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George Osborne’s fiscal strategy is based on trust

The Chancellor understands the importance of appearing both competent and, at times, benevolent

By George Magnus  

George Osborne has won trust by moving to the centre ground © PA/PA Wire/Press Association Images

The economic run-up to Christmas includes an ECB meeting this week, the Bank of England’s Monetary Policy Committee next week, and the Federal Reserve the week after. The first and the last, at least, are expected to set tongues wagging. This week though, something a bit different, but no less important.

It isn’t easily measurable, takes a long time to build, and can be gone in the blink of an eye. It’s trust. Enduring success in business depends on it. Economies only develop and progress if they evolve robust institutions commanding the trust of citizens. Politicians crave it.

It was a key topic in a lecture given in Oxford last week by Lord Browne of Madingley, currently promoting his new book, Connect: how companies succeed by engaging radically with society. Browne, formerly CEO of BP and now, inter alia, UK Chair of the Chinese telecommunications giant Huawei, is clearly anxious about the relationship between companies and society nowadays, now ever more transparent because of ubiquitous information and the power of social media. 

Browne and his co-authors reckon that the interaction between companies and society may account for up to a third of annual earnings, underscoring how important it has become for companies to build and retain the trust of their customers, counter-parties and regulatory authorities. Lose trust, and a company is increasingly likely to suffer a significant threat to its revenues and share price, and perhaps insolvency.

The key to trust in business and to corporate relations with society, according to a relatively recent Harvard Business Review article, is the combination of competence, integrity and benevolence. Put another way, is the company good at what it does, is it honest, and does it act in our interests?  The very recent scandal involving VW, which won many corporate social responsibility awards, is a case in point. Amazon, Google and Apple deliver great service and products to customers, but when they use complex tax accounting laws and loopholes to avoid paying taxes where they earn their profits, how socially responsible is that? Banks constitute the classic example in recent years, where institutions we need to trust, lost it.  To this day, for many people, “customer service”  in the retail finance sector is an anachronism, and trust in banks and bankers remains at a low ebb.  

Trust isn’t normally trotted out by economists as a key factor in the economy, which is an oversight at least. Here is a trio of examples.

China, even with—or perhaps because of—strong state control, its regulatory authorities and body of law, has witnessed countless examples of corporate wrong doing and malfeasance over the years. These are likely to become more important as incomes increase, cities grow, and social media penetration rises. A litany of quality and corruption scandals involving the food, construction, chemicals, energy, transportation, and finance industries has undermined public trust and confidence in policies and regulations governing the environment, health and safety, and citizens’ rights. Shoddy construction standards in the terrible Sichuan earthquake in 2008, for example, feature in the current Ai Wei Wei exhibition in London (ends 13th December), while one of China’s worst ever industrial accidents in Tianjin earlier this year was attributed to chronic corporate and political failures.

In Brazil, which is facing its worst economic crisis for many years, a long-running corruption probe surrounding Petrobras, the giant oil and gas company, has just erupted. The arrest of one of Brazil’s richest and most powerful financiers, along with a high-ranking government Senator, and an assortment of high profile corporate leaders suggests that the trust needed for Brazil to emerge from its crisis is still eroding. Eventually, due political and legal processes may actually help the country on its way, but what is going on today still augurs poorly for the country’s economic stability. By contrast, for example, the surprising election victory last week of Mauricio Macri, who will replace Cristina Fernandez as President of Argentina, has offered some hope for long overdue economic resuscitation.

Closer to home, George Osborne’s Autumn Statement is still being digested. He is the butt of a lot of anger and cynicism but in the country as a whole, he may still have the trust of voters. And this, despite borrowing strategy from his one-time opposite number, Ed Balls. He has restored about £30bn of previously planned spending cuts in this parliament—precisely the same amount that Labour planned to do. He has shifted the burden of fiscal adjustment strongly towards higher revenues, as Labour would have done. He has launched a broadside against buy-to-let and second home purchasers, measures which wouldn’t have been out of place in a Labour economic policy. Under the heading of “apprenticeship levy”, he proposes to raise considerable revenues from what is otherwise a payroll tax, which would have been considered anti-corporate if it had emanated from the mouth of a Labour Chancellor. And he is depending on new estimates of lower debt service payments, and the accuracy of new models of tax receipts provided by the Office for Budget Responsibility.

Leaving the Chancellor’s strategy, per se, to one side, the interesting conclusion is that he managed to do all this, and still came away with his credibility largely, if not wholly, in place. We will never know how such a strategy would have gone down, had Ed Balls delivered it. But the Chancellor is still drawing on a well of trust and is certainly blessed because John McDonnell’ has next to none, especially leading off his response to the Chancellor with a student-union type reading from Mao Zedong’s Little Red Book. Criticise the Chancellor by all means, but it is clear that his front bench opposite numbers come up short when it comes to competence, integrity and benevolence. 

Things can change for the Chancellor. The OBR may be wrong about the additional revenues. The economy could be knocked off course by an external shock or by the negative consequences of a vote to quit the EU, The UK’s external deficit could undermine confidence in the stability of the pound. If any of these things happened, the government’s best laid fiscal plans would then have to change again, and we might then get a better chance to judge whether the Chancellor’s reserves of trust are well-founded. For as many companies have found—for example, WorldCom, Enron, the Tylenol brand, Northern Rock, HBOS, Lehmans, Petrobras, and VW—trust accumulates over long periods, and evaporates in a moment.

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