When he delivers his autumn statement later today, George Osborne will inevitably highlight any good economic news he can. With a general election barely five months away he will ride the jeers of Labour (and Liberal Democrat) MPs to focus on positive growth figures and a seeming decline in unemployment. He will talk about the economy recovering and what he sees as the positive prospects for long-term economic growth (at least under his continued chancellorship). Osborne will say that the good news is all down to his and the coalition government’s efforts and will claim vindication for his much vaunted “long-term economic plan”; that he has had to make tough choices but that these are now paying off for the electorate.
With an intriguing political campaign ahead, the chancellor will also try to show how any change of economic policy will jeopardise the recovery. This form of presentation, however, masks a litany of policy failures. It also hides the fact that the recovery is not firmly rooted and indeed is very likely to be reversed, especially if economic policies remain as they are.
Mind the gap
Let us start with the policy failures. Despite its austerity measures, the coalition government has failed to meet its target for the reduction in the budget deficit. The budget deficit has actually increased. This is not a bad thing in itself. Rather it has helped to support aggregate demand in an otherwise flagging economy. Had the coalition government stuck to its plan of reducing the budget deficit economic growth would have been much lower and unemployment would have been much higher.
Part of the reason the deficit has not fallen is because of the stagnation of real pay. The UK economy has recovered thanks to a rise in low-paid and insecure work. In order to escape unemployment many people have started working for themselves – these are not budding entrepreneurs but more a conscript army of the self-employed. The rise of low-paid work has restricted the growth in tax revenues for the government and made it more difficult for the chancellor to hit his deficit targets.
The low wage economy, of course, is even worse for workers. While unemployment has declined, workers have faced having to run down savings or borrow more to maintain living standards. The electoral feel-good factor that one would normally associate with economic recovery has failed to materialise. This must be one of the first recoveries in history that has coincided with increasing hardship for workers.
The growth of the economy has been sustained only because of increased consumption partly linked to reduced savings and higher borrowing. Despite sitting on large sums of cash, firms have failed to invest. Exports have also failed to offset imports. While the engine of exports – the manufacturing sector – has shown signs of revival, it has failed to recover sufficiently. The UK economy remains just as unbalanced and vulnerable to shocks as before the crisis.
With monetary policy at its limit, there is a need for fiscal policy to stimulate demand and rebalance the economy. Alongside policies to restore wages, there should be policies aimed at promoting industry and regional growth. This is not a call for a bigger state, but more a recognition of the necessity of co-ordinated action facilitated and led by the state to ensure that the economy is restructured in ways that meet the needs of all in society, rather than the few.
From the perspective of the Labour party there are criticisms of austerity but no real worked out macroeconomic alternative. Though Labour rightly highlights the “pay-less recovery”, it has yet to set out concrete plans that would create a more equal and sustainable recovery. The party has left itself with an electoral obstacle by mimicking the coalition government’s obsession with reducing the budget deficit. It needs to be understood that budget deficits are absolutely essential if the private sector is not spending enough and imports exceed exports.
If the election race can spark an honest debate about the importance and necessity of the budget deficit, then we would witness a very welcome step forward in economic policy debates in the UK. Maybe the electorate would respond positively to some honesty about the purpose and consequences of budget deficits? Maybe they would think differently and positively about the budget deficit if they were told that it helped to fund vital public services that enhance the quality of everyday life?
For the Labour party, votes could be won by saying that it would use the budget deficit to avert a downturn in economic activity and to secure a more equitable and sustainable economy. By using public borrowing to invest in the economy, for example by renewing and rebuilding infrastructure. Labour could say that it will pay down the deficit through the stimulation of tax-yielding economic activities. Reversing its stance on deficit reduction, in short, could help the electoral fortunes of Labour.
The Liberal Democrats are in an unenviable position. On the one hand, they are held responsible for the failings of current government policy. On the other, they are seen (by their own pronouncements) as a moderating force on austerity. This position is hardly tenable and puts them in a perilous place come the next election.
As for UKIP, it is not clear what its economic policies are. Its apparent advocacy of a small state suggests that it would push even harder for a reduction in the budget deficit, worsening the economic situation. It is left to smaller parties such as the Green Party to argue against austerity and in support of a different economic approach.
The sad truth is that the autumn statement ultimately is only likely to confirm the degree of consensus over the push for restraint in public expenditure. It will confirm how close the main parties are and how far we remain from resolving the pressing economic problems of our time.
The next election may be exciting in electoral terms but it is unlikely to excite in economic policy terms. We will all be worse off because of this fact.
David Spencer receives funding from EU FP7, EPSRC, and ESRC.