8 January 2016

George Osborne’s legacy: an economy just as fragile as it ever was

The British economy is even more vulnerable than it was in 2007.

On Thursday the Chancellor George Osborne used a speech in Cardiff to warn about the global and domestic economic headwinds that have kicked off 2016 and look set to continue throughout the year. Difficulties in global financial markets, prompted by renewed fears for the Chinese economy, mean, he argued, that we need to ‘guard against complacency’ and continue along a path of deficit reduction.

Hang on a minute, many said – wasn’t the chancellor pushing the ‘sunlit uplands’ line just six weeks ago at the spending review? Manyhave suggested that he is in master-tactician mode, playing a game of expectations management ahead of a March budget that may show that he has missed his fiscal targets for the year. The latest data on tax receipts suggests he may well have cause for concern, with analysts warning(£) that the government may have to revise-up borrowing forecasts or announce further spending cuts in order to meet its fiscal targets. Others have expressed the view (in line with mainstream economic, if not political, opinion) that worsening economic headwinds are a reason for less austerity, not more.

There is merit in both these arguments. However, both risk reinforcing the misconception that the size of the government’s deficit is the most important factor in our long-term economic health. Our fundamental economic weaknesses run much deeper. The UK doesn’t manufacture enough, it doesn’t export enough, and it relies far too heavily on London and the greater South East as a source of economic strength. These imbalances have been with us for years, but the gathering headwinds to which the chancellor drew attention this week are liable to make them even worse: for example, a stronger pound risks placing a further drag on exports.

The chancellor has declared concern about these imbalances many times in the past, but has not yet produced a credible strategy for addressing them – indeed, many of the programmes put in place by previous governments with the explicit aim of countering economic imbalances have now fallen to the axe of deficit reduction. Following the spending review, it was announced that the Business Growth Service, a set of schemes aimed at supporting high-growth small businesses, would come to an end. Similarly, the turning of innovation grants into loans, part of a set of cuts to the UK’s innovation agency, looks short-sighted for a government that is keen to appear on the front foot when it comes to economic growth. Elsewhere, the housing policies announced in recent years are set to inflate the UK’s property market even further, particularly in the South East. Perhaps the only notable rebalancing action from the chancellor is his drive to devolve to the bigger cities outside London – but devolution in England remains partial, piecemeal and unlikely to bear fruit anytime soon.

While the Chancellor has certainly proved the scale of his ambition when it comes to fiscal policy, this has not extended to a concerted effort to reduce the country’s persistent economic imbalances. The continued failure to do so, with successive governments at fault, has reduced the capacity of our economy to withstand shocks of the kind that 2016 looks set to bring.