Like a gambler who has staked all his chips on one bet, George Osborne has no plan B. Caution should be the watchword of any responsible Chancellor, but this one has decided to put politics before economics.
His great political gamble is to inflict a double-whammy on a fragile economy – a hike in VAT and deep spending cuts – as he tries to pin all the blame on Labour and wipe out the deficit in this Parliament. The prize he hopes to gain is a rolling back of the state and a pre-election tax cut giveaway in 2015 which persuades voters that the years of pain were all worthwhile.
To win, he has to hope for almost unprecedented growth in business investment and exports to make up for the depressing effect on growth and job creation of rising inflation, falling real incomes and public spending cuts which will hit public and private sector jobs alike. Yet George Osborne seems to have declared victory too early – even allowing David Cameron to declare at Prime Minister’s Questions just before Christmas: “Britain’s economy is out of the danger zone and recovering.” They may well come to regret that complacency now the evidence is mounting that the economy has taken a turn for the worse.
Thanks to the action we took to get the economy moving, when Labour left office unemployment was falling and growth was starting to pick up. But in the past few weeks the signs are that the new Government’s reckless plan to pursue a different course – and cut the deficit too far and too fast – is hurting but isn’t working. January saw the biggest fall in consumer confidence since 1992. Inflation and unemployment are both on the up. Growth has stalled – even when the statisticians take out the effects of the pre-Christmas snow. And this is all before we see the full impact of the VAT rise and deep spending cuts this year.
Of course, one should always treat the figures for one quarter with caution. Yet George Osborne refuses to even entertain the idea that he might need a rethink. The Business Secretary Vince Cable agrees. “There is no plan B”, he says – just as business leaders condemn the Government for having no plan for growth.
The Tory-led Government insists there is no alternative and that in any case this is all Labour’s fault. To win the economic argument we have to show both those things are not true. So, who is to blame? Everyone knows that the whole world was hit hard by the biggest global financial crisis in living memory. The credit crunch was caused by irresponsible lending by the financial sector. And without the action we took, recession could have turned to depression.
Of course, we didn’t get everything right. On regulation, Britain, the rest of Europe and the United States underestimated the risks. We should have ignored the calls from the Conservative Party and others – who at the time complained we were being too tough on the City – and been tougher still. But let’s not allow the myth to take hold that the global recession was due to Labour “over-spending” or too much debt.
The fact is that before the crash we had the second lowest debt in the G7 at 36.5 per cent of gross domestic product – down from the 42.5 per cent we inherited from the Tories. It was low because of the choices we made like using every pound raised from the mobile phone spectrum auctions to pay down debt.
It was our declared policy to borrow for capital investment in things like schools, hospitals, roads and housing – but for day-to-day spending our budget was balancing over the economic cycle. No Chancellor could ever say every single penny was spent wisely but we were not living beyond our means. Our deficit before the crash was lower than we’d inherited from the Tories.
For all the rewriting of history we’ve seen in recent months, there were no Conservative complaints at the time. Just days before the collapse of Northern Rock in 2007, George Osborne pledged to match our spending pound for pound. This was just a few weeks after he’d been endorsing a report by John Redwood which called for deregulation of the mortgage market.
Our task now is to win the argument that there is an economically credible alternative to what the Tories are doing. We should put jobs and growth first because it’s the best way to get the economy moving again and get the deficit down. That’s what we were doing before the election and the action we took to support the recovery and the tough choices we made meant that the deficit last year came in over £20 billion lower than forecast. That’s why I say we should repeat the bankers’ bonus tax which raised £3.5 billion last year – and use that money to help create the jobs and growth we need this year.
The US Treasury and the US central bank, the Federal Reserve, are putting jobs and growth first and their economy grew at the end of last year while ours shrank – even though they had snow blizzards like us.
George Osborne seems to be in denial about the risky gamble he has taken with our economy. For the sake of millions of families and businesses who can’t afford for it to go wrong, he needs a plan B and he needs one quick.
Ed Balls is the Shadow Chancellor and Labour & Co-op MP for Morley and Outwood
