George Osborne’s tears at Margaret Thatcher’s funeral may have been over the intensifying economical storm, writes Alf Young
George Osborne was seen to shed a tear or two at Margaret Thatcher’s funeral. Some suggested it was really about some disturbing UK unemployment numbers released that morning. I’m no conspiracy theorist. I have shed tears myself. At many a funeral. But if there were other things on the Chancellor’s mind, my candidate wouldn’t be lengthening dole queues.
It would be an academic spat raging on the other side of the Atlantic that threatens to demolish the intellectual underpinnings of the Westminster coalition’s whole austerity agenda. Osborne insists he will not waver from the approach he’s adopted since day one to getting the UK’s fiscal deficit and burgeoning national debt under control. On his Plan A, as his former leader would have had it, this Chancellor is simply not for turning.
Like other politicians preaching resolute fiscal rectitude, George Osborne rests much of his case on an influential paper published at the beginning of 2010, called Growth in a Time of Debt, written by two Harvard economists, Kenneth Rogoff and Carmen Reinhart.
The pair, well-regarded thanks to their influential book on the history of financial crises, had this time studied patterns of growth and debt in 20 advanced economies since the Second World War. Their core finding was that, whenever national debt exceeds 90 per cent of an economy’s gross domestic product (GDP), growth seems to evaporate. Below that level, average annual growth rates were between 3 per cent and 4 per cent. Above it, economies contracted, by 0.1 per cent on average,
Their paper, circulating just as Greece was plunging into its initial crisis, appeared to carry a stern warning for governments everywhere. If you borrow to try and re-stimulate your ailing economy, beware what happens if you cross that 90 per cent threshold. Your growth mission will prove self-defeating. Fiscal conservatives everywhere had a convenient academic anchor to which they could hitch their gut conviction that a dose of austerity and restraint, not more reckless borrowing, is always the right medicine.
But that Rogoff-Reinhart anchor was not all it seemed. Some questioned whether the negative correlation they had found between higher debt and growth demonstrated causation. Others struggled to replicate their findings. Then three other economists, from the University of Massachusetts, got permission to reassess the Harvard pair’s hard evidence.
This week, having pored over the original R-R spreadsheets, they revealed their findings. They had found “a series of data errors and unsupportable statistical techniques”. One year’s data, from New Zealand, dating way back to 1951, had ended up “exerting a big influence on their overall findings”.
As two of the critics, Robert Pollin and Michael Ash, put it in a Financial Times article this week, “we found that for the years 2000 to 2009, the average GDP growth rate for countries carrying public debt levels greater than 90 per cent of GDP was either comparable to or higher than those for countries whose public debt/GDP ratios ranged between 30 per cent and 90 per cent”.
Reinhart and Rogoff have conceded their data error. But they are insisting, pending further review of the Massachusetts trio’s critique, that it does not invalidate their findings. Their initial response also claims that, far from suggesting causality between high debt and vanishing growth, they only ever spoke of “association”. That has moved the Nobel laureate Paul Krugman to wonder “So, did an Excel coding error destroy the economies of the Western world?”
This isn’t just a storm in an Ivy League teacup. It coincides with fresh doubts among global policy makers about the UK coalition’s approach to securing economic recovery. The International Monetary Fund (IMF) has been meeting in Washington this week. Before proceedings got fully under way, its chief economist Olivier Blanchard had already risked George Osborne’s wrath, by accusing the Chancellor of “playing with fire” with his inflexible commitment to Plan A.
In its latest World Economic Outlook, the IMF has again downgraded its forecasts for UK growth by more than for any other advanced economy. Not for the first time, Blanchard insisted the UK should consider slowing its planned rate of deficit reduction. As he told Sky News, “The danger of having no growth, or very little growth, for a long time, is very high. You get a number of vicious circles that come into play.”
The scene is set for some serious friction when an IMF team arrives in London next month to carry out its latest annual on-the-ground assessment of the British economy. UK Treasury sources are promising the Chancellor will “aggressively” defend his existing fiscal stance. IMF insiders are predicting they may have to dodge some “poisoned umbrellas” around Whitehall.
George Osborne has, of course, another secret weapon. He is awaiting the imminent arrival in London of Mark Carney, the Canadian he has selected as the next governor of the Bank of England. With the departing governor, Sir Mervyn King, stuck, for the third consecutive month, on the wrong side of the vote in the Bank’s monetary policy committee over further extending its programme of quantitative easing, Osborne is desperate for the new man to bolster Plan A’s route to recovery.
Carney has also been in Washington this week. But the messages he’s been sending out are not exactly reassuring for the Chancellor. At one point he appeared to suggest that the UK is one of “a pack of crisis economies” from which only the United States appears to be “breaking out”. But he appeared even more downbeat on whether he, personally, can deliver the fresh momentum Osborne is seeking from him.
“Can central banks provide sustainable growth?” he reflected. “No. They can help with the transition, but they can’t deliver long-term growth. That needs to come through true fiscal adjustments and necessary structural reforms… Sustainable growth comes from the private sector”.
His own role, he went on, could be “overplayed”. The growing range of powers the Bank of England has been invested with are all vested in committees. “I am a member of these committees. Policy is not mine,” he insisted. Not quite the tone the Chancellor must have been hoping for. But, then, Osborne is having a rotten run of luck.
The triple A credit rating he had set his whole tenure around retaining is already gone, at least as far as one of the big rating agencies is concerned. The blue-chip academic rationale for austerity has been shown to be based on some rather dodgy numbers. And his new ace central banker seems to be getting his excuses in first. More than enough, after three years of missed forecasts, rising debt and elusive growth, to trigger a tear or two. Time for even more Thatcherite resolve? Or a belated rethink?