David Cameron should override his chancellor—and the coalitionby Gavyn Davies / September 19, 2012 / Leave a comment
Published in October 2012 issue of Prospect Magazine
When my family went to the Olympic Stadium, we said to our 14 year old, a fan of the Romans, that it must have been just like this in the Colosseum. No, he replied sagely, we would not see anyone thrown to the lions. George Osborne must have been grateful for that when the Paralympic crowd spontaneously started booing him a few days later.
The crowd’s reaction summed up the sense of frustration and impatience which seems to be rife in the British economy at present. The unfortunate Mr Osborne, who has scarcely been around long enough to deserve all of the blame, seems to be a man in the wrong place at the wrong time. David Cameron, generously or not, sees advantage in keeping him there. How can he dig himself out of this hole?
According to Denis Healey, the Labour chancellor in the late 1970s, the first law of holes states: when in one, stop digging. Osborne is not doing that, or is certainly trying hard to give that impression. Plan A was his idea, and it seemed like a very good one at the time. He is sticking to it. His intellectual ally, Mervyn King, governor of the Bank of England, continues to play his required role with determination. Nick Clegg, though lost in the economic maze, cannot find an exit. We are going to fix the economy, says the coalition, even if it is the last thing we do.
The problem is that the economy is not behaving as was predicted when Plan A was launched.
Osborne’s key judgement was that he could reduce overall debt by around 6 per cent of gross domestic product (GDP) in the course of the parliament, while relying on aggressively easy monetary policy-—in this case, printing money—to ensure that GDP growth would remain slightly above its long-term trend. That would eliminate the budget deficit (or more accurately the structural current budget balance) by the last year of the forecast period, 2015/16. And it would bring the public sector debt down thereafter. Around 80 per cent of this budgetary adjustment would come from spending cuts, not through higher taxation.