With this budget, the Chancellor is taking us into unknown territory
George Osborne has often been described as the most political of chancellors. His economic strategy prior to the election consisted of fuelling a housing boom, whilst continuing with austerity policies that are choking off aggregate demand in large swathes of the economy. This approach was designed to appeal to the bedrock Conservative coalition of wealth business and financial elites and the “middle England” Daily Mail core vote. The latter, in the face of any compelling alternative discourse in the political mainstream, has imbibed the madness of austerity economics. In a nutshell this is the basic fallacy that countries should be run like shrewd households. Public finances should always be steered towards the same fiscal prurience as private ones.
As many of the most vulnerable Europeans have found out, from Athens to Dublin, Glasgow to Lisbon, this not only doesn’t work, but it actually leads to a downwards spiral. The recent Greek referendum result shows that people at the grassroots are learning this the hard way. But our political elites remain in thrall to a set of policies that will only benefit the financial class and wealthy asset holders who can hoard their money at the expense of the rest of us.
Keynes and other intelligent economists showed long ago that this was nonsense. It is a fallacy of composition. What is true for an individual is not true for the collective good. In a complex, aggregate and dynamic economy, debts in one part are the potential for surplus and future growth in another.
Modern economies exist on credit. If everybody is saving and reducing their spending, the result is an overall decline in growth. That is why some government debt in times of economic downturn and crisis can finance spending, investment and a return to stable prosperity for the many, rather than the few. Indeed, because governments can borrow far more cheaply than the private sector, running government deficits is far more preferable to allowing the private sector to get into massive debt to finance economic growth. This, of course, is exactly what happened during the last financial crisis.
The only thing that has kept the UK economy in statistical (as opposed to real and sustainable) growth has been Osborne’s housing bubble. The deep and cruel irony is a situation where unsustainable private debt is being encouraged while Osborne and his fellow neoliberals shrink the public realm through cuts and sell-offs of public assets.
Now that the election is out of the way, more years of austerity and public sector cutbacks are on the agenda. The scale of cuts proposed is out of proportion to anything we have seen so far. Mr Osborne is taking us into unknown territory in terms of cuts to working tax credits, housing benefit and other much needed sources of income for vulnerable households. Meanwhile, cuts to inheritance tax will line the pockets of the wealthy and more affluent home owning families even more, further fuelling the housing boom.
Recent evidence from the Office for National Statistics suggests that the gap between rich and poor in the UK is moving ever closer to the experience of the United States. Osborne’s economics has massive wealth inequalities which will multiply these effects. Alongside growing social inequality, there is a massively uneven geography of wealth in the UK. Previous welfare cuts have hit the old industrial cities and regions of the north, Scotland and Wales hardest. These are the areas where there are greater numbers of poor and low income groups. More affluent part of the south and east of England emerged relatively unscathed from the last five years of austerity. This is likely to change with the new deeper round of cuts. It is not just the soft targets of the non-working poor that will be hit. The average British family’s real income has fallen significantly over the last decade. Osborne’s political strategy may well fall foul of his dubious grasp of economics.