Policy Research in Macroeconomics

The (sheer) Audacity of the Chancellor’s Hope

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The Chancellor’s speech today was truly audacious. And the most audacious aspect of it is the hope embedded in almost every line, no matter how tenuously connected to evidence.

Hope that the tiny uptick in industrial production and manufacturing – up a fraction recently from among the lowest levels since records began – represents ‘recovery’.

Hope that exports will  continue the upward path they seemed to be climbing, until July’s poor figures brought us all back to earth.

Hope that the modest  increase in residential investment will spur on Britain’s businessmen and women, who in the first half of this year delivered the absolute lowest levels of business investment since records began.

Hope that this ‘recovery’ will not resemble the ‘recoveries’ of 2009 and 2011 which petered out amidst the debris of budget cuts and private sector disillusion.

Hope that the huge gamble he is taking by “repeating the debt-fuelled mistakes of the past” –  handing out more taxpayer-backed subsidies (in the form of ‘guarantees’) to a small group of business people and voters in the City of London – will not annoy the millions of voters explicitly denied government support or subsidy, and who were made to suffer “the bulk of the consolidation” – as he reminded us today.

Hope that more and more families will take up Loan to Value mortgages of 95% – thus bravely shouldering the risk, shame and consequences of default and foreclosure. A risk made more probable by falling real incomes and rising rates – about which the Chancellor made clear he would do nothing. Because he argued “you don’t solve the pressure on cost of living with simply a shopping list of interventions and government regulation.”

Instead, while the Chancellor chooses to use taxpayer resources to protect bankers from the risk of default and from the discipline of the ‘free market’, he encourages middle-class homeowners to take up 95% LTV mortgages – and to single-handedly face the ruthlessness of the one-sided “market”, with its risk of default, foreclosure and homelessness for those left exposed.

Hope that bond yields will not keep rising, forcing mortgage rates higher, and ‘debtonating’ the Funding for Lending and Help to Buy bubbles he has floated on top of Britain’s sea of private debt – still (at over 430%) by far the highest level of private debt as a share of GDP amongst the large, advanced economies.

Hope that this ‘debtonation’ – or even a simple pricking of the bubble – will not occur before the general election which is clearly his principal point of reference.

Hope that the electorate will not be insulted by his belittling of their concerns about falling incomes:

  “We know every penny counts for hardworking people. But by themselves these changes (“interventions and government regulation”) don’t amount to an economic policy. And to focus exclusively on these things (i.e “family budgets”), important as they are, is to miss the wood for the trees.”

 Hope that no economist will call into question his definition of policies for taxpayer-backed guarantees to cover deposits paid to bankers as “monetary activism” – when it is clearly fiscal activism, which in others he decries and denounces.

Hope that the “many economists” who he said backed his austerity strategy of “fiscal consolidation” will not look too closely at the upward variations in his government’s deficit plans, and at the resolute refusal of public debt to decline.

Hope that the public will not spot the intellectual contradictions in his speech – in particular the point that while the Chancellor proclaims he has no intention whatsoever of altering the “hard road” of fiscal consolidation he has set Britain on, with huge damaging cuts in public investment, he simultaneously proudly boasts that: “we are delivering the biggest programme of investment in our railways since Victorian times – the biggest programme of road building since the 1970s….”, which  if it proceeds – will (rightly for such matters) be financed by government borrowing.

One has to admire the Chancellor’s audacity. Over the last three years his government has presided over a quite unnecessary and precipitous slump in economic activity, resulting in GDP rising in 2012 by a derisory 0.4%, far below the rate of population growth. It was a Coalition-fashioned slump that guaranteed a collapse in political support at the next election. For an arch-political strategist that prospect must have been galling. Hence the audacious measures in his speech yesterday.  Measures based almost entirely on hope. Political hope.

Hope that no one will notice that he is looking to generate enough imbalanced, debt-fuelled “growth” – especially in the assets of the well-to-do – to offer the British people the mirage of recovery by the electoral deadline of 2015.

But sometimes ‘hope’, however audacious, and however beguilingly articulated, is exposed as no more than wishful, delusional thinking.

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3 Responses

  1. I agree.Nice polemic. I wonder what the effect will be of the growing population. It is growing at around 0.5million p.a. that is going to push the nominal figures up and appear to support the recovery view in terms of retail sales and employment. It is strange how the contractionary fiscal consolidation notion has so much support and so few critics. Just been advised of your site . I think it is excellent. Douglas.

  2. Ann,
    I quite agree. But it’s always possible that Osborne has a run of luck. I.e. the private sector rather than go into a fit of totally irrational exuberance (or the opposite) might gradually become more confident over the next three or five years, and that would bring steady and sustained growth.

    And the Tories would take credit for that, despite the fact that, like much of the West’s elite, they are clueless.

  3. I’ve been arguing for several years that there is a 3 year trade cycle that seems to have applied for at least the last 30 years, probably tied to the technology upgrade cycle. It coincided with the financial meltdown at the end of 2008, and recurred at the end of 2011. It doesn’t necessarily mean a recession, just a downturn, and usually last around 4 quarters. On that basis I actually though the UK, US, and EU as well as China would see some recovery by the first half of this year.
    China seems to be conforming, but the US hit by the sequester, and the UK and EU hit by austerian economics have not until now. I’d say the current uptick is only the delayed cycle, not anything that Osborne can take credit for. In fact, as I’ve argued before, the irony is that the uptick could be the death of his policy. If economic activity turns up, there will be an increased demand for capital globally, and that means higher interest rates. Whatever, Bernanke, Carney and others might think they can achieve, interest rates are rising. The US 10 year, and the UK Gilt Yield have doubled in the last few months, and continue to march higher. One thing Osborne can’t claim is that his policies are causing interest rates to fall!

    In fact, with huge sums tied up in Bond Funds, it can only be a matter of time before someone blinks, and the bond bubble bursts. There have already been increasingly large outflows from Mutual Bond Funds, yet we have not yet seen the ‘great rotation’ into equities yet. If increased economic activity causes interest rates to continue rising, its difficult to see how mortgage rates can avoid rising, at a time when the banks are massively over committed to property debt, and are engaging in ‘extend and pretend’ on an unprecedented scale.

    Osborne could face a double whammy come the next election. On the one hand a collapse in property prices will undermine the Daily Express reading Tory core vote of people who delude themselves that they are well-off because of inflated property prices, and on the other, the 3 year cycle should kick in again towards the end of 2014, hitting an already weak economy, kept afloat on the steroids of private debt.

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