Economies are pretty resilient things. Of course output can decline extremely sharply as a result of negative shocks – and the British economy shrunk 6.4 per cent in 2008-9 as a result of the world financial crisis and subsequent recession. But at some point they do usually bounce back to decent growth rates, particularly if you are lucky enough to get decent employment rates. That is the good news.
The trouble is that the length of time it takes and the pace of that recovery is very uncertain, and is not under the control of anyone. And that is news to make you nervous not only if you are tending to a business on the edge or searching for a job, but if you are the chancellor tasked with making sure the economy comes right in time to win you the next election.
Of course this last is never explicitly stated, but that is what all George Osborne’s colleagues are expecting of him. Indeed he needs to pull it off a lot faster if the Coalition is to hold. Bewitched by the lure of power, the Liberal Democrats have supported very tough fiscal policies despite having stood full square against them in the general election. But that support won’t hold for ever if there are no visible signs that the pain is going to be worth it.
IT’S ABOUT THE WORLD NOT THE UK
So much can go wrong with economic recoveries. The world economy is the most important factor for a medium sized, open economy like the UK. So if the US falters, if the German obsession with fiscal consolidation rather than growth is too strong, if the Greek crisis does spill-over to Portugal and Spain, if China stalls, then however low our exchange rate, a booming export led recovery to save the day will not materialise.
And then there is that elusive driver of domestic demand that Keynes called animal spirits, and that business and the city usually call “confidence”. Osborne staked the house on some old fashioned, pre Keynesian economics in his first Budget.
He bet that getting down spending fast to reduce the deficit would allow interest rates to stay low, would get the thumbs up from international markets and would convince business decision makers that now was the time to invest, to expand, to hire. In other words he bet that this strategy would boost not dent confidence.
For Osborne this course of action was not a risk at all. Broadly speaking most Conservative economic thinking sees the deficit and debt as the root of virtually all our economic problems. In the Tory version of history the harsh Budget of 1981 was not an event that prolonged and deepened the degree of recession, but the vital ingredient in the strong growth later on in that decade. The lesson is cut and cut fast whatever the external circumstances.
The trouble is that while the public have never bought into the concepts of Keynesian economics (every mythical housewife knows you pull in your belt when in debt, you don’t spend more), they know bad times coming when they stare them in the face and that is what they seem to feel the first Osborne Budget offered them.
CUTTING FOR RECOVERY?
It was a categorical rejection of the idea that the state has any role in supporting demand through fiscal policy. Instead, to bring down the deficit swiftly, thousands of jobs are to go – directly in the public sector and indirectly from the firms which supply them and from the consequent fall in spending power. And VAT is to go up steeply.
And to add to that this week Martin Weale, the newest member of the MPC, has said there is still a real risk of a double dip recession while centre-right think tank, Policy Exchange, has claimed that inflation may take off forcing interest rates to rise to eight per cent. No wonder confidence indicators are not looking healthy.
George Osborne and his team will be sweating over each and every economic statistic, looking for signs of life and momentum.
They may pull through and he will be a hero.
Or he may just prove that you cannot cut your way out of a recession.
Both the economy and the future politics of Britain will be heavily influenced by the gamble he has taken and by events he cannot control.
That indeed is the lot of a chancellor.
Dan Corry, ex-senior adviser on the economy to former Prime Minister Gordon Brown