Was the Chancellor Right on Fiscal Policy?
… aides to George Osborne think the growth rate vindicates their stance to hold firm with deficit reduction in the face of continued economic disappointment over the past three years.
In other words, the Chancellor’s advisors opinion seems to be ‘we were right after all’.
I’m afraid that not only does this not stand up to close analysis, but it was also an entirely predictable response.
Those arguing for a stimulus at the Budget are not saying that without a stimulus we will face perpetual contraction, what they are saying is that a stimulus now would lead to a quicker recovery, lower unemployment and better economic outcomes than would otherwise be the case.
The worry now is that growth expectations are so weak, and the public so accustomed to bad economic news that any growth will be hailed as a sign of success. The fact that some people are seeking comfort in the experience of the early 1980s is a reason for concern.
What we now have is a recovery that is coming three years later than expected, with unemployment higher than expected, little evidence of rebalancing (yes manufacturing is doing better but the recovery is being led by consumer spending, business investment remains weak), the deficit much higher than anticipated and living standards undergoing a severe squeeze.
If this is the definition of successful economic policy, I’d hate to see a failure.
Still, as I’ve noted before, I’m not surprised by this development. This is after all the Government that reacted to loosing the triple A rating by basically arguing – ‘the fact that we have lost the AAA means that we must stick to our plan to retain the AAA rating’ and that celebrates a sign of economic weakness as a policy success.