Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

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.

I have a plan..

Budgets are overhyped. Half serious policy announcement, half political theatre. Truth is, almost everything that matters in the government’s fiscal policy was set out in June 2010. Back then, George Osborne announced the pace of the fiscal tightening which would dominate the next five or seven years. The events of today have, very largely, simply been another step along a pre-determined course.

Knowing this, Osborne has been busily doing the things that Chancellors are meant to do: tweaking taxes, adjusting allowances, creating soundbites, encouraging his backbenchers. He’s like one of those contestants on Strictly Come Dancing: not much natural talent, but plenty of effort and bags of commitment.

So in that spirit, I’ll cast myself as (erm) Craig Revel Horwood and score his performance.

Political theatre: Chancellor George Osborne leaves Number 11 Downing Street today on his way to Parliament to present the 2012 Budget

The big picture

That austerity is required is obvious. It was obvious back in 2010. Now, after the slo-mo collapse of Greece, Portugal, and Ireland, and the still-precarious state of Spain and Italy, you would have to be a galumphing idiot not to realise that belt-tightening is required. Indeed, Ed Balls may be the only person in the country who still thinks that tax-and-spend is a recipe for a success. And it isn’t. Of course, it isn’t. It’s a recipe for being Italian.

George Osborne gets the need for austerity. Personally, I consider his plans too timid and too slow. You don’t address a debt problem by continuing to add to the debt pile. You don’t address an overmighty government by trimming it back to the levels it was at in 2002-03. And of course, the UK is still at risk of losing its coveted AAA rating. With net debt just shy of £1 trillion, you can’t expect anything else.

But still, I don’t want to be too harsh. These are tough times and Osborne is moving in the right direction. A good performance.

8/10

Deluded: Shadow Chancellor Ed Balls may be the only person in the country who still thinks that tax-and-spend is a recipe for a success

Taxing the rich

End of boom and bust and delusional Ed Balls

Reducing the top rate of tax was an obvious, necessary step. Gordon Brown had so little faith in this upper rate that he didn’t introduce it until six weeks before the end of his government. The tax raises very little money (because the money simply moves off shore). And it sends a signal that Britian is hostile to success and entrepreneurship: precisely the wrong message to send.

Equally, it makes good sense to tax £2 million homes that can’t easily be moved offshore (though I bet some bankers will try to give it a go.) It makes good sense to come after tax dodgers hard and aggressively … though I’d be willing to bet that any such aggression dissipates somewhere in the HMRC.

Having said that, why did Osborne not have the courage of his convictions and reduce that top rate to 40%? It was good enough for New Labour. It should be good enough for the Tories.

6/10, plus 2 bonus points if tax dodgers are in fact prosecuted with vigour.

Obvious: The scrapping of the 50p tax rate, the top rate of tax, was a necessary ste

Incentives for jobs & business

Osborne’s performance is somewhat less than convincing here. On the one hand, the rate of corporation tax is to be lowered to 22% by 2014. That’s good news. It makes Britain an attractive location in which to invest. Since we need jobs and investment now more than ever, it’s the right move.

At the same time, however, payroll taxes are still way too high. They’re a tax on jobs. If we want to create jobs, why tax businesses for creating them? Osborne needed to be radical and has wimped out of any real tough decisions.

And what is it with governments, the way they think that showering a few favoured industries with tax breaks will create jobs? Giving tax breaks to the likes of Disney means one of two things, either the government’s debt load increases or other taxpayers are being asked to pay more. And in the meantime, the whole tax system becomes ever more complex, ever more convoluted. We needed radical simplicity and got more government fiddling.

5/10

The big picture: Overall a good performance by Mr Osborne

Welfare

Keeping the pensionable age under review so that it permanently tracks any increases in longevity makes excellent sense. It’s bewildering, in fact, that such an obviously commonsensical proposal is only being enacted now. Why wasn’t this done in 1981? I’ve no idea.

Likewise, the partial removal of child benefit from high-earning households: it’s amazing that this hasn’t been done before. It’s amazing it hasn’t been done more vigorously now.

It’s hard to award high points for such obviously necessary steps – and why on earth are child benefit and other ‘universal benefits’ not being tackled more rigorously? Overall, somewhat disappointing.

5/10

Transparency

It was George Osborne who created the Office for Budget Responsibility and the OBR has done a decent job since its inception. It was also Osborne who introduced the Whole of Government Accounts, a vastly overdue and important innovation.

But Osborne persists in focusing on the very smallest quotient of public debt. A portion which ignores the financial consequences of the bank bailouts. A portion which ignores the Private Finance Initiative. Which ignores our swelling pension obligations. Which ignores nuclear decommissioning costs. Which excludes any allowance for contingent liabilities. In short, he focuses on a figure which makes virtually no sense, and which skews public debate in the nation at large.

So: I like the OBR and I like the Whole of Government Accounts, but Osborne is still locked in an old mind-set – the one that almost brought the country to its knees.

3/10

The price of strawberries is up this year.

‘Inflation falls.’ That’s the headline countless British consumers have been longing to see. And inflation isn’t just falling: the Bank of England predicts that prices rises will be down as low as 1.7% some time later this year. If that’s true, it’ll be a blessed relief for countless consumers.

Personally, though, I’m just about able to contain my excitement. Yes, inflation is falling, but it’s still very high. Prices are still rising way above the Bank’s 2% target. What’s more, the Bank of England has consistently failed to achieve its target. Since the start of 2007, inflation has been almost permanently above 2%, twice nudging above the frightening level of 5%. Given that the Bank has been permanently wrong about inflation for years, I’m not placing too much faith in Sir Mervyn King’s latest boosterish prognostications.

What’s more, I don’t believe the inflation figures anyway. There’s too much massaging going on. Why, for example, does news attention tend to focus on the consumer price index (where price increases are currently running at 3.6%) instead of the retail price index (where price increases are growing  at 3.9% down from a stonking 4.8%)? After all, the retail price index includes house prices. Since, I assume, many of my readers live in houses, it seems reasonable to study an inflation index that includes the associated costs.

What’s more, back of the envelope type calculations focusing on what ordinary people actually spend have consistently suggested that inflation has been running way above published rates. Last December, for example, the Mail reported that the price of basic purchases, including food and fuel, had soared by 43% over ten years, far ahead of the published 27% increase in the CPI. These days, with wages stagnant and prices soaring, those essentials occupy a far larger and more important share of our shopping baskets than they ever used to. It’s probably the thing you personally think about when you think of inflation. Indeed, oil prices were $100 a barrel as recently as October; they’re touching $118 now. Petrol and utility bills are soaring.

Indeed, I’d like to take these thoughts further. I’d like the Bank of England to publish a regular Essential Goods Index. Rather than exclude items like food and fuel because they’re ‘volatile’, it would include them because they’re critical to most household budgets. When Sir Mervyn King writes to the Chancellor to explain why, yet again, he’s failed to meet targets, he might want to include a paragraph or two on what that failure means for ordinary households.

Indeed, while we’re on the subject of total transparency, I’d like the Bank to include data on asset price inflation. House prices, for example, have barely fallen in this recession, despite the fact that the number of houses being traded are at 27-year lows and unemployment hit a 16 year high toady. The FTSE 100 stockmarket index is nudging 6000, despite the fact that the outlook for the British economy is more precarious than it has been for decades.

These things are hardly hidden from view. The ratings agency, Moody’s, has placed the UK on credit watch for a likely downgrade of its AAA debt rating. That assessment simply mirrors the stark reality of our current predicament. Indeed, the extraordinarily low interest rates at which the British government is currently able to borrow – and of which George Osborne so frequently boasts – are simply the flipside of a crazy run-up in government bond prices.

Those things might sound remote from your ordinary life, but what we’re witnessing is the creation of yet another asset bubble – and a bubble in which the Bank of England is, once again, utterly complicit in creating. When that bubble bursts, as bubbles always do, the destruction inflicted on normal households and taxpayers will be prodigious. It’s that potential destruction which makes Moody’s – quite rightly – so anxious.

And, I’m sorry to say, I agree with Moody’s. I have no faith in the Bank of England. I don’t believe its headline inflation numbers. I don’t remotely trust its record on controlling asset price bubbles. And I’m willing to put my money where my mouth is. Back in 1999, Gordon Brown sold 400 tonnes of gold at around $377 an ounce. I bought some of it – and I’m pleased that I did because the gold price is now around $1730.

Posen promised to resign if UK inflation is not 1.7 by August

So here’s the bet. I’ll bet Sir Mervyn King one ounce of gold that inflation does not come down to 1.7% within the course of 2012. If I’m wrong, I’ll be happy to pay up, because that’ll be a sign that Britain – finally – might be returning to the path of financial probity. Somehow, though, I don’t think he’s going to take my bet. In the meantime, he shall keep writing monthly form letters explaining his failures to the Chancellor of the Exchequer.