25 Jul 2012

“It could be a lot worse…”: Osborne’s five GDP shuffles

Let’s be very clear. The GDP number was abysmal. It was more closely expected internally at the Treasury and the Bank of England. The City economists clearly did not listen to the Bank of England’s May bulletin which pointed out that the Jubilee Bank Holiday shuffle could cost 0.5 per cent of growth in Q2. The rain was not great for the economy either.

However, there was no excuses such as this from the Chancellor in a round of TV interviews including myself. He hasn’t really sought to excuse negative GDP figures in the last quarter either by blaming the eurozone (although the prime minister did).

The Chancellor has refined his message in some telling ways:

1. “…as difficult as Britain’s economic problems are, they could be a lot worse if we didn’t command the confidence of Britain’s ability to pay its way in the world.” Mr Osborne to me today.

A vital change in tone. Really the coalition should have argued this from the beginning. It is their main argument. The economic slump is like an insurance premium that the country pays to avoid the very worst outcome of a disastrous sovereign debt run. But there is a reasonable disagreement to be had over whether the premium is too high, or the risk being insured against rather remote. The reality is, that two years on, the UK economy is now 0.3 per cent smaller than that inherited by the coalition. So in his two years as Chancellor George Osborne has shrunk the economy.

For context the June 2010 Budget that set out the coalition deficit reduction plan, presumed an economy 5 per cent larger in this same time. The key question for me: “does the government believe that a shrinking economy is a price worth paying for deficit reduction?” I asked the chancellor this today. He could have said “yes”, and actually that is what would have been the most honest answer, but he didn’t, he said “we’re doing everything possible to get econ growing.” Watch the interview above to see his full answer.

2. No excuses, he blamed “deep rooted economic problems” including “private & public sector debt…”

The politically-minded might see this entirely as a dig at Labour. But even staunch Gordon Brown supporters would surely recognise that the hangover from the private sector debt bubble was always going to involve a painful half-decade or decade of deleveraging. Under the Labour government the biggest credit bubble the world has ever seen was inflated. It then kept a burst balloon artificially inflated to prevent a catastrophe in 08/09. The coalition is trying to allow the air out of this balloon, and this outweighs relatively small differences in fiscal policy between the coalition and the opposition as a drag on growth.

3. Osborne: “Deep problems” include “fact that our economy was orientated more towards European continent than towards the Chinas and Indias”

This is a new line from the chancellor. It is rather interesting. He’s saying this now instead of saying, “we’ve been dragged down by the eurozone” perhaps mindful of the fact that it is impossible for the eurozone to drag the UK down, more than it appears to be dragging itself down (the eurozone is not in recession). Perhaps it is also attractive to those Conservatives currently flocking to UKIP. It works better for the Chancellor’s new mantra of difficult long term transformation rather than short term debt fixes. As he told me: “changing these things takes time, but we are tackling the deficit, we are exporting more to China”.

4. “We’ve got to do more on infrastructure”: I ask him why he’s cutting investment capital spending. He says Labour would cut even more.

That awkward moment when George Osborne chides Labour for not spending enough. This, even as the government is halving investment spending in cash terms from £50bn to £24.5bn, obviously even more in real terms. Indeed it is rather telling that in the past fortnight, we broadcast economics editors have twice been summoned to giant public funded construction sites. When I pressed him on public investment cuts, he boasted: “We’re now spending more on roads and rail than this country was spending in the boom years”. (Hang on, I thought we were nearly bankrupt). Osborne wants more infrastructure and less benefit spending. At first he thought the private sector would just fund £250bn of much-needed UK infrastructure if he kept interest rates down. Now he is offering widespread government guarantees. I discussed this in my previous post on “Contingent Keynesianism”. If this doesn’t work, then expect a U-turn, more spending, backed by the IMF by the next Budget.

5. “Credit ratings are for credit ratings agencies. I’m determined people have confidence in our ability to pay our debts”.

This was George Osborne’s response to my suggestion that Britain will lose its AAA rating on growth fears. It no longer seems that the AAA is the be all and end all for Government policy, from this answer. Two of the three major agencies have Britain on the downgrade shortlist. In that time the economy has got significantly worse. Indeed my last thought is that perhaps the best thing that could happen to Britain would be an imminent downgrade. Only then could we have a full and proper debate about how to get the economy motoring again, through supply and demand measures.

Follow Faisal on Twitter via @faisalislam

10 reader comments

  1. Saltaire Sam says:

    More proof, if any were needed, that Osborne is indeed the work exprience chancellor, a tag that will surely haunt the rest of his career.

    Labour caused the problem by overspending (pause) we are spending more on infrastructure than labour.

    Which, if he is determined to cut the deficit, means more and deeper cuts in welfare, NHS, police etc etc. We are likely to end up with a superb infrasture inhabited by down and outs unable to make ends meet.

    In fact, if I am reading recent announcements right, he is not spending more on infrastructure, he is guaranteeing private spending on infrastructure. Yet another case of private enjoying the profit while the public stands by to pick up any losses.

    All this against policies of tax cuts for the richest and a VAT increase that hits the poorest hardest; a clamp down on disabled benefits but a code of conduct approach to rich tax dodgers; nothing done about cheating bankers but ready to stop your local plumber being paid by cash in hand.

    The government’s incompetence is bad enough; its attitude to social fairness is intolerable.

  2. Philip Edwards says:


    I don’t know how you keep your face straight when interviewing this suited-up ex public school conman. Amusingly, his hand gestures are getting steadily wilder. Maybe he can hear the swish of the Grim Reaper’s blade :-)

    But stand by…coming up on the rails is Yorkshire’s own Mogadon Man, William Hague. Christ, you’ll be asleep by the time you get five minutes into an interview with that balloon head.

    Meanwhile, it would help if you could use the proper terminology for the “opposition” – which is (their own words) “New Labour.” They long ago disassociated themselves from the moral principles and founding aims of the Labour Party.

  3. Kate says:

    Faisal – well done on getting Osborne to put in an appearance and not send a minion as has been the usual and on conducting a fairly robust interview.

    It made for interesting,if depressing,viewing.
    His view of what “people” want and believe about the efficacy of his policies is so removed from the reality of those of us truly suffering.
    I’ll bet too his seeming sangfroid over the potential drop in the UK’s credit rating bugs him
    like hell. It should do.

    It seems unbelievable but it’s true – we entrust the running of our country (and hence our lives) to those who have zilch in the way of experience of a) the job and b) the lives of the people they govern.

  4. Sage Against the Machine says:

    I feel sorry for poor George Osborne.

    If he gets elected as Chancellor again at the next general election, just look at the mess he’ll inherit!

  5. sue_m says:

    I can’t bring myself to watch the video clip. Past experience of watching this snake slither this way and that without comprehending or caring about his contradictory statements tells me how nauseating it would be.
    Osborne has no ability to empathise with the majority of people in the UK. He lives in the uber-rich bubble whose members feel superior and expect the rest of us to do as he says but not as he does. He talks of the UK economy like it is an entity in its own right which needs to be managed for the benefit of the few and ignores the fact the economy is a fluid thing affected by all the people living here. Take money from the poorest and they cannot spend at all. Take a little from the richest and they barely notice it. A countrys finances should be run for the benefit of the many. It’s not acceptable to shrink living standards for 95% of the population driving some into dire poverty so that his little bubble economy still works for the select few.
    His inability to do the job is enough reason to resign but that would require an honourable man. His close connections to the discredited Murdoch empire are the other reason his judgement cannot be trusted and he should go.

  6. Andrew Dundas says:

    We may all have overlooked the implications of the low interest rates. Which traders in Bond markets have created for us. The interest cost of British Bonds has not been so low since our post-war years.
    In fact UK, German & US governments now borrow growing amounts at interest rates that are negative in real terms. Because Bond buyers remain very KEEN to lend to us – and just as they were keen before the last election.
    It’s as clear a constant signal that UK, German & US Governments should be spending more as we’re ever likely to see.
    But each government seems blind to these clear market signals.

    1. Arthur Embleton says:

      @AndrewDundas – Our rates are low but I think they are low by artificially raising demand in the following ways:

      1. Until the last round, QE has been used to buy UK Gilts from Banks.
      2. Banks have been required to increase their reserves which I believe can only be held with certain products such as Gilts as these aren’t subject to currency fluctuations.
      3. Lastly, we are still AAA, so insurance companies and pensions still have reason to buy our Gilts.

    2. Andrew Dundas says:

      Interesting observations. Have you considered Reinhart & Rogoff’s finding that large economies such as ours NEVER default?
      UK sovereign Bond rates have been low since 2000. Banks all over the world are holding national Bonds, yet the UK’s Bond rates continue to remain well below average (which suggests Bond investors agree with R&R). Even in 2009-10, when entire UK media & presumptive leaders were vigorously attacking UK credit standing.
      My pension fund relies on a variety of Bonds, not all of them AAA. I note that US is not AAA any more.
      You’re correct to point out that almost all UK Gov Bonds have always been held by UK institutions. Same in Italy & Spain. But not for Greece, ’cause it’s much smaller.
      Our persistent low interest rates are clear market sign that our savings and debt repayments are excessive.
      Pass it on!

  7. C Smith says:

    I wrote to David Cameron about his Chancellor’s abysmal performance on 15/06/2012. Thus far, he has managed only an acknowledgement, via my M.P. I assume that his minions find it very difficult to defend the indefensible.

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