The economy is still flatlining, GDP is below where it was in 2008 and the chancellor has had to water down his austerity plans
Booed at the Olympics. Author of the worst received budget in memory. In charge when the economy plunged into its first double-dip recession since the 1970s. It has been a year to forget for George Osborne. And it is about to get worse.
The biggest week of the chancellor’s two and a half year stint at the Treasury began on Sunday with a dogged “no turning back” performance on The Andrew Marr Show. It will culminate on Wednesday when he delivers his autumn statement.
Although it will be dressed up as prettily as possible with the promise of a £10bn crackdown on tax avoidance, the underlying message will be that Osborne has failed to deliver the new economy – less dependent on the City and living within its means – promised on his debut as chancellor in the Treasury’s inner courtyard one sunny morning in May 2010.
Instead, as the nights grow longer in December 2012, he will have to admit that deficit reduction is off-track, that he cannot meet his self-set rules for managing the nation’s finances and that austerity will continue well into the next parliament.
“It is clearly taking longer to deal with Britain’s debts, it’s clearly taking longer to recover from the financial crisis than one would have hoped but we have made real progress,” Osborne said.
But the clock is ticking. Wednesday marks the halfway point between May 2010 and the next general election in the spring of 2015, and the expected pick-up in the economy has not happened.
Michael Saunders, UK economist at Citibank, said even after the 1% growth in the third quarter of 2012, Britain had experienced the “worst recession-recovery cycle for many decades”.
GDP is 3.1% below where it was when the recession began 18 quarters ago in early 2008. “By contrast, real GDP was 4-5% above the pre-recession peak at this stage in the 70s and 80s cycles, and 7-8% above the peak in the 1990s”, Saunders said.
In his first budget, in June 2010, Osborne said forecasts produced by the Office for Budget Responsibility showed that the economy would be expanding by 2.8% in 2012, with the budget deficit down to £60bn in the 2013-14 financial year. In the 2011 budget, the OBR said growth would be lower at 2.5% and the deficit higher at £70bn. In the March 2012 budget, it estimated growth of 0.8% and a deficit of £98bn.
On Wednesday Osborne will admit that even these forecasts have proved too optimistic.
Hopes have been dashed of a repeat of the 1980s. Then, Geoffrey Howe raised taxes and squeezed spending but saw growth accelerate in time for the Tories to win the 1983 election. Osborne has increased VAT, frozen public sector pay, made welfare less generous and announced real cuts for all Whitehall departments except health and international development. And seen the economy flatline for the past two years.
The chancellor’s critics point to key differences from the 1980s: energy prices fell sharply, there was scope to cut interest rates and the rest of the world economy began a long upswing.
The TUC’s general secretary designate, Frances O’Grady, said: “Two and a half years in and the chancellor’s masterplan to blast a significant hole in the deficit during this parliament looks decidedly like a project on the verge of failure. Despite embarking on the sharpest spending cuts in modern history, government borrowing continues to rise.”
Free-market thinktanks offer a different perspective. For them, Osborne’s problem is that he has pussy-footed around with the deficit, and deeper spending cuts would generate growth by allowing taxes to be cut.
But with the economy at risk of a triple dip recession, the chancellor believes it would be unwise to intensify the austerity programme. Instead, he is expected to push back the date at which Britain’s national debt as a share of GDP will start declining. Politically that’s a real problem, because a slower, less aggressive approach was what the previous chancellor, Alistair Darling, proposed back in 2010.
Darling accused the chancellor of a “bankruptcy of ideas” and Ed Balls, the shadow chancellor, is waiting to pounce on Osborne’s admission that weak growth means borrowing this year is going up, not down.
The chancellor’s defence will be that Britain has chronic economic problems, that Labour left him a dreadful inheritance and that he has been the victim of events beyond his control: the crisis in the eurozone and rising commodity prices in particular. He will insist that despite its track record the government is on the right course.
Doug McWilliams, the chief executive of the Centre for Economic and Business Research, said any chancellor would be forced to tackle the deficit and Osborne had been ill-served by the OBR’s duff forecasts.
Nick Parsons, head of strategy at National Australia Bank, said one success had been in protecting Britain’s AAA credit rating, now under threat. “The credit rating is much less important going forward but when it was important it was very important,” Parsons said, adding that in May 2010, Britain and Spain both had to pay just over 4% to borrow money for 10 years on the money markets. “One government had a deficit reduction plan, the other did not, which was why bond yields went to 7.5% in Spain and to 1.5% in the UK.”
Yet, Parsons added, the government has failed to exploit the benefits of low interest rates, to the irritation of its Liberal Democrat coalition partners, who would have liked Osborne to borrow cheaply to fund infrastructure projects.
Although not in the euro, Britain’s recovery has been slower than that of Germany or France. Only Italy of the G7 industrial nations has a weaker growth record and in the business community, which backed Osborne’s deficit reduction plan, patience is wearing thin.
Sir Martin Sorrell, chief executive of the advertising company WPP, acknowledged that the deficit reduction strategy had kept financial markets sweet and ensured interest rates remained low.
“That’s all fine. The trouble I have had is the overall plan. You can ask people to make sacrifices and talk about grim times but it becomes a self-fulfilling prophecy if you don’t have a plan.” Sorrell said it was a political mistake to cut the top rate of tax for the rich when living standards for the less well-off were being squeezed. He said action was needed on technology, hard and soft infrastructure, tax, immigration, and housing. “These are all the things that make a comprehensive plan. The coalition does bits but it doesn’t look like a joined up plan.”
Terry Scouler, chief executive of the EEF, which represents manufacturers, agreed. In the 2011 budget Osborne hailed the “march of the makers”, but Scouler said: “If this were a classroom and we were marking the government, even allowing for issues beyond their control such as the eurozone, our message would be ‘could do better’.” Scouler rejected the argument that Osborne’s problems were not of his own making. “The government didn’t respond quickly enough to the re-emergence of the eurozone crisis in 2011.”
One manufacturing firm bucking the trend is David Nieper, a clothing firm based in Alfreton, Derbyshire. The company, which celebrated its 50th anniversary in 2011, has thrived while most of Britain’s textiles industry has disappeared by direct selling of quality products at home and abroad.
Managing director Christopher Nieper said the firm had continued to grow throughout the recession, and was producing 25% more than it was this time last year. “We had our highest sales last year in our 50-year history.”
Nieper says the firm has succeeded by developing a niche market: upmarket clothes made to order for customers with plenty of disposable income, mostly in the 40-plus age range. The company exports 36% of its production, turnover has gone up from £600,000 to £14m in the past 10 years, and 30 new members of staff were hired in the past year.
Yet Nieper said manufacturers needed more help from the government, adding that the cuts in capital allowances to finance lower corporation tax rates were a mistake. He urged cuts in national insurance contributions – “a tax on jobs” – to encourage hiring and do more to develop skills.
Green groups worry that the pressure to get the economy moving is leading to Osborne playing fast and loose with the environment. Dave Powell, economics campaigner for Friends of the Earth, said that in opposition, Osborne had been critical of Labour’s record on climate change, but it had been a different story since May 2010.
The chancellor, Powell said, had opposed long-term targets for de-carbonisation, promoted a dash for gas, provided tax breaks for North Sea exploration while hacking away at subsidies for renewable energy, cut spending on home insulation, hamstrung the new Green Investment Bank and backed the construction of new roads and airports.
“We have a sense of despair. There is such a pressing need to decarbonise the economy but we are still fighting the old short-termist battles. You still get the impression that for Osborne looking after the environment is a luxury.”
The chancellor and his team know that the next 12 months are crucial. Osborne believes that if he can get the economy moving in 2013 there is still time to win an election on the basis that Labour’s mess is being cleared up.
Current portents are not good. The Organisation for Economic Cooperation and Development predicted last week that the UK would grow by just 0.9% and Sorrell said the mood of business was downbeat. “Planning our business in 2013 we are taking a very cautious approach. It’s going to be quite tough.”
Lord Oakeshott, a former Liberal Democrat Treasury spokesman, said a big problem was the unwillingness of the banks to lend. RBS and Lloyds – the two banks in which the taxpayer has a large stake – between them account for 60% of the small business market. “There has been a monumental failure to face up to that.”
The other problem, Oakeshott added, was the Treasury itself. “It is like a beached whale watching as the economic tide goes in and out”, he said. “There is much talk of Plan B. The Treasury only has a Plan I: I for Inertia.”