The first problem has been the composition of the austerity package. Much of the tightening has been via tax hikes rather than spending cuts – capital gains, national insurance, stamp duty, value added tax, and now pasties and the rest. That was the wrong choice: lower taxes are good for growth, higher taxes are bad. The trick is to deliver austerity by cutting spending, not by hiking taxes.
The next issue is that the government’s supply-side agenda has failed miserably. By now, developers should have been set free to build new airports and even cities; the labour market should have been liberalised; job-reducing red tape eliminated; the top rate of tax abolished; mad EU rules abolished, and so on and so forth. Britain needed a revolution; it was granted a few over-hyped reforms. With the exception of some small cuts to corporation tax, and some other changes, there is more red tape and more people face higher marginal tax rates now than when Labour was in power. There has been a massive onslaught on the financial services industry, much of it unrelated to sorting out the crisis. It’s madness. Add to that the ongoing war on wealth, the demonisation of successful people and business executives, and the decision to relentlessly attack – rather than reform to strengthen – the City and one begins to understand why firms are spending their cash abroad, rather than at home.
Next, inflation. This is a recession made in Threadneedle Street, home of the Bank of England, as much as in Downing Street: excessive inflation has slashed real incomes and real wealth; this, rather than cuts, is what has depressed spending the most. Osborne should have changed the Bank’s remit, and been stricter when inflation overshot. Ultra-low rates and QE have become counter-productive.
Last but not least, banking rules. It was right to ensure banks held more capital and that credit became priced rationally – but the reforms have spiralled out of control. UK, EU and Basel rules are forcing banks to hold too much cash in reserve against loans they make to small businesses and others, reducing supply and increasing cost. We need a stable banking system – not a dead one.
What is most depressing is that the double-dip (if that is indeed what it is) will wrongly discredit austerity, even though the state remains incredibly profligate. The budget deficit in 2011-12 was a massive £126bn, down just £10.9bn from the £136.8bn the year before. The national debt is still rocketing: public sector net debt at the end of March 2012 was £1,022.5bn (66.0 per cent of GDP) compared with £905.3bn (60.5 per cent of GDP) at the end of March 2011. Current spending rose in cash terms from £604.8bn to £617bn in 2011-12. The OECD says UK public spending was 49.8 per cent of GDP in 2011. Public sector net borrowing remains at a catastrophic 8.3 per cent of GDP. All of this remains utterly unsustainable – yet the public have wrongly been told that the UK “is tackling its debt”. Osborne has been a disappointing chancellor – but not for the reasons cited by the left.
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