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…