George Osborne at the House of Lords Treasury Select Committee. Photo Parliament TV, watch at http://ow.ly/Spni3
Is Osborne now saying his new cuts are for the next financial crisis?
There was a significant exchange last week (Tuesday 8 September) ago in the House of Lords Treasury Select Committee.
Sir Andrew Turnbull, head of the Civil Service (2002-2005), head of the Treasury (1998-2002) challenged the Chancellor on the real purpose of his spending cuts. Reiterating his support for the initial cuts (discussed further below), he wanted to explore the rationale for aiming at a budget surplus:
What I haven’t really understood is why the priority given to not just getting this deficit down to zero by 1920  and then on into surplus.
[You can enjoy it here from 15:55:40.]
In particular, Turnbull made the quite radical (but wholly valid) argument that government debt served the further purpose of creating assets into which households can invest:
And why is it so wrong to borrow if you are creating assets at the same time. Why are you not looking at the total balance sheet? The other issue is when you talk about debt you talk about debt as if it is impoverishing the future. The majority of UK government debt is owned by UK citizens who have an asset. They own the gilt. So they pay taxes to you, certainly, and then they get the interest in return. So the idea that this debt is impoverishing people I think is an economic fallacy.
And then, the jugular:
I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can’t see the justification for it.
The Chancellor appeared unruffled, but was about to let a big cat out of the bag:
We just disagree. If tomorrow the financial crisis were to hit us, we would have a lot less firepower than we would have if our debt was half [twice, presumably] what it is today as a percentage of our national income. I think it is a responsibility to prepare your country for whatever the global economy throws at it. And you know a debt to GDP ratio, which if we had not done anything about it, would now be approaching 100 per cent of national income is something that is a bit uncomfortably high, frankly. And international observers of western economies tend to use that as a cut off point.
The Chancellor has previously argued that cuts are good for growth, but now he’s arguing they are in preparation for a financial crisis.
Plainly he will have been alive to the increased risk of financial crisis given the turmoil in markets ahead of his appearance at the Committee, as well as the material deterioration in many economies across the globe, including a degree of weakening in the UK. But let us get this straight.
After a global financial crisis of unprecedented scale, in 2008 the government was obliged to step in and rescue the financial sector. With the worse of the crisis done, the taxpayer was obliged to foot the bill. Turnbull was among 20 economists and policymakers who in February 2010 (i.e. just ahead of the general election) wrote to The Times demanding an intensification of spending cuts to bring the public finances back into order. As we all know, in office George Osborne ploughed ahead with the most severe spending cuts since the 1920s. Now seemingly even without their backing he ploughs on, with the economically spurious and wholly political device of budget surplus legislation (see here; nor are we alone – e.g. Canada).
But while the Chancellor may pretend that the goal of a budget surplus is feasible, the recommended actions did not get the public finances back in order. The ultimate goal of policy was to avoid the debt to GDP ratio hitting 90% of GDP, devised by the Harvard Economist Ken Rogoff (Dean Baker calls him Mr 90 per cent). But on the internationally-comparable measure of public debt, that is pretty much exactly where UK public debt has ended up. Taking the same recommended course, much of the world has ended up in the same place – see this newly published assessment from the Bank for International Settlements.
And we note in passing that the Chancellor now seems to have modified the threshold that he was seeking unsuccessfully to avoid – now it seems it’s all about 100 per cent.
On top of all this, it is now acknowledged that we might still confront financial crisis. So the taxpayer has footed the bill for exactly what? How can this ‘long-term plan’ be the right plan for the economy? How can this be a good deal for working people?