From the TUC

The June 2010 Budget: An Historical Mistake

29 Jan 2013, by Guest in Economics

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.

Over a year ago now, Nicola wrote that:

…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.

7 Responses to The June 2010 Budget: An Historical Mistake

  1. John
    Jan 30th 2013, 5:30 am

    If he is inept now, he is going to be hated before his shelf life date comes to an end. I am not an economist, nor a fiancial accountant, but I cannot but help make a comparison with a financial director of a major plc. Something tells me that with no financial improvement with that company after nearly three years, then the finance director would have definitely been sacked – something that this negative government are only ´´good´´ at doing; sacking people!

    Thankyou for this article, I plan to read The Independent piece later.

  2. Tyler
    Jan 30th 2013, 9:20 am

    It’s going to be pretty hard for Osbourne to be remembered as the most inept Chancelloor in history when you have Gordon Brown’s legacy, and what Osbourne is being forced to do to rememdy those mistakes, to take into account.

  3. Keith reeder
    Jan 30th 2013, 12:05 pm

    Tyler, if it wasn’t so embarrassing to read, I’d be laughing at your oh-so-predictable – and baseless, unfounded-in-any-objective-facts – dig at GB: there’s simply no bloody comparison between whet he did and the utterly shambolic mess that Gideon is leaving behind him.

    The simple fact is this: it will take generations to recover from Osborne’s evisceration of the UK economy, and even he has stopped blaming Labour for the mess we’re in.

    Get on message, there’s a good troll…

  4. BenM
    Jan 30th 2013, 12:11 pm

    @Tyler

    Osbourne (sic) was not “forced” to do anything.

  5. Tyler
    Jan 30th 2013, 12:55 pm

    To borrow from Tullet Prebon’s Dr Tim Morgan:

    “Between 2001-02 and 2009-10, Britain
    added £5.40 of private and public debt
    for each £1 of ‘growth’ in GDP (fig. 1.3).
    Between 1998 and 2012, real GDP
    increased by just £338bn (30%) whilst
    debt soared by £1,133bn (95%) (fig.
    1.4). Asset managers have a very simple
    term to describe what happened to
    Britain under Brown – it was a collapse
    in returns on capital employed.
    No other major economy got it quite
    as wrong as Britain under Brown, but
    much the same was happening across
    the Western world, most notably in
    those countries which followed the
    disastrous Anglo-American philosophy
    of “light-touch” financial regulation.”

    So this idea of continued debt financed deficit spending enabling the UK to grow our way out of debt is simply laughable. If it couldn’t happen in times of good global growth it is not going to work now in bad times. Osbourne simply has no choice but to doo something less the UK ends up in a debt/deflation trap like Japan.

    Full report – worth a read (especially you, Duncan) here:

    http://www.tullettprebon.com/Documents/strategyinsights/TPSI_009_Perfect_Storm_009.pdf

  6. BenM
    Jan 30th 2013, 1:53 pm

    @Tyler

    What Osbourne (sic) is doing is in direct opposition to what needs to be done.

    Data are not on your side.

  7. Tyler
    Jan 31st 2013, 10:31 am

    So tell me BenM, what needs to be done?

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