Osborne’s achievement: the shrinking economy

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The FT has said this morning that the Office for Budget Responsibility has told George Osborne that there is a new £20 billion hole in his budget forecasts. The reason, it says, is that "while Britain has staged a remarkable recovery, indicators of the economy’s capacity for future growth have deteriorated." This means that "with unemployment falling quickly, the figures show that companies may have little room to expand production rapidly."

Unpacking that just a little suggests that what Osborne has delivered is a situation where his drive for austerity has had some extraordinary consequences.  By slashing state investment and by cutting public spending in a process combined with an increase in VAT he guaranteed  a fall in earnings capacity that reduced consumption and inevitably resulted in a private sector investment slump.   At the same time his failure to reform banking meant that there was a credit squeeze for small and medium-sized businesses just as hundreds of thousands of people were forced into self-employment by changes in the benefit system,  all of whom have, as a consequence,  ended up in marginal and low productivity work.

This combination of events meant that state investment  has fallen well below previous levels,   there has been very limited  net private sector investment by larger companies  and very little investment by smaller companies  whilst people are being forced into extremely marginal employment.  It was, inevitable, as a result that productivity was going to fall, and any upturn in the economy was bound to be constrained  as a consequence.  The Office for Budget Responsibility has just realised this.  Despite the fact that we have two million or more unemployed people in this country,  with one million of them being young people ready and willing to work and open to training, there is,  apparently, no capacity to employ them.

Despite this the goal is a balanced budget.  Let me reiterate something I've said often: we do not need balance budgets, any more than we need budget surpluses.  In an economy worth at least £1.5 trillion  a year  which issues its own currency and with inflation running at more than 2% on average  a deficit of  up to £30 billion  a year simply represents standing still:  it is the debt that can be afforded because of the fall in the value of money.  Balancing the books in that situation is an absurd objective;  it is simply an exercise in shrinking the state at a time when it is very obvious that the demand for state services exceeds that for private sector activity.

There is, however, more to it than that.  As is very obvious, there are now very few state services that can now be cut without causing considerable hardship  either directly through the imposition of poverty, ill-health, reduced life expectancy or unemployment or  indirectly by reducing our long-term prospect for sustainable economic activity which has massive consequences for  younger generations.  As a result of further cuts would only increase the harm already caused by the  programme of austerity.  I would add, that with the exception of tax increases designed to reduce inequality (the 50p tax rate, new wealth taxes, reform of council tax so that higher value properties are appropriately charged, changes to corporation tax to penalise the  accumulation of cash, etc)  there is no justification for tax increases at the moment and the opposite may be true:  we can actually do with tax cuts to improve people's living standards, with VAT being the obvious place to start.

In that case, where is the money to come from to create the new productivity that is required in our economy?  I've said it before, and I will say it again;  there are three sources.

The first is closing the tax gap.  I will be writing much more on this over the next few months.

The second  is green quantitative easing,  whose time has surely come.

Thirdly,  as I have also argued, the time has come for a levy on pension funds  where I have proposed that 25% of all new contributions should be directed towards the creation of new employment activity, whether in the UK or not (to deal with EU lawyers' concerns),  with tax relief being denied on contributions made of this target is not met.

In combination  I believe that these three sources of  finance could release a wall of cash to fund the investment that we need in the UK economy to deliver the growth that will be sustainable into the future, produce a low carbon economy, create employment,  reverse the current decline  and provide us with  that missing part of the economic equation that Osborne has so effectively destroyed, which is hope.

There is, however, no prospect that George Osborne will deliver this.  Regrettably, so strong is the economic consensus,  no one else appears to want to do so either.  We are stuck in a malaise created by the poverty of our economic thinking  and not by the reality of our economic potential.  That's what's so sad  about the predictability of George Osborne's response to this latest forecast,  which will be yet more cuts.