George Osborne’s narrative is collapsing
Most Touchstone readers will wince every time they hear a minister talking about ‘maxing out the nation’s credit card’. Those of us old enough to remember can hear the direct echoes of Mrs Thatcher’s housewife’s purse, which she used to justify what in retrospect look like quite mild cuts in spending.
Yet this simple narrative has worked for the government. A majority still believe cuts are necessary (even if they want them to be temporary and reject the small state ideology that drives a good part of the cuts/public service “reform” agenda).
We can summarise ministers’ arguments as:
Labour spent too much and left us with a huge bill called the deficit. The overwhelming priority must be to close that deficit and we will do that in four years. That is why we have to make painful decisions to cut spending and raise VAT and other taxes. If we don’t the economy will collapse as markets lose confidence.
The trick here is ignoring that tax income depends more on the level of economic activity than tax rates. This might be rather obvious as soon as you point it out but the success of the government narrative depends on most people thinking the deficit is defined by public spending and tax rates alone.
Yet policies that depress the economy will make the deficit worse as the tax take falls. Spending money can pay for itself if it results in greater economic activity that raises more in tax – what economists call the multiplier effect.
But the conditions for this sleight of hand to work are disappearing.
- The IMF and NIESR are warning that the government is unlikely to meet its deficit reduction target as the economy is too depressed.
- Increasing numbers of people – including many Conservatives – are calling for tax reductions to stimulate the economy.
But calling for a tax cut goes against the central simple plank that we have to cut spending or raise taxes as we have ‘maxed out the nation’s credit card bill’.
Conservatives make it even more difficult for the government’s narrative by concentrating on the 50p rate for those earning more than £150,000 thus breaching the already very tattered claim that ‘we are all in this together’. Employing an advocate of ending maternity rights as a key adviser hardly helps here either.
Narrative collapse is perhaps the most serious problem for any modern politician.