I’ve presented more business plans to more people than I care to remember.
I always hoped they were right. I spent much time making sure that I got my assumptions as accurate as possible. After all, the credibility of the plan was dependent upon the assumptions made.
There are two key assumptions in George Osborne’s plan. The first is that the private sector will pick up the slack in the economy. Martin Wolf dismisses that idea this morning, saying:
In current circumstances, the belief that a concerted fiscal tightening across the developed world would prove expansionary is, to put it mildly, optimistic.
It is worse than that, as Martin implies: there is not a hope that this will happen. I’ve explained why:
George Osborne thinks that there will be growth from new private sector employment. But that’s just not credible. Domestic economies are going to be depressed because people have less to spend. The government is going to reduce the incentives to business to invest – so it will invest less. And all our major export markets are introducing similar austerity measures. There is in that case no hope of a private sector led recovery in our economy.
So the first assumption fails. The second assumption is that departmental budgets can be cut by 25%. I am absolutely sure this is impossible. I’m not alone. Take this, for example from historian Glen O’Hara:
George Osborne's emergency Budget is the most important statement of a new governing ideology since James Callaghan's famous renunciation of Keynesian economics at the 1976 Labour Party Conference. In particular, the scale of the public sector cuts ahead are staggering - even to historians used to analyzing the roller-coaster of twentieth century economic growth. The next four years will see public sector spending fall by 25 per cent in real terms, outside of the NHS and the international aid budget. It may be that this proves impossible to achieve: and four incidents in the twentieth century demonstrate the scale of the challenge ahead. Three periods of public spending restraint - the 'Geddes Axe' of 1922-23, the years following the IMF loan of 1976, and the Conservatives' deficit reduction in the early 1990s - are all relevant here. But in none of those cases was the spending reduction more than nine per cent (the 'Geddes Axe', which aimed to achieve 20 per cent); the other two periods saw public spending fall by around five per cent. The Swedish and Canadian experiments of the 1990s have been closely studied in the Treasury, but it is also clear, fourth and last, that those planned spending reductions were nowhere near as draconian as the UK's new strategy, and took place over two parliaments, not one. The British fiscal experiment of 2010-14 is much, much tougher than any of these examples.
Candidly, there’s not a hope that savings on this scale can be delivered. Which in one sense is good news. But in another sense it leaves the strategy Osborne has adopted in tatters and the pain wholly unjustified.
And therefore as a business plan Osborne’s effort deserves a fail.