Given the reality of the situation and ignoring the phony shock of some economists, George Osborne did the best he could with a very bad hand on Tuesday. This is not to say he got it all right, but he got as much right as anyone can expect, given the underlying facts. These are that the debts of the Eurozone, the U.S. and the U.K. are so big as to put a huge brake on any form of growth. To that has to be added the difficulty that revenue falls short of income in the U.K. to the tune of £1 in every£4 and it has the highest total debt in the world.
The U.K. is now fighting on three fronts. There is an international debt storm sufficient to trigger a global recession, there is a crisis of control of the euro in a structural sense and the state of U.K. personal, corporate and public finances demand correction to avoid calamity. At the time of the crash and after researching the headline and underlying figures, I remarked that the problem was so big that it would take a generation to be resolved. At first it looked as if I would be proved wrong. Now it beginning to look as if I may have been right.
The OBR forecasts seem to have taken many by surprise. The mistake has been common that we were dealing with just a bubble and things would soon bounce back. The reality is that recovery has to come from within which will be a slow process, it cannot be hastened by borrowing more and that in order to get the year on year structural budget deficit into balance, the government will be forced to borrow even more than forecast in the short term.
Labour, having steered the economy into the situation where it was extra vulnerable to the effects of the banking crash, now demonstrates what amounts to economic illiteracy by suggesting that its own plan, which the electorate rejected, would have worked better. Had they been given the opportunity to put it into effect we would now be facing borrowing costs like Italy’s, but with much more devastating impact upon every home in the land. A hype in interest rates on any scale would sink the frail finances of literally millions of people, because Britain, as a percentage of GDP, owes more money than any other major country in the world.
When a company is so over borrowed that it cannot any longer finance the running of its business without borrowing more and when the cost of the accumulated borrowing stifles the growth of the core business, which can then no longer keep up the payments, that company is bust. It is the same with sovereign debt.
Osborne might have been in a better place if he had introduced the measures proposed yesterday earlier, but he is right to maintain his cuts. It is imaginative, perhaps the first glimmer of hope that the core of the whole debacle is at last being understood in the Treasury, to try and fund development of infrastructure projects without more borrowing. Whether credit easing will make a big difference is less certain. Lending more money to new home buyers to reduce the deposit they have to pay is a bad idea because it will raise their repayments above levels, in many cases, which are safe. But at the end of the day, without picking over every detail, tow things emerge from yesterday. The majority of the measures may help a bit, but whether they do or not we are all in for a much longer haul, no matter what new plans are hatched, than anybody supposed and any economist foresaw.
Most significant of all, unlike America or the Eurozone, Britain has a secure government with a credible plan. That may, in the end be more important than the plan itself.