Let’s not be too hard on George Osborne. He came into office with what was arguably a more difficult bundle of challenges than any incoming Chancellor had ever faced.
Facing a challenge: George Osborne
Flaky banks, a hideous deficit, soaring debts, public services that had become hooked on ladlefuls of new cash, and an economy that had become disturbingly over-reliant on a financial services industry of dubious value and uncertain profitability. Those are huge problems and no one could expect them to vanish overnight.
But we do have a right to expect visible improvements. On debt and the deficit, Osborne is making progress. It’s slow – slower than I’d like – but these things take time. Reforming the public services is going achingly slowly, but at least you can see a government keen to do the right things.
Elsewhere, however, what’s going on? Public sector austerity is a reasonable financial strategy, especially given wipeout in the eurozone, but it’s not a growth strategy. It’s the opposite of one. It’s an anti-growth strategy, which hasn’t yet kicked into full operating force but which has already thrust the country into the second dip of a double-dip recession I’ve been forecasting for six months and more now. (My book, Planet Ponzi, is still the best available map to the on-going crisis.)
Though the country may be starting to stumble out of recession now, you shouldn’t get excited. As austerity starts to bite at home, as the United States starts to tackle its own (awful) public finances and as our European friends continue to make a mess of their beautiful continent, Britain will be back on Recession Row within a year. You heard it here first.
And meantime, what is the government doing to energise growth? Or, rather, let me rephrase that: what in hell’s name is the government doing?
Well, there’s Project Merlin for one thing. That was a plan to get the banks lending again, to fire up those private sector afterburners and watch high-tech small companies blast us off to a different economic orbit.
Alas, the banks forgot to lend, smaller private firms are starved of cash… and even though we own the damn banks we don’t seem able to control their behaviour. Meantime, the government ‘investments’ in terminally-ill Zombie Banks still look horrible. And the bank’s bosses are still paying themselves insane amounts of money.
And then, for another Growth Strategy From Hell, try quantitative easing. The strategy is so dumb, a schoolchild could see through it. Don’t get too bogged down in the technicalities of how QE works. Essentially the strategy boils down to this: ‘Let’s print vast sums of money, slosh it around the financial system and see what happens.’
Well, I can tell you what happens. If you print money, it will eventually create inflation and do nothing at all to help small businesses grow.
If we had a banking system that was good at funnelling spare resources to promising business ventures, my verdict might be a little less scathing. But we do not have that banking system and everyone knows it. So the most recent bout of quantitative easing (nicknamed QE2) delivers more or less the same quality of ride offered by the Titanic. A short colourful ride, followed by a journey to the bottom of the ocean. Just make you’re your cabin is close to the lifeboats.
Finally, there’s also the misreporting and the misrepresentation that has become a standardized exercise in ‘creative accounting practices’ across the Western world. Government debt currently stands at just north of a trillion pounds. But when the Government puts out its data releases, it states the figures after ‘excluding the temporary effects of financial interventions’. Huh? Just what exactly is that supposed to mean?
The answer: when we nationalised the banks we nationalised their debts. It’s true, of course, that we nationalised their assets too … but their assets were crummy, overstated and unsaleable: that’s why nationalisation was necessary.
What’s more, to talk about these nationalisations as ‘temporary’ is deeply questionable. Something is temporary if you take something into government ownership, clean it up, and quickly flip it. But RBS has been in taxpayer hands for years now and there is no prospect of any imminent sale. So that’s not temporary. In fact, RBS shares are nearly worthless.
Worthless: The state is unlikely to make money from its bailout of RBS
And do you want to know the extent of British government debts if we account for those bank debts the way any private sector corporation would be forced by law to account for them? And are you sitting down? The answer – according to the government’s own statistics – is an eye-watering £2,181 billion. That’s more than double the number the government (and most media commentators) routinely use. Unfortunately, it’s the only number that makes sense.
In summary, then, Osborne could have done worse. But he needs to do a whole lot better. He needs to understand the fundamental failure of the financial system to perform its function: the essentially modest one of funnelling capital to the people who can use it best. He needs to forget about QE as a strategy and he needs to set a new level of transparency and honesty in government reporting.
Osborne also needs to get government out of the way of entrepreneurs. There must be a bonfire of regulations and tax complexities that flames high enough to entice businessmen into risking their time and money again on new ventures. Britain used to be good at that stuff, you know. Somewhere in our DNA, we still have that memory of success. At the moment, sad to say, the memory’s fading.
This article was published in todays Daily Mail.