The OBR published a short note last week showing the impact on growth from the fiscal decisions taken by the Coalition Government. This is not a revelation. The OBR has said before that austerity would have and has had a negative impact on growth, but the chart it produced with this note is quite striking. Here’s the chart.
It shows that following the crash, Labour’s discretionary fiscal policy (that’s active changes to government spending and taxation) had a positive impact on growth of around 0.3% in 2008/9 and 2009/10. Labour enacted a fiscal stimulus, but not a very big one.
It’s what this chart shows about the period after the 2010 election though that’s most interesting. After assuming power in 2010, the Coalition embarked on it’s policy of austerity. When it was formed, the OBR actually thought austerity in the first year would have a bigger negative impact than it in fact did, but it still provided a drag on growth of about 1% in 2010/11. 2011/12 was actually the year when austerity really started to kick in. When the OBR made it’s first forecasts though, it thought austerity would have a negative impact on growth of around 0.6%. In actual fact though, it was more like 1%.
It’s fairly well known now that despite the rhetoric, George Osborne actually responded to terrible growth figures in 2011 and 2012 by easing up on austerity, and this can be seen clearly in the chart above. In 2012/13, the government’s discretionary fiscal policy had a very small negative impact on growth, turning to a very small positive impact in 2013/14.
In 2014/15 though, the year before the election (coincidentally I’m sure), George Osborne’s discretionary fiscal policy made a positive contribution to growth of over 0.3%, which is more than Labour’s stimulus provided after the crash. So growth is only at the level it is now because of the positive impact of fiscal policy, something that many Conservatives don’t want to hear.
We are to believe that more cuts are on the way as Osborne tries to achieve a surplus by 2019/20, but if he goes ahead with the cuts implied by his plans – tax credits being only one part of it – it seems likely this negative drag will continue. Coupled with prospects for growth in the rest of the world looking bleak, it seems unlikely that growth can persist alongside spending cuts. Something will have to give.
Today was a day of U-turns. One for the Tories, one for Labour. For the Tories, David Cameron decided to pull out of bidding for a Saudi prisons contract, over concerns for human rights and the death penalty in Saudi Arabia. The wily Michael Gove appears to have leaked the story of a Cabinet row in a (successful it seems) bid to paint himself in the best possible light, but others may wonder if Jeremy Corbyn’s public calls for the contract to be pulled also had something to do with it. Whatever the truth, Cameron’s decision seems to be popular as U-turns go.
For Labours part, Shadow Chancellor John McDonnell made a significant U-turn of his own. This one has gone down like a lead balloon within his own party, even though it’s a very good about turn for him to make. Two weeks ago he appeared to commit Labour to voting for George Osborne’s Fiscal Charter; a ridiculous document which would commit future governments (in theory, but not in practice) to run fiscal surpluses in ill-defined ‘good times’. McDonnell appears to have signed up to it to try to allay concerns about Labour’s ‘fiscal discipline’. He has now changed his mind and should be applauded for doing so, although it will be embarrassing for him for a few days and has caused serious ructions in the Labour Party. Veteran MP Mike Gapes (who it seems has been having a lot of fun today) summed this feeling up succinctly today Tweeting:
It’s no secret that many (most) Labour MPs actively despise McDonnell, so it should be no surprise that they look to pounce on any perceived errors in judgement. The important thing though is that he has now made the right decision on the Fiscal Compact and now has a chance to make a coherent case against austerity. They should probably now try to get as many ‘experts’ as they can onto the airwaves to trash the Fiscal Compact. That shouldn’t be too hard.
Health Secretary Jeremy Hunt was asked today about the forthcoming cuts to tax credits which are so unpopular they have united Jeremy Corbyn with The Sun. His answer was very candid are rather revealing about the conservative mindset. When asked if the tax credit cuts should be slowed, Hunt said:
“No. We have to proceed with these tax credit changes because they are a very important cultural signal. My wife is Chinese. We want this to be one of the most successful countries in the world in 20, 30, 40 years’ time.
“There’s a pretty difficult question that we have to answer, which is essentially: are we going to be a country which is prepared to work hard in the way that Asian economies are prepared to work hard, in the way that Americans are prepared to work hard? And that is about creating a culture where work is at the heart of our success.”
People like me would say that the economic system we have causes unemployment and it has a tendency to use this to push wages down. Conservatives like Hunt though don’t agree. They think the qualities of the individual determine someone’s experiences. Presumably, when he reads stories of over-worked Chinese workers committing suicide, he sees only hard-working strivers who desperately want to get on. Only through hard work does Britain succeed. It’s the conservative theory of individual success applied to the national level. Hunt went on to say:
“Dignity is not just about how much money you have got … officially children are growing up in poverty if there is an income in that family of less than £16,500. What the Conservatives say is how that £16,500 is earned matters.
“It matters if you are earning that yourself, because if you are earning it yourself you are independent and that is the first step towards self-respect. If that £16,500 is either a high proportion or entirely through the benefit system you are trapped. It is about pathways to work, pathways to independence … It is about creating a pathway to independence, self-respect and dignity.”
Again, people like me would say the system traps people in low paid, insecure work and means they have to rely on the social security system to live anything like a decent life. Hunt and his fellow Conservatives would bring those people cheer by pointing out the ‘dignity’ in their struggle to put food on the table. In other words, “Forget that you can barely pay the rent. Take heart in the dignity of your hard work and the fact you are no longer such a burden on the state.” As Jeremy Corbyn said in his speech last week “you don’t have to take what you’re given.”