The Least That Is Needed

Seumas Milne writes:

Most budgets have little impact on either the economy or most people's lives, and are soon forgotten.

Ministers love them, of course, because they provide an unmatched opportunity to parade in front of the cameras and dominate the news for days on end.

Titbits are leaked in advance to a pliant media, as a vision of economic plenty and technocratic cunning is conjured up in what amounts to a glorified government spinfest.

Marginal changes to duty on this or that, far outweighed in real life by day-to-day corporate decision-making, are heralded as acts of high drama, while economic forecasts revealed every year to be as good as worthless are hailed as the work of prophecy.

So it was yesterday, as George Osborne threw off the burden of his omnishambles budget, to claim the mantle of fiscal triumph. 

"We have won," the chancellor has been telling "friends" in private, his fists clenched in victory, as he manoeuvres to see off the threat from Boris Johnson to his hopes of becoming the next leader of the Tory party.

But even on the basis of the notoriously unreliable projections from the Office for Budget Responsibility, it's difficult to work out why.

Any sort of growth, it seems, along with the prospect that the British economy might this year return to the size it was six years ago, is now enough to count as a political breakthrough.

As living standards continue to fall for the majority in the slowest and shallowest economic recovery for over a century, it's hard to see that being accepted as a "win" across most of country.

Even by their own yardsticks, Osborne and David Cameron have failed abysmally.

Whether it's the debt and the deficit, borrowing, growth, or the "rebalancing" of the economy away from finance, personal credit and the south-east, the pair have not even come close to meeting their own targets.

This is a "long-term plan" that has already flopped.

Osborne promised to have slashed the deficit from £149bn to £60bn by now.

Instead it's expected to be £108bn, and he's now planning to cut another £62bn to meet his original target – two years later than promised.

The single most important reason was that the coalition choked off the recovery under way in 2010 with a savage programme of austerity that delivered a double-dip recession and three years of stagnation.

The chancellor has since been trying to get round the impact of his own calamitous "fiscal consolidation" – £210bn of lost output and every household an average £2,000 poorer as a result – by pumping cash into the financial sector and subsidising mortgages, deepening the very "imbalances" that made the crisis so deep in Britain in the first place.

Osborne and Cameron rightly damn New Labour's failure to regulate the City – as well as the "bad luck" of the eurozone crisis for knocking them off course.

But both Conservatives and Liberal Democrats also backed the disastrous "light-touch regulation" of finance (along with Gordon Brown's spending plans before the crash), while the eurozone was turned into a basket case by the very same insistence on cutting during a slump that has done such damage in Britain.

Not that austerity has been a disaster for everyone, of course. Corporate earnings have soared and inequality has widened still further as benefit cuts bite and foodbanks multiply.

Coalition politicians boast that employment has never been higher. But four out of five jobs created under Osborne have been in sectors where average wages are less than a quarter of average earnings.

Just under 80% are in London and most are involuntary part-time, zero hours or enforced self-employed: the flexible labour market in action.

That's one reason real earnings have fallen continuously for four years, the longest decline in living standards since the 1870s.

Behind that lies the slump in British productivity.

While the productivity of other advanced economies has bounced back since the crash, Britain's has stagnated as employers have switched to low-wage, low-skilled labour, rather than invest to raise output and efficiency.

That failure to invest is what lies behind the "productivity puzzle", the fall in real wages and the feebleness of Osborne's much acclaimed recovery.

Low investment has long been the Achilles heel of the British economy, running far behind other comparable economies.

But the collapse in private-sector investment has been by far the greatest factor in the crisis of the past six years and is still 15% down in real terms.

Meanwhile, UK corporations are sitting on a £750bn cash mountain, while paying out a record £65bn in shareholder dividends last year.

Small- and medium-sized businesses still face a credit squeeze seven years after the start of the crisis, and public investment is down 35% on pre-crash levels.

Unless that changes – and the evidence of the past couple of years is that increased investment allowances and corporate tax pampering certainly won't do the trick – the prospects for a sustainable recovery in the economy and living standards are zero.

Osborne is banking on increased household borrowing and pumped-up house prices – as well as tying the crash round Labour's neck – to get the Tories through the election.

That's what today's budget was really about: support for better-off pensioners and savers to solidify the Tory vote against the threat from Ukip, and the skewing of tax allowance rises to ensure that the greatest benefit goes to higher rate taxpayers.

Whether that will be enough to get round the fact that most people's living standards are still falling seems doubtful. Real wages are now expected finally to pick up before the election.

But if housing costs are included, the latest forecasts don't expect real earnings to return to pre-crash levels until 2018-19.

That's a measure of how dismal the coalition's economic record really is.

The scale of investment needed to turn the economy round – in infrastructure, social housing, supply chains and the green economy – is going to demand large-scale public intervention and regulation if the private sector continues to sit on its cash piles (including, say, the taxation of dividends and unused cash reserves). 

Clearly, the Tories will countenance nothing of the kind and Labour has barely shown its hand.

But that is the least that's needed.