-free’ hinted at a desire to cut taxes on top of the recent increases in the personal allowance.

As I have argued before, the Conservatives seem determined to seize a rare political opportunity to reset the size of the state compared to the rest of the economy. Cutting back on current spending and releasing better-than-expected tax revenues as tax cuts means government is locked into spending cuts irrespective of the GDP growth rate. Whether this is achievable remains to be seen. Central government spending cuts are only just becoming apparent to most people and the ability of government to deliver services people require, including properly funding our armed forces, is at or near being compromised. For the moment, the political impact is minimal. The further attack on social security is politically astute. Unless unemployment and the risk of unemployment rises, pushing more people into poverty, the chancellor probably calculates there remains room for further cuts. Labour members will already know of people suffering under current policy. The rise of food banks seems both very British (our voluntary spirit and desire to help others coming to the fore) and really not British at all (in the sense that they should not have to be a feature of our society). Osborne, in effect, promised more to come.

There was little in his speech about how the coalition will tackle the squeeze in living standards people have faced over the past decade. Indeed, his aim seems to be to encourage an increase in household debt, in both mortgages and consumer credit (data just out shows 75 per cent of new car purchases are being financed by credit). Labour’s focus on living standards should help unite economic policy with people’s everyday experience. However, there are two risks. First, the marginal voter may begin to feel better off as he/she benefits from low mortgage rates, stable inflation, and possibly higher wages. That is why our theme should be investment in the future, from education to infrastructure. Second, actions to mitigate rising inequality without fundamental economic reform will be merely treating symptoms. The underlying disease – inequitable participation in our common economic life – will remain, and so will those symptoms to a lesser or greater degree

This article was first published by Progress on 7 October 2013.
Progress, 7 October 2013, 08/10/2013

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