The June 2010 Budget: An Historical Mistake
Former MPC member David Blanchflower has an excellent article in the Independent this week entitled “George Osborne is destined to be remembered as the most inept Chancellor in British history”. As can be gathered from the title, the article doesn’t exactly pull its punches.
I highly recommend reading it, it is especially good on the crucial role of falling real wages in explaining our current predicament.
But maybe calling George Osborne the ‘most inept Chancellor in British history’ is taking criticism at bit too far. The competition here is pretty stiff and George Ward Hunt probably deserves that particular accolade. After rising to give his speech on his only Budget day as Chancellor in 1868, he discovered he had left the red box containing at home.
Had George Osborne made a similar error in June 2010, things might have turned out for the better. While it may be too early to judge the overall record of Osborne as Chancellor (although the portents are not looking good), the results of his June 2010 Budget are already clear to be seen.
Growth, as we discovered last week, since the second quarter of 2010 has been just 1.1%. This compares to an initial OBR forecast of 6.5% over the same period. The self-imposed fiscal rules have been missed. We are not only underperforming our international peers but underperforming previous recoveries. The economy is still some 3% smaller than it was in 2008.
An old feature on the BBC website lists the greatest ‘budget blunders’ of modern British history including Snowden’s budget of 1931, Barber’s of 1972 and Lawson’s of 1988.
It is already clear that Osborne’s budget of 2010 will one day rank alongside them. The Chancellor’s allies will no doubt argue that it is too early to tell – yes we may be suffering pain now but the price will be worth it in terms of a better performance in the future. There is no evidence that this is correct.
…it is also vital not to overstate the OBR’s assessment of lost economic capacity – even if there is less scope for the economy to grow than we previously thought (by no means an uncontested fact – as the OBR say there are ‘enormous uncertainties’ around any such assessment) that does not mean that there is no potential to boost growth now. Even the OBR’s arguably conservative view is that we still have an output gap of 2.5 per cent – there is plenty of potential for growth rates to increase over the years ahead (and there could be even more if access to credit could be improved).
So the OBR forecast shows there is definite scope for increased demand to boost growth; and that even if – in the worst case scenario – increased government stimulus was to lead to a small increase in the interest rates we pay on our national debt (a contentious point in itself) the impact on the overall costs of government borrowing would not be significant. Plan B is possible – the OBR say so.
Despite two new sets of forecasts this picture has not fundamentally changed. The OBR still believes that the economy is operating below capacity and there is room for an expansion of demand. In other words, even if things do get better in the future that will not be a defence of Osborne’s current policies. In 2010, 2011 and 2012 there was an output gap – had the government expanded demand, growth would have been higher and unemployment lower.
The austerity enacted in June 2010 has depressed demand, reduced growth, reduced living standards and led to unemployment higher than it had to be.
And yet despite all the pain, the deficit reduction plans are wildly off course. The triple AAA rating is once more under threat.
In June 2010 the Chancellor made a judgement call – he decided that the economy was strong enough to bear an aggressive fiscal tightening. As is now apparent to anyone viewing the UK’s recent economic performance, he made the wrong call.
In terms of poor macroeconomic decision making, I believe future historians will rank the June 2010 Budget alongside Churchill’s 1925 return to gold – a decision so bad that Keynes penned ‘The Economic Consequences of Mr Churchill’ in response.
Unless the Chancellor thinks again there is every chance that the UK will experience a lost decade. Just such a scenario is now the OBR’s central forecast.