For George Osborne, every economic failure serves only as confirmation of the wisdom of his approach. Confronted by the threat of a triple-dip recession, a rising Budget deficit and the loss of the UK’s triple-A credit rating, the Chancellor has chosen not to lessen his commitment to austerity but to “redouble” it. On one point we can agree with Mr Osborne: the credit downgrade is no basis for a change in policy. The judgements of Moody’s, in common with those of all ratings agencies, do not deserve their exalted status. It is remarkable that anyone believes the agencies that rated AIG and Lehman Brothers as well as various mortgage-backed securities as “safe” investments up until the financial crash of 2008 should be regarded as anything other than irrelevant.
Had the Chancellor made this point before the election or at any point since, he could have legitimately shrugged off the downgrade – but he did not. On the contrary, he made retention of the triple-A rating the ultimate test of his economic policy and argued, in opposition, that its loss would be a “humiliating” moment. When the UK was taken off negative watch by Standard & Poor’s in October 2010 (it has since been put back on), Mr Osborne boasted of a “big vote of confidence in the UK and a vote of confidence in the coalition government’s economic policies”. Having prostrated himself before these false gods, the Chancellor cannot now dismiss their pronouncements as easily as he would wish.
In its explanation of the downgrade, Moody’s told us nothing that we did not already know. The UK’s “sluggish growth”, it observed, is likely to extend into “the second half of the decade”, with a reduced pace of deficit reduction the inevitable consequence. It is these points, rather than the loss of the triple-A rating, that should force a change of direction from Mr Osborne. At the time of his “emergency” Budget in June 2010, the Chancellor declared: “Unless we deal with our debts, there will be no growth.” Yet he has learned that the reverse is true – unless you stimulate growth, you cannot deal with your debts. The man who made such play of his fiscal rectitude is now expected to increase the national debt by 58 per cent over the course of the parliament and by more in five years than Labour did in 13. Rather than borrowing for growth, the Chancellor is borrowing to meet the costs of failure.
Contrary to what some on the right claim, there has been no shortage of austerity. Infrastructure spending has fallen by 42 per cent, VAT has risen to 20 per cent and 370,000 government jobs have been cut, so that the public-sector workforce is at its lowest since 2003. Yet because of the disappearance of growth, coupled with a resultant fall in tax revenues and a rise in long-term unemployment to 879,000 since 2010, which caused a rise in the benefits bill, deficit reduction has stalled. Even with the additional £2.3bn from the auction of the 4G mobile spectrum, borrowing will be higher this year than last.
Having presided over an economy that has grown by just 0.4 per cent since the autumn of 2010 – a slower rate than every G20 country except Italy and Japan – the government puts ever more emphasis on its superficially impressive employment record. In the past year, unemployment has fallen from 8.4 per cent to 7.8 per cent and employment has reached a record level of 29.7 million. Yet while ministers celebrate the expanding quantity of jobs, they devote little attention to the diminishing quality. As our economics editor, David Blanchflower, explains on page 19, there are now over a million people working part-time because they are unable to find full-time jobs. Together with David Bell, professor of economics at the University of Stirling, he has developed an “underemployment index”, based on individuals’ preferred number of hours. It shows that the UK’s level of excess labour capacity is now at its highest level (43.8 per cent) since the recession began in 2008. As a result of this fantastic waste of human potential, ever more find themselves in jobs unable to secure an adequate standard of living.
Although Mr Osborne would never admit it, his determination to persist with his strategy has more to do with politics than economics. The electorate continues to regard the coalition’s austerity measures as a necessary corrective to years of profligacy by Labour. Mr Osborne’s hope is that, if the next election is again fought over the issue of deficit reduction, voters will put their faith in the original axeman.
For the Chancellor, the worse it gets, the better – but the country, with its growth prospects reduced by austerity, faces years of avoidable misery.
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