Austerity plan is failing by the Treasury’s own standards, since the coalition is having to borrow far more than planned
Last weekend, cabinet minister Iain Duncan Smith accused the BBC’s estimable economics editor of “peeing all over” British business. The work and pensions secretary accused Stephanie Flanders and her colleagues of “carping and moaning” about less-than-stunning economic data. In this exciting statistical version of shoot-the-messenger, one wonders who frontbenchers will train their blunderbusses on next. The Office for National Statistics, which this week revealed a 20% drop in corporation tax receipts last month, compared to July 2011? Mervyn King, who now predicts the economy won’t grow at all this year? Business chiefs, who in a survey on Wednesday called on the chancellor to do more to boost growth?
Sadly for Mr Duncan Smith, no amount of ministerial bluster can disguise just how badly the economy is doing. The austerity plan imposed by the Treasury is failing by Horse Guards Road’s own standards, since the coalition is having to borrow far more than planned. Going by the Treasury’s own compilation of independent forecasts last week, the government will have to borrow £175bn more from now until 2016 than originally promised. Compared with other large economies in the G20, the UK is matched only by Italy in being in a double-dip recession. The economy has failed Mr Osborne’s rationale for making historic spending cuts, since he claimed that Labour’s bloated public sector was “crowding out” private businesses, which would be set free only once big government was downsized. And a month before the party conference season, the economy’s performance has also let down Conservative and LibDem activists, who had been counting on a roaring recovery come the next election; that just isn’t going to happen, was the clear message from the Bank of England’s last inflation report.
Not every bit of this is the chancellor’s fault. No one could have foreseen how badly bungled would be the European response to the single currency crisis. But many economists and commentators have warned that the Conservatives’ strategy would be ruinous. As time has gone by, he has been offered plenty of opportunities to reverse – and has spurned them all. Meanwhile those economists and business leaders who did originally support him (for high- and low-minded reasons) have either recanted or fallen silent. The same goes for many senior figures within the coalition. Mr Osborne now cuts a very lonely figure, clinging on to his austerity plans while erstwhile supporters peel away and while evidence floods in that he would be better off changing course.
The result is that the things that most need doing to revive a deeply ill economy are precisely the things the coalition cannot do without finally shredding its claims to economic competence. After his haranguing of the BBC’s economics journalists (which the corporation would be best off ignoring), Mr Duncan Smith claimed: “They think if only you spend and borrow more money you can create growth everywhere.” Yet that’s precisely what should happen now. The bonfire of the red tape and employment protection urged by the right wing of the Conservative party would do nothing to alleviate a crisis of economic demand. The same goes for big infrastructure such as high-speed rail or a new airport – whatever boosterists promise, they simply will not provide a significant lift within the next two, three, five years.
What ought to happen is a programme of lots of little capital spending: refurbishing train stations, bringing back Building Schools for the Future, and retrofitting energy-inefficient homes. The premium should be on job-creating projects that can be implemented within nine months. The cash to pay for this can be raised for next to nothing from the armies of investors desperate to get safe returns. The need is there; the projects are in many cases easily identifiable; and the funding would not be hard. What is lacking is the government personnel, who would rather tackle economic journalists than the economic problems they are talking about.