The below is a transcript of Lord Skidelsky’s speech in the House of Lords debate on the state of the British economy in light of the Budget statement, 14 November 2018.
First, let me say I welcome the general thrust of the Budget. As the OBR says it represents the “largest fiscal loosening” since 2010.
But we are not here to discuss the Budget, over which we have no control in this House, but “the state of the economy in light of the Budget statement” – that is, how will the Budget affect the economy?
The answer is: very little. The “loosening” of which the OBR speaks is much too small to repair the damage caused by the eight years of austerity policy since 2010. An adequate loosening would have required an admission of error beyond the economic understanding or moral compass of this government.
The Conservative Party’s narrative has been unchanged for ten years. The Great Recession was caused by the Labour government: Mr Hammond twice called it “Labour’s Great Recession”. The austerity policy, he said, had nothing to with ideology; it was “necessary” to clear up the mess Labour left. Now, with the public finances in more or less decent shape, the Chancellor can afford to reward the “hard-working British people” with a few goodies.
Let me put it as bluntly as I can: this narrative is economically illiterate and morally fraudulent.
Let’s start with the myth of ‘Labour’s Great Recession’. The idea that Labour was somehow responsible for the Great Recession is ludicrous. It was the banks which caused it, and governments which were left to clean up the mess. The Chancellor would have been more honest had he talked of the Bankers’ Recession, but no Conservative chancellor can talk that way about his friends.
A slightly more reasonable version of Mr Hammond’s story is that the Labour government left a fiscal mess for its successor to clean up. This doesn’t run either. The macroeconomist Simon Wren-Lewis of Oxford University has made a detailed, and far from uncritical, analysis of Labour’s fiscal policy between 1997 and 2010. I quote just two sentences: “any claim that the UK fiscal position was dire before the onset of the Great Recession is not tenable” and “the line that the Labour government was responsible for leaving a disastrous fiscal position is pure spin”.[1]
What I want to emphasise is that though Professor Wren-Lewis supports Labour, no competent analysis of Labour’s fiscal record would differ greatly from his summary. In any of its forms, the story of Labour’s Great Recession is a lie.
But let’s exclude the lie, and ask: was austerity a necessary policy in 2010, as the Chancellor claims?
The answer is no. The economics of the matter is straightforward. If the private sector reduces its own spending, government has to increase its spending to plug the gap. If it cuts its own spending as well, it deepens and prolongs the recession. The only counter-argument is that austerity was needed to give confidence to ‘the markets’. But the evidence is clear that any confidence-boosting effect of cutting spending on the poor was overwhelmed by its depressive effect on total spending.
No competent economic authority now disputes that this is what happened. Martin Wolf of the FT called austerity a “large unforced error”. That well-known left-wing extremist Mark Carney, governor of the Bank of England, estimated at the end of 2016 that austerity “has, on average, subtracted around one percentage point from demand each year” – that is, cumulatively, it has left the British economy about 6% smaller than it would have been, or in round numbers knocked £125 billion off the economy.
I don’t want to claim that the last eight years has been a tragedy like the First World War, or even the Great Depression. What I would claim is that the Coalition government inflicted quite unnecessary harm on the British people, which it has never acknowledged or apologised for.
My Lords,
This Budget has to be judged by the extent to which it sets about repairing that damage. It is not enough to say “austerity is coming to an end”. Austerity has to be reversed sufficiently to make up for the harm of the last eight years. And this can’t happen unless that harm is acknowledged.
The damage is most clearly seen in the low growth figures. Far from bouncing back vigorously as is usual after a deep collapse, the British economy has been growing at less than 2% a year since 2010, well below its historic trend. And things are expected to get worse. The OBR forecasts growth to be 1.5% on average over the next 5 years.
These are dreadful figures. Britain is near the bottom of the G7 countries. If we take into account the growth and ageing of the population, and the large inequality of the income distribution, there is little room here for improvement in the real living standards of most people.
The reason for low economic growth is the collapse in productivity growth. British workers work longer hours than workers in Germany, the Netherlands, France, and Denmark. But they produce less output in those hours. Annual growth in productivity has plummeted from average annual rates of about 2.3 per cent before the Great Recession to 0.4 per cent in the past decade. “Had the pre-crisis growth trend continued, then productivity would be more than 25 per cent higher today” says the Resolution Foundation.
I agree with Andy Haldane of the Bank of England when he says: “We have a long tail problem.” But our tail has become a lot longer than it was in the past, because our path back to headline full employment – in itself very welcome – has largely consisted in multiplying the number of low productivity jobs at the expense of high skill services and manufacturing. Look at the cuts in investment, housing, further education, and public services since 2010, and you have a pretty good explanation of the collapse in productivity.
The Budget should at least have begun to reverse this appalling trajectory. Instead we are promised a bagatelle for the British Business Bank, ‘a little extra’ for schools, public toilets and potholes, a little relief here and there, and yet another enquiry into the productivity puzzle.
Over everything hangs the fear of the deficit. Some commentators even fear that the Chancellor has given away ‘too much away’ to balance his books. But balancing the books should never have been the object of policy. Balancing the economy should have been the objective, with a balanced budget as the by-product of strong economic growth.
My Lords,
The hard-working British people, whose praises the Chancellor never ceases to sing, deserve better than this Chancellor is prepared to give.
[1] Wren-Lewis, S. (2013) “Aggregate fiscal policy under the Labour government, 1997-2010”. Oxford Review of Economic Policy 29(1), pp. 25-46.
Photo credit from previous page: HM Treasury / Flickr