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MONEY

If only Osborne’s spending would make a great leap forward

Our chancellor could not resist it. Once again, while presenting the latest revisions to his “long-term plan”, he dragged up the Labour chief secretary Liam Byrne’s line in 2010 that “there’s no money left”. I say line, because it was not a spoken remark but a phrase contained in the customary written note from the outgoing chief secretary to the incoming one, who happened – for what turned out to be a very short time – to be the Liberal Democrat David Laws.

This was meant to be a joke, and Treasury officials thought it was bad form for Laws to publicise a private letter. But the joke rebounded on Byrne and Labour, and the Conservatives are still milking it all these years later. And last week shadow chancellor John McDonnell tried a deliberately more public joke with his production of Chairman Mao’s little red book. This backfired too, and the Tories will milk it mercilessly as well.

The “no money left” remark was an obvious joke. There was plenty of money left, as investors all over the world almost fell over themselves to lend to the British government. They were doing this under the premiership of Gordon Brown and the concurrent chancellorship of Alistair Darling. They have been doing it ever since under the premiership of David Cameron and concurrent chancellorship of George Osborne.

The position of the UK was in no way comparable to that of the benighted Greek economy, although that never stopped Osborne from misrepresenting the case. In the old days, confronted with the Osbornes of this world, people with a resemblance to the Major in Fawlty Towers used to shake their heads and observe: “He is not quite 16 annas to the rupee.”

A similarly jovial comment to Byrne’s was made by outgoing Conservative chancellor Reginald Maudling to incoming chancellor James Callaghan in 1964. But it was kept for Callaghan’s memoirs in 1987. As Callaghan wrote of Maudling, who had taken some time to pack his bags: “On his way out, he put his head round the door carrying a pile of suits under his arm. His comment was typical: ‘Sorry, old cock, to leave it in this shape. I suggested to Alec [Douglas Home, the outgoing prime minister] that perhaps we should put up the Bank Rate but he thought he ought to leave it all to you. Good luck.’”

Now, it is a pity that McDonnell, having started so well in his response to the chancellor, should then have led with his chin. The point he was trying to make about Osborne’s dealings with communist China over contracts for nuclear power stations is a serious one. I find people are baffled as to how a political son of Thatcher, who gave privatisation to the world, should be relying on a combination of a communist state and a French nationalised industry to build nuclear power stations on dubious financial terms in circumstances that raise such serious questions about security – which is supposed to be an obsession of this government – that they worry the Americans too.

Ah, China! We come by a circuitous route to Osborne’s fourth budget in 12 months, and what has been popularly greeted as a U-turn. This reminds me of the time I was invited to the Chinese embassy in London in the early 1970s. I was on the Financial Times in those days. I thought the Chinese wanted my views on the economy, but what they were really after was an explanation of strange phrases in the press, and the frequent use of the expression U-turn.

As far as I recall, the expression first came into vogue politically in 1972, when the Conservative government of Edward Heath completely changed the direction of its economic policy. This, notwithstanding the various concessions made by the chancellor to his critics last week, is not what Osborne has done. There may have been U-turns over specific issues, such as the favourable revision of plans for expenditure on the health service and the police, and the timing of welfare cuts aimed at the poor, but there has emphatically not been a U-turn when it comes to Osborne’s overall strategy.

That strategy remains: to reduce the size of the state for ideological reasons; to aim at a budget surplus not only on current account – which makes sense when, to coin a phrase, “the sun is shining” – but also on capital account. The latter, as almost all economists know, does not make sense, and it is noteworthy that, for all his rhetoric about “infrastructure” and the “northern powerhouse”, Osborne is budgeting for an absurdly small proportion of GDP to be devoted to such expenditure.

The idea that the chancellor propagated in his post-statement interview on the Today programme – that welfare cuts are needed in order to make room for public sector capital investment – is patently absurd. Such investment should be financed by long-term borrowing at what are, historically and in practice, negligible interest rates. One does not, unless one is a Russian oligarch or Middle Eastern potentate, finance the purchase of a house with one year’s earnings.

The concessions made by Osborne in response to the OBR’s latest forecasts of the probable outturn of the balance between revenue and (previous) plans for expenditure are certainly welcome. But, as the OBR itself is only too aware, its forecasts – rather like Bank of England governor Mark Carney’s on the probable path of interest rates – tend to change markedly from quarter to quarter. And tax revenues could slow down if the Bank decides to clamp down on the rapid growth of the consumer credit that has been assisting the recovery.

Incidentally, it is characteristic of this slippery chancellor of ours to claim that his critics want to run permanent budget deficits. He ought to be aware that even dyed-in-the-wool Keynesians such as your correspondent know there is a time and a place for deficits, and the Great Recession and its aftermath made a sequence of deficits necessary.

Indeed, Osborne himself has, thank goodness, been overseeing a sequence of budget deficits. He would not have got where he is today without them. His ill-conceived austerity meant, of course, that the deficit was reduced too fast, thereby ensuring that we have experienced the slowest recovery on record.

Carney has several times pointed out that fiscal tightening has impeded the recovery. And the OBR notes, in its Economic and Fiscal Outlook, that its higher forecast for growth “mainly reflects the government’s decision to ease the pace of fiscal tightening”.

I rest my case.

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