{"id":26824,"date":"2014-11-26T08:42:38","date_gmt":"2014-11-26T08:42:38","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=26824"},"modified":"2014-11-26T08:42:38","modified_gmt":"2014-11-26T08:42:38","slug":"the-poverty-of-osbornes-economic-thinking","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2014\/11\/26\/the-poverty-of-osbornes-economic-thinking\/","title":{"rendered":"The poverty of Osborne’s economic thinking"},"content":{"rendered":"

The FT has reported that<\/a>:<\/p>\n

George Osborne will next week announce plans to put into law a promise to balance Britain\u2019s underlying budget deficit by the middle of the next parliament, in a move partly intended as a trap for Labour.<\/p><\/blockquote>\n

There are three immediate observations to make, and then a more serious, conceptual one to raise.<\/p>\n

The first, and glaringly obvious, point is that this is as petty and simultaneously surreal as Alistair Darling's Act passed in 2010 requiring a halving of the budget deficit in the current parliament. He had no idea how to do that and George Osborne has proved it was not possible. That Act was a folly by a man who knew he had no chance of having to implement the law he created and I can only presume that George Osborne is putting forward this proposal precisely because he knows there is no chance that he will be Chancellor, or even in government, after May 2015. The Liberal Democrats support for the proposal is testament to that.<\/p>\n

Second, as a matter of fact Osborne has failed to meet any target date for balancing the budget to date: there is no reason to believe why he should do so now.<\/p>\n

Third, if Labour have any sense they wont see this as a trap but as an opportunity to spell out just why they think it appropriate for them to have power over the economy, and that George Osborne should not be trusted with it.<\/p>\n

Which brings me to the conceptual point, which is that the last thing we need right now is a balanced budget. I explored the reasons for this last December and they're worth repeating. As I said then, the trouble with George Osborne is that he has never studied either economics or accountancy. \u00a0If he had he would realise that there is no merit in a balanced budget, let alone a budget surplus (for which he aims, to reduce our debt), not least because such a surplus is part of an accounting equation. At the macro (national) level, which is what we\u2019re talking about, there are some accounting equations that hold true in economics. One is that the economy does in fact balance. It may well balance at the wrong point with a result that we do not want, but it does balance. And what that means is that if someone is in surplus then someone else is in deficit.<\/p>\n

There are not too many variables in this equation either: just the government, consumers (that\u2019s you and me), business and trade. So, if the government runs a surplus someone else has to run a deficit. It\u2019s pretty obvious really: the books will balance. So, a government surplus is matched by increasing consumer debt, business spending or money flows via trade.<\/p>\n

We have remarkably little control over trade. First, we almost invariably run a deficit and secondly we have (unless we suddenly and ruinously begin using interest rates to alter exchange rates) almost no control over that rate so let\u2019s treat that as fixed to the extent that it is beyond control. And let\u2019s also be aware that such is the state of the Eurozone we should not be looking for much hope from that source \u2014 which is our biggest market.<\/p>\n

In that case we\u2019re looking for a government surplus to be matched by consumer borrowing and business spending on investment.<\/p>\n

Now, again, let\u2019s deal with the easy one \u2014 business spending. This would be on investment of course; we can\u2019t imagine they\u2019re going to start a free for all in pay rises for anyone but bosses. But as we know, whilst they\u2019re laden high with cash<\/a> (which right now they lend, in practice, to the government) they appear to have no intention of spending that and worse still appear clueless as to what they might spend it on<\/a>. There is no hope of them creating a deficit on their budget, and so they will not create one for the government.<\/p>\n

In that case we\u2019re down to consumers to start borrowing heavily to make the government surplus happen. The simple fact is that Osborne is wholly dependent on the very thing that caused the recession - rising consumer debt - to fund his balanced budget giving his other current economic policies.<\/p>\n

But he doesn\u2019t just need a but of a bubble, he wants us to plummet into debt. As Duncan Weldon, when at the TUC argued<\/a>, George\u2019s growth plan in 2010 was predicated on consumers going into increasing household debt on the basis of their belief that a budget surplus and tax cuts would be just around the corner. This was what George called expansionary fiscal contraction at the time. It was nonsense then and it is nonsense now. Consumers had more sense: they did not believe him and so we got a recession because they saved instead of spendin<\/a>g. But now George is back on the same band wagon \u2014 with the same tune \u2014 selling the same myth.<\/p>\n

Will it happen? No is the simple answer: whatever growth we have is not giving rise to extra consumer spending. Consumers are not that stupid and most simply won\u2019t be offered the credit from anyone but Wonga this time, and that runs out fast,\u00a0and with it Osborne\u2019s hope of a surplus. All we\u2019ll then get is a Geddes Axe, 1922 style <\/a>- and we all know what followed that.<\/p>\n

And this is utterly absurd. First we do not need a surplus: when the government has control of its currency it can run a deficit equivalent to debt multiplied by the interest rate and sand still \u2014 so \u00a330+ billion a year of deficit is balance right now.<\/p>\n

Second, as George has now found the multiplier <\/a>he should be spending \u2014 as that is the way to clear debt<\/a>.<\/p>\n

Third, the reality is that a balanced budget is meaningless as \u00a0goal. All it actually says of the person who promotes it is that they do not want to accept any responsibility for the economy that they have been elected to manage - and that because they're clueless they won't intervene in it. In that sense a balanced budget is the policy of the person who does not believe in democracy or choice and who wants power to deny it to others.<\/p>\n

Which pretty much sums up the poverty of Osborne's economic thinking.<\/p>\n","protected":false},"excerpt":{"rendered":"

The FT has reported that: George Osborne will next week announce plans to put into law a promise to balance Britain\u2019s underlying budget deficit by
 Read the full article…<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35,1],"tags":[],"class_list":["post-26824","post","type-post","status-publish","format-standard","hentry","category-economics","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/26824","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=26824"}],"version-history":[{"count":0,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/26824\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=26824"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=26824"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=26824"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}