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Here we go again: Chancellor warns of ‘cocktail of threats’ and ‘complacency’

Sound familiar?

But our recovery – already facing powerful headwinds from high oil prices and the debt burden left behind by the boom years – is being killed off by the crisis on our doorstep.

This was the Chancellor writing in the Daily Telegraph in June 2012, setting out to blame the Eurozone for the increasingly obvious fragility of the UK economy in the first half of the last parliament.

Only three and a half years later, the BBC this morning is leading on the Chancellor’s latest retreat.

Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats. For Britain, the only antidote to that is confronting complacency and sticking to the course we’ve charted.

    I worry about a creeping complacency in the national debate about our economy. A sense that the hard work at home is complete and that we’re immune from the risks abroad. A sense we can let up, and the good economic news will just keep rolling in.

(The speech is not released at the time of writing: I am basing this on the reporting so far, with the preceding quotes drawn from the Guardian and BBC.)

Once more George Osborne’s successes born of ‘hard work’ and ‘not letting up’ are in jeopardy as those in the rest of the world presumably succumb to laziness and letting up.

I suspect news that the prospects for the UK economy are less rosy than supposed at the general election or the autumn statement will not come as much of a surprise. All the economic reforms that the Chancellor wanted to happen did not happen. The march of the makers did not happen; our trading relations with the rest of the world have not been restored to balance; the reliance on consumers borrowing to spend and house price excess has not gone away; economic growth has been dismal; public debt has not been reduced etc. etc..

But the Chancellor is not interested in addressing why. He is interested only in protecting his toxic political and economic legacy.

He therefore asserts that ‘sticking to the course’ [presumably the latest euphemism for spending cuts] is the only thing that protects us from the more severe economic dislocation suffered in other countries.

The alternative view is that ‘sticking to the course’ in the UK and the rest of the world remains fundamentally misguided, and is exacerbating economic dislocation.

As we have repeatedly argued on the TUC's ToUChstone blog, the only reason the Chancellor’s ‘sticking to the course’ did not fully derail the UK economy in the last parliament was that he didn’t stick to the course. The statement above from June 2012 was rapidly followed by the announcement of extra support for banks and subsidies to house-buyers, and then in 2013 by the Bank of England’s ‘forward guidance’. On top of this, the Chancellor reversed his spending cuts (see here for figures).

And he was not alone. Most importantly the Federal Reserve began another colossal programme of quantitative easing (here). And even European governments retreated a little on spending cuts.

But both UK and US stimulus have now been reigned in. It is impossible to conceive that global commodity price falls and global financial conditions are not in part related to the removal of the Fed’s stimulus, that emerging economies did not benefit from stimulus in advanced economies and are now suffering in part because it has been withdrawn. (While the ECB has taken the stimulus baton, the global reach appears far more restricted.) As well as anything else, advanced economies are in turn exposed to emerging market economies through investments by banks, pension funds etc..

The alternative reality is that the world economy (including the UK) has been in a precarious condition ever since the economy came off the bottom of the financial crisis:

  •     underlying problems of indebtedness (see chart at end of blog) and financial fragility remain unresolved
  •     these fragilities are exacerbated by asset price inflations caused by central bank action
  •     demand has been severely depressed by the legacy of indebtedness on business and household spending
  •     downward pressures on demand have been exacerbated by politically motivated but economically irresponsible spending cuts
  •     the ongoing threat of deflation reflects the consequent vast scale of idle resources, of unemployment, underemployment and severe declines in real wages.

Financial markets may be reacting to immediate fears about China, but there is much more to fear than China alone.

The real complacency is pretending that the sole compass of this brutal, fragile and complex situation is ‘sticking the course’. To play politics while Rome burns.

Annex

Bank for International Settlements indebtedness figures (in blue on RH scale)

This post originally appeared on ToUCHstone blog and is cross-posted here with permission.

Work areas: Economy and Industry.

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