Hammond needs to learn what Osborne never grasped

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Since this blog began George Osborne has held the role of either Chancellor or Shadow Chancellor. And now, as I predicted before the Brexit vote, Prime Minister May has sent him to the back benches.

He deserves to be there. He failed. That is in both his own terms and more objectively.

He failed to cut the deficit and never came close to balancing the budget which he, bizarrely, said he would do.He borrowed more than any Chancellor in history instead.

And he delivered a stagnant economy where GDP per head is still struggling to meet pre 2008 levels and where most people have not seen their incomes rise for a decade, or more.

Leave aside a catalogue of tax, benefits and other errors of judgement that stretched right across government. Leave aside too the supposed reputation as the master political strategist who instead helped create Cameron's dire legacy. Osborne can be condemned for simply failing to ever get to grips with the economy.

There are three good reasons why that happened. First remember he began his economic career as a supply side reformer. He was a proponent of flat taxes. He always wanted to emulate Itreland's tax status. And he wanted to relax regulation in the City in 2007 as the crisis loomed. At heart, he got everything wrong before the 2008 crisis.

And he got everything wrong after it. Believing the economy to be akin to a household and showing no understanding at all of the nature of money, its role in macroeconomic policy, or the true nature of tax, he demanded cuts in government spending and increases in tax to supposedly balance the books without giving any indication that he understood that this would shrink GDP and create liquidity issues. More QE was the necessary response, which inflated all the wrong sectors of the economy whilst Osborne never understood that at a stroke it could also solve his debt problem by simply cancelling it.

As a result, crucially, he refused to realise that what the markets were saying as interest rates held low and gilt yields fell was that what they really wanted him to do so was supply more bonds to meet their demand for a safe place to save, but with the corollary being that they expected and trusted the government to invest on their behalf, which he never did. He cut investment spending as a proportion of GDP instead: he never got over his initial belief that there was no real role for the state in the economy. The consequence has been economic failure.

He failed because for eleven years he did a job he did not believe in. He was in charge of the government's role in the economy when he fundamentally  believed it did not have one. No wonder nothing good ever came of it. That attitude was, and will always be, a recipe for disaster in a Chancellor.

There have been no signs to date that Philip Hammond's core beliefs on this issue are very much different to George Osborne's. We just have to hope otherwise. Yesterday the UK government sold more than £1 billion of index linked gilts at a negative rate of more than 1%. In effect people are willing to pay the government to take their money, albeit in this case with a gamble on inflation rates built in.

The point is, in a world where there is a massive savings glut, a shortage of demand and a crippling lack of investment and so no hope of economy recovery without government intervention the last person we need at the Treasury now is another hands off Chancellor.

A new Chancllor, and I would say this whatever their hue, has to realise that George Osborne did get everything wrong.

The state is not a household. It can and should print its own money.

The UK is not like Greece. It has its own currency.

But the UK does face an economic crisis and the sectoral balances show that only by the government investing can growth be delivered, incomes raised, tax revenues grown and anything like balance restored.

I am not confident that Philip Hammond will make such a radical change to policy, but I have to live in hope. After eleven years of Osborne that is all that is left.