Budget Statement

Lord Skidelsky Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, we are invited to discuss the effects of the Budget on the economy. Let me state my views right at the outset. I believe that there are lots of small, good things in the Budget, which have been pointed out, but also quite a number of sleights of hand, which have also been pointed out. However, the effects of the Budget and of the Chancellor’s budgetary strategy in general on the economy have been largely negative. I believe that the austerity policy has slowed down the recovery of the economy and made it more fragile. It has also slowed down the reduction of the deficit, which I think we all want to see.

Many noble Lords have been discussing the challenges of the future and of the new normal. All those are very important. The noble Lord, Lord Desai, even said that we were living in a post-Keynesian age. But as long as we have spare capacity in the economy we are living in a Keynesian age. I, too, have my views about the future and I hope to be able to expound them in an interesting way in future debates. However, at the moment, we are not fully recovered and the recovery is not fully secure. I want to concentrate on the effects of budgetary strategy on the present situation.

One obvious thing to say from the start is that the Chancellor has failed to meet his deficit reduction targets. That is very obvious but it is not much mentioned any longer. He inherited a prospective deficit of £149 billion in 2010-11, equivalent to 10% of GDP. He promised to get this down to £20 billion or 1% of GDP—or zero, depending on your definitions—by 2015-16, mainly in spending cuts. By this fiscal year, the deficit should have been down to £60 billion. In fact it is projected to be £108 billion, or 6% of GDP. Now the Chancellor says he must cut spending by another £25 billion, which would be £62 billion in total over four years, to meet his target. The key question is: why did he fail on this crucial test—the test on which he staked his credibility in 2010?

In order to answer that, we have to start by distinguishing between fiscal tightening and deficit reduction. They are not the same thing. Tightening is raising taxes and cutting spending. The effect of these measures on the deficit depends on what happens to the Government’s revenue—the other side of the balance sheet—and that depends on what happens to the economy. Here we come to the key explanation of why the Government have failed to hit their targets. The Chancellor has done the tightening all right but the economy has not grown as expected. George Osborne expected the economy to grow by 2.3% in 2011, by 2.8% in 2012 and by 2.9% this year. In fact it grew by 0.9% in 2011, 0.3% in 2012 and 1.8% in 2013. The economy started collapsing almost from the moment George Osborne took office and because it did not grow according to plan the Chancellor has been forced to announce further tightening.

Was this just bad luck? I do not think so. The official line is—it is always is when policies do not work out as expected—that sound measures were blown off course by unexpected events; these being the Greek sovereign debt crisis, European stagnation and so on. Then the argument goes that to have abandoned austerity at that point would have been fatal. The markets would have done a bear on sterling and things would have been a lot worse. By sticking to his tightening, the Chancellor was able to continue to borrow cheaply. In his Budget speech George Osborne claimed that debt interest payments would have been £42 billion more had he not stuck to the policy.

I obviously do not have time in the two or three minutes left to say why I think that whole set of arguments is fallacious. But let me just say that the Chancellor’s policy was based on the wrong theory of the relationship between the Budget and the economy. It is as simple as that. He believed that if the Government cut their spending, the private sector would take up the slack. That is simply untrue when we are in a slump. If the private sector is tightening its belt—either reducing its debt or increasing saving—the last thing the Government need to do is to be tightening their own belt at the same time for the obvious reason that the two sets of tightening will reduce total spending in the economy. If there is a reduction in total spending in the economy there will be reductions in investment, output and employment. The Government cut their spending but so did firms and households. No wonder the economy went into a nosedive. I do not think it takes rocket science to work out that that would happen. The TUC just the other day suggested that we have an investment gap of £50 billion as a result of these policies.

What about the present upturn? Surely that is a vindication of austerity. It may be three years late—later than he thought it would happen—but it has still happened. I do not think that is as a result of austerity. It is true that employment fell less than output between 2011 and 2013 and the Government have congratulated themselves on the number of new private sector jobs that have been created—1.7 million on the present count as the Minister said in his introduction. However, the headline unemployment figure—the claimant count—has ceased to be a reliable measure of the amount of slack in the economy. In the past two years the private sector has created a large number of bad jobs—part-time, minimum-wage and zero-hour contract jobs—to replace the better jobs that have been lost. That is why productivity has fallen. Any job is better than no job, but we need a measure of underemployment and economists have been thinking of different sets of measures. On those measures, underemployment in the United Kingdom amounts to about 10% of the workforce and not 7%.

The economy’s growth in the past six to nine months has been in spite of the Chancellor’s Budgets. The reason for the resumption of growth is twofold: first, external conditions have been kinder, and secondly, there has been an aggressive policy of monetary easing. Since 2011, the Bank of England has injected £175 billion of new money into the economy. That, much more than fiscal austerity, has kept down the interest on government debt. It has also produced a boom in asset prices—homes and stock exchange securities—which has contributed to the feel-good factor and to an increase in confidence. By the same token, quantitative easing has produced a lop-sided and vulnerable recovery. Not only does it threaten new financial crashes down the line, but it has increased inequality. As John Kay of the Financial Times put it last year:

“The main effect of QE is to boost asset prices”,

and,

“The one certain outcome … is that those with assets benefit relative to those without”.

I agree with that. To put it crudely, a recovery based on an asset boom will be weaker and less resilient, to use the Chancellor’s favourite word. I prefer it to “sustainable”, which has been hugely overused. It will be weaker and less resilient than a recovery based on a widely distributed upsurge of purchasing power.

I do not believe that the Chancellor has been much influenced by economic arguments; certainly, he has not been influenced by mine. His policy has, I think, been mainly driven by the ideological belief that state spending is inherently wasteful, that it destroys incentives to private wealth creation, and therefore should be cut to a minimum. The ballooning of the deficit in the slump simply gave him the opportunity to act on these beliefs. In doing so, he has prolonged the slump, caused unnecessary hardship to millions and seriously damaged the growth potential of the economy.