George Osborne’s economic illiteracy left us exposed to this crisisby Jonathan Portes / March 25, 2020 / Leave a comment
“We must act to fix the roof when the sun is shining,” George Osborne said, not once but many times, when defending spending cuts. A laudable aspiration, indeed—and a good adage for government. Unfortunately, as we are now discovering, he paid for the new roof by stripping out the supporting beams and allowing dry rot to spread throughout the building. The austerity programme of the last decade has prepared us neither for the health, social or economic consequences of the Covid-19 crisis; instead, it has left us far more vulnerable than necessary. When this crisis is over, we must not repeat the same mistakes.
Over the last decade, the government made two fundamental errors. The first was the delusion that the primary metrics of readiness for an economic crisis are the level of the debt and deficit. To be fair, this was encouraged by institutions like the IMF, with its talk of “fiscal space.” This was based on the almost entirely spurious notion that in a crisis markets would somehow stop countries with high debt and deficits from responding appropriately.
This wasn’t the case in 2008-09 and thereafter, when developed countries which—like the UK—can borrow money (and if necessary print it) in their own currencies had no problem financing very large deficits at very low interest rates. The scaremongering that the UK would become like Greece, or even Italy—which, because of euro membership, do not have that flexibility—was just that. Those of us who said that, while there were indeed plenty of things worry about, market panic about UK gilts wasn’t one of them, were right, both in economic theory and in real life.
So there was absolutely no excuse for thinking that this crisis would be any different. The UK—like most countries—has much higher debt than in 2008, but a somewhat lower deficit. No one really cares, and certainly not markets; interest rates on 30-year gilts are under 1 per cent, meaning the government can borrow essentially for free—and this is after the chancellor has just announced an unprecedented economic support package which is likely to see the deficit ballooning out again.
The simple fact is a crisis that requires a very large increase in government borrowing is also likely, as now, to be a crisis when the private sector is cutting spending and doesn’t want to invest—so government bonds are likely to be the most attractive option going. The question is not “who will lend us the money?” but “what else are they going to do with it?”
Crucially, this obsession with deficit reduction was at the expense of other forms of readiness. And this was the second fundamental error. The government decided—on a distinctly dodgy interpretation of the economic research—that the burden of deficit reduction should fall almost entirely on spending cuts rather than tax increases, on the grounds that such cuts would be more politically and economically sustainable.
And in the short-term it was right. Cutting central funding for local authority services in half—and by more in deprived areas—was indeed a “sustainable” strategy for the government, since much of the blame for the resulting cuts in social care, childrens’ services and the like could be redirected to local councils. Blaming immigrants for increased pressures on the NHS, and benefit scroungers for those on the welfare system, was also a successful political strategy on the right for a while.
But eventually, and inevitably, this hit the buffers. With the NHS overstretched and understaffed, thousands of people sleeping on the streets, and the welfare safety net increasingly full of holes, it was obvious, even before Covid-19, that many of these cuts would need to be reversed. Rishi Sunak’s 12th March Budget—which now seems years ago—simply recognised that reality. In other words, many of Osborne’s “savings” turned out not to be “savings” at all, just spending postponed, admittedly at a great social cost. As Giles Wilkes, Vince Cable’s adviser during the coalition government, put it, “I always felt that there was a false economy in allowing [spending] to slip too far in that it built up a future liability.”
And Covid-19 has made this clear. As Warren Buffett famously said about financial markets during crises, “Only when the tide goes out do you discover who’s been swimming naked.” The same is true of governments. It has often been pointed out that, if the NHS regularly found itself unable to cope with the normal winter peak in demand, it would struggle to deal with a severe flu season. And while none of us—certainly not economists like me—foresaw exactly when and how this pandemic would hit or the consequences, it’s not exactly a shock. In fact, it’s been top of the government’s own official risk register for years, both for likelihood and for impact. Cutting NHS capacity to the bone to temporarily reduce the deficit, at the cost, at least in part, of greater readiness, was inexcusable.
This is now obvious to us all; but perhaps less so is the damage to the welfare system by the combination of Iain Duncan Smith’s incompetence and George Osborne’s determination to balance the budget, despite his denials, on the backs of the poor. Many are now saying, rightly, that it’s unreasonable and unacceptable to expect people who lose their jobs to live on £73.10 a week (the current jobseekers’ allowance rate for single people over 25). True enough—but it was no less true last month, before Covid-19 threatened hundreds of thousands more with being put in that position. The buoyancy of the UK labour market, with very low unemployment and with most unemployed people moving quickly into work, made unprecedented cuts to benefits just about politically, if not morally, sustainable. But the point of a safety net is that you construct it in good times, to catch us if we should fall in the bad times.
Why does all this matter? Even if we wouldn’t have started from here, surely we must make the best of it? True enough. But when this crisis is over, we’ll find ourselves again with a large deficit and debt, and choices to be made. Who will pay, and when? What are our priorities as a country, and what do we need to do to get ready for the next crisis (which, again, will be different from the last)? Those who fail to learn from history are doomed to repeat it.