Eddie Barnes: George Osborne’s bottom line
IF there is one question that George Osborne and David Cameron would most like to ask voters ahead of the next UK general election, it is this: “Do you really want to hand the keys back to the people who crashed the car?”
For three years now, since the 2010 Tory conference when the Chancellor first coined the phrase, the pair have been raising it relentlessly. No matter how bad things are going under the coalition, goes the theory, there will never be a majority of people who will answer “yes” in sufficient numbers to allow Labour to get back behind the wheel.
The politics, as George Osborne used to say, look great, even if the economy doesn’t. This weekend, as the Chancellor puts the finishing touches to his fourth Budget, due on Wednesday, that no longer seems quite so true. The Budget will mark the end of what has been the Chancellor’s toughest year in politics. From the Omnishambles budget of 2012, to the rows over the pasty and granny taxes it spawned, to the sound of 80,000 people booing him at the Olympic park, and finally to the sight of Britain’s triple-A credit status being replaced by the prospect of a triple-dip recession, Osborne’s reputation as a political operator par excellence has been battered. And in the face of a further slump in Britain’s stumbling recovery from the financial crash, he is vulnerable to the charge of impotence.
Wednesday’s Budget is possibly Osborne’s last big chance to make amends before the electorate decides in 2015 whether or not to keep him in office – and is the last chance he has to show that, while he may not have been the one who drove the car into the wall, he at least managed to find the ignition switch on the steering column. Out of gas, tyres punctured, and exhaust pipe slapping the tarmac, the British economy under Osborne today resembles an old banger marooned on the hard shoulder. Can the Chancellor yet find some va-va-voom?
The motoring metaphor may be appropriate, for one of the most likely plans that Osborne will confirm on Wednesday is that the planned increase in fuel duty, due this autumn, will once again be scrapped. Both Cameron and Osborne are acutely aware of the petrol-pump rage current among people paying more than 135p a litre for unleaded. Other “retail” measures aimed at families may include generous childcare tax relief worth up to £1,000 a year to help with the soaring costs of nursery and childminding fees (perhaps – for high earners – to replace the cash they have lost in child benefit) And, with a nod to the Liberal Democrats, the Chancellor may also opt further to increase the personal tax-free allowance above £10,000. With these measures, he will hope to convince Austerity Britain that the government remains on its side.
Such micro measures – together with the regular increases in the price of cigarettes, wine and spirits – are the standard brickwork of every annual budget. But this year, perhaps more than any other, the focus is less on the pretty window boxes that the Chancellor is able to produce, as it is on the foundations of the house he is building. At a time of economic crisis, fiddly attempts to reward one section of taxpayers and to buy off the wrath of motorists are not really the point.
Like any occupant of Number 11, Osborne is not short of advice. But, economically, those offering it can be broadly sorted into two camps. To his right are the supply-siders, who argue that it is the UK’s anti-business regulatory and tax system which is keeping the British tiger locked in its cage. The stalking-horse Tory MP, Adam Afriyie – who a few weeks ago was said to be considering a challenge to Cameron’s leadership – declares: “If it was up to me, we would be much more agile, bolder and take more considered risks to encourage wealth creators, entrepreneurs, businesses and inward investment.” He was speaking after former defence secretary Dr Liam Fox demanded a freeze on all government spending, including the NHS, to pay for tax cuts. It was time, he said, to reverse “the great Socialist coup” of the past 20 years in boosting the size of the state.
To this cause yesterday was added the powerful voice of Sir Terry Leahy, former chief executive of Tesco. “Unfortunately,” he said, “the Prime Minister and the Chancellor are standing still… Cutting the debt should be part of a bigger plan to create a competitive, enterprising economy, capable of winning in cut-throat markets. To do this, Britain must become a low-tax, small-state economy.”
Leahy joined Fox in calling for the NHS “ring-fence” to be removed, in order to cut spending further. But he has already been slapped down by Cameron who last week used a speech to reassert that, so long as he was PM, the NHS would remain protected (the reason why Afriyie has declared he expects to be “sorely disappointed” this week). Instead, Osborne will tip his hat to these critics, perhaps by simplifying the tax system, cutting regulation, and trying once again to deal with planning. Also mooted is another major cut in corporation tax to around 20 per cent. But, with two members of the all-important “Quad” – Deputy PM Nick Clegg and Chief Secretary to the Treasury Danny Alexander – resistant to a repeat of last year’s top-rate tax cut, the Chancellor is unlikely to offer much to sate Fox’s thirst.
In any case, their attention is likely to be elsewhere. Far more troublesome for Osborne and Cameron is the growing clamour for change on the other side of the argument, represented by a coalition which now includes Labour, the SNP, the Economist magazine and a growing number of business groups, who argue that the basic problem is the simple lack of demand in a deflated economy. In the words of one highly critical economist, Osborne has failed to understand “line one, chapter one of Economics 1.1”. Businesses and households right now, Osborne’s critics point out, are simply not spending. Exports are flat because the rest of the world is in the doldrums too. So the only person left who can shell out a few billion to help boost demand therefore – and do so by borrowing at record low interest rates – is the Chancellor himself.
The Keynesian-minded Fraser of Allander Institute at Strathclyde University advocates a “massive infrastructure” spending plan to help revive construction and hurl money into circulation. The Economist argues around £28 billion should do it, and says the markets “will forgive” Osborne if he funds half by extra borrowing. A spokesman for the Scottish Chambers of Commerce adds: “What we are looking for is a recognition that enhanced capital spend is an important part of the solution to kick-start economic activity and growth. Whilst we do not expect the Chancellor to radically increase overall levels of spending, we do believe that the balance of capital-to-revenue spending requires to be tipped very considerably in favour of capital.”
The damaging criticism facing Osborne and Cameron (and the Lib Dems as well) is that they are refusing to contemplate Plan B purely for political reasons, simply to keep Labour in “car crash” territory. It was exemplified by a line in Cameron’s speech last week when he mocked the opposition. “They say that by borrowing more they would miraculously end up borrowing less. Let me just say that again: they think borrowing more money would mean borrowing less. Yes, it really is as incredible as that.” Martin Woolf, of the Financial Times, hit back: “What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started.”
However, already embarrassed by the continuing growth of the national debt thanks to the moribund economy, Osborne this week will avowedly not go begging to the markets to pay for “shovel-ready” plans. Instead, he may lay one of the traps he so enjoys – perhaps by making investment in infrastructure contingent on further cuts to welfare, and forcing Labour to choose.
But the big card he may play, according to Tory sources, is on further efforts to boost bank lending. Osborne’s “Funding for Lending” scheme – which lowers banks’ funding costs so they can pass savings on – has helped people get mortgages, Cameron claimed last week. But it has largely failed to do anything for Britain’s small and medium sized firms, which continue to complain that they are being charged high rates of interest by risk-wary banks, and are being starved of credit as a result.
The Treasury is now desperately trying to find ways to get the hundreds of billions of pounds freed up through quantitative easing out into the real economy, rather than sitting on bank balance sheets. Banks themselves are caught between conflicting policy demands – to build up cash reserves in order to avoid another 2009-style bail-out, and to push more money out the door. Osborne will seek to solve the paradox, this week, say Tory sources. “All this QE money is getting stuck in the banks. The banks have been told to build up their capital but you might see a shift in that. The QE money was there to help the economy, not to get stuck in bank vaults.” The problem there, say his Keynesian critics, is that even if banks are “freed up” to lend, they may find few takers due to the fact that no-one is currently in the mood to invest.
The real trigger for growth may be nothing to do with Osborne at all. The Fraser of Allander Institute noted last week that the best chance for the economy may lie with America’s ability to jump-start global growth, and so drag the UK along in its slipstream. Perhaps this is leading to what, insiders say, is a state of helplessness within the Treasury. Critics suggest that its motto should now be: “It’ll all work out in the end.”
It prompts a worrying thought for Osborne as he prepares to face baying opposition MPs on Wednesday. The car itself may not be the problem. The problem may be that, without some help from the rest of the world, his drive to growth may have run out of road. «