Coffee House

Osborne’s ghost of Christmas future

7 December 2012

There was plenty to welcome in George Osborne’s budget, from the proposed corporation tax cut to scrapping the 3p fuel duty rise. But to read Jonathan’s seven-graph summary is to realise that Osborne’s 2010 plan is not now enough. I look at this in my Telegraph column today. Here’s a festive summary of my pain points:-

Osbrownism – the ghost of Christmas Present 

Osborne’s words – tough on deficit, dealing with debt – are very encouraging. The figures: not so much. The main features of Osborne’s plan are identical to the Brown plan he inherited.

·      Slow-motion deficit cuts (Francis Maude on Question Time last night boasted about cutting deficit by 25% so far; the Brown plan he once rubbished involved cutting it by 33% by now)*

·      Capital spending (infrastructure, etc) halved, to protect current spending (jobs, etc)

·      Moderate spending cuts, averaging about 2.5 per cent a year

·      A 60 per cent increase in national debt

·      Increased higher rate of tax, not to raise revenue but a stunt to make the cuts palatable (Brown’s ‘temporary’ 45p, later 50p, is now a permanent 45p)

·      Debt made artificially cheaper using QE, and used as a growth tool.


·      Everything planned out using five-year plans (that become out of date after five months).

Osborne is, of course, running the same HM Treasury with its institutional aversion to radical thinking and supply-side economics. It’s different decorations, but the same Christmas tree – and the needles are falling off fast. In June 2010, Osborne’s ‘Tinkered Darling’ plan seemed enough. No longer. What’s changed is not so much the Eurozone crisis (that’s been far better than expected this year, ask John Paulson).

The ghost of Christmas Past: What’s changed is our better understanding of the depth of the hole we are in, and how much of the old stability was a debt-fuelled illusion. Economic history is, even now, being rapidly rewritten. The IMF only now tells us that 2007 was up there with 1989 in terms of crazy overheating of the economy.

The ghost of Christmas Future: graphs say a thousand words.

We are already in a Japanese-style lost decade. This isn’t the bleakest scenario: you can look at Tullett Preborn for that.

Osborne is a formidable talent; just last week he snatched Mark Carney from under the nose of the Canadian government to be our Bank of England governor. His tax cut stopped an election in 2007. He is a politician of flair, imagination and resolve, and even he will realise Britain’s on a road to nowhere.

So what to do? Here’s my six-point plan:

1) Reject the fatalistic idea that Britain is doomed – that, just because the Eurozone is in the mire, there’s not much we can do. If tiny Estonia can grow in these circumstances by adopting different policies, then so can Britain.

2) Focus on youth unemployment. Yes, Britain’s jobs market has done okay but most of the rise in employment is accounted for by foreign-born workers. A million young people are on the dole, and this is a huge waste of young talent was well as money. This ought to be treated as a national emergency.

3) Focus a growth policy on helping the low-paid. The Swedish experiment found that if you make sharp tax cuts to low-paid workers, it can have a stunning effect. Research from the OECD suggests that tax action on low-paid workers is the single more effective form of stimulus for countries with generous welfare states. This can be done many ways: reducing National Insurance, cutting employers contribution or even German-style mini jobs (that I wrote about earlier)

4) Be careful about cutting those tax credits World over, people are proving more sensitive than you might think to work incentives. The Swedish tax cut that I’m so fond of citing was transferred via an Earned Income Tax Credit. It made then 8pc net better off a year, allowing the government to say “You now get the equivalent of an extra month’s salary every year”. A message strong enough to have the Conservatives re-elected for the first time in Swedish history. My colleagues at the CPS spotted the potential of this in 2006 (pdf).

5) Fund the tax cuts from savings in still-huge state spending It’s not even 3 per cent lower than its peak – the same government machine that grew by 61 per cent under Labour. And the £26,000 welfare cap can be lowered, if it helps the low-paid and tilts the bias back towards work.

6) Make it a cross-party mission. Helping the low-paid should be the ideal coalition task, as the Lib Dem manifesto promises action on the lowest-paid workers. The most influential economists on the left, such as Jonathan Portes and David Blanchflower, also back tax cuts for the low-paid. A consensus is fast taking shape.

Youth unemployment is becoming a national issue. Two years ago, it looked like it was enough for Osborne to tinker with the Brown model. No longer. He has about four months until his next Budget – and he has a choice. To give in to the above graphs, or to reject them. To shape our economic future, or grimace and say there’s nothing he can do (except dream up ways to be rude to Ed Balls). It isn’t much of choice. The OBR’s pictures of Christmas Future leave us in little doubt about what awaits Osborne – and Britain – unless he comes up with something good soon.

*Footnote: A key aspect of Osbrownism is the leisurely deficit-cutting timetable. Rather than cut ‘too far, too fast’ Osborne is going gently — which may yet cost us our AAA rating. One method of spinning the progress is to say ‘we have got rid of 25 per cent of the deficit’ — focus groups like it (they hear ‘debt’). But it’s worth remembering that Brown’s plan involved cutting the deficit by 33 per cent by now.The two deficit plans are below. Yes, Osborne is facing stronger headwinds. But I’m not sure ministers should expect applause when they use the 25 per cent figure now, given that they so loudly booed Brown for a more ambitious deficit plan.

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    There is evidence that if youth have bad experiences on entering the labour market the effects can linger for DECADES

  • Daniel Maris

    1) Comparing us with Estonia – ex USSR and impoverished – with a per capita GDP something like a quarter of ours was never going to be very illuminating I would say.

    2) Focus on youth unemployment. Agreed – it is national emergency (in fact I used that phrase before you I think, not that there’s any copyright on it!). But do we do it the bureaucratic inefficient way backed by this government (and the previous one) or do we create a right to work for young people and find them productive work to do if the existing public and private sectors doesn’t have it for them.

    3) Focus a growth policy on helping the low-paid. Yes, that is not a bad approach. Universal credit should help us tackle the issue of work incentives for the low paid, but I am worried the Treasury have stitched this up to make it fail. Welfare dependent used to having their rent paid direct via housing benefit are not all going to be able to cope with the new arrangements.

    4) Tax is tax and we need a more honest and open debate about how we raise it. I think the income tax system needs to be simplified. Credits and allowances just complicate things endlessly. Ideally we should just have a flat rate applied to the whole of our income – maybe 20% or thereabouts. The rich need to be targeted through property tax and other difficult-to-avoid taxes.

    5) When it comes to state spending, I think the elephant in the room is the NHS, probably the least productive aspect of public expenditure. A health voucher system though expensive to adminster might actually deliver real savings. If people got a credit as real money from not using the NHS I think we’d see much less use of the Service. I think we’d find people putting off that op of dubious value, not visiting the GP with a sniffle. a long term project perhaps.

    6) I favour increased minimum wage and increased universal credit for the low paid. I think that is a more effective way to go.

  • barbie

    Brown’s and Darling’s plan may have worked better, because you wouldn’t have had the job losses we have endured from the coalition. They would have been paying tax and NI towards the national income pot. Now we have more on the dole, the usual thing with Tory plans, 40 after one job. Cuts could still have taken place but they would have been targeted cuts where they would not effect national systems; example, quangos, some welfare benefits, and tax increases on those who can afford to pay more. How this coalition are doing it is draconian on one section of society and its unfair. I doubt the food banks would have been so busy, and personal debt so rife as it is today. We all know even Labour would have to make cuts but like said, its how you cut and where that is important. This coalition is peddling the stance that money in the rich’s pockets is reinvested in jobs, its not it lines their pockets just as it did before. You will never get the two sides to agree over where cuts should be, but while foreign aid is put before our own citizens none are right in the what they do. All have been complicit in spending our money abroad more so than here, they should all hang their heads in shame.

  • HooksLaw

    And in Germany
    ‘Although orders for German-made goods grew the most in
    nearly two years in October (reported here yesterday), production at the
    nation’s factories in the same month tumbled 2.6pc against
    analysts’ expectations of a 0.2pc fall. The sharp decline, following a fall
    of 1.3pc in September, was largely blamed on a weak construction sector.’

    And Austria
    ‘The Austrian central bank revised its growth
    forecast for 2013 to 0.5pc from earlier predictions of 1.7pc,
    citing weak exports and subdued investments. This year’s growth
    forecast was revised down to 0.4pc compared with a previous estimate
    of 0.9pc.’

  • HooksLaw

    All very wel,l and it must have taken the work of a genius to come up with the oh so droll graphics

    But in the real world
    ‘Germany’s central bank has slashed its growth forecasts, saying it expects GDP
    to grow just 0.4pc in 2013, compared with previous estimates of 1.6pc. It
    also revised down this year’s growth from 1pc to 0.7pc, and predicts the
    economy will contract in the third quarter and stagnate in the fourth.’

    Some problems have no solution.

    • TomTom

      It wasn’t the Bundesbank but the Economics Ministry that said industrial production fell 2.6% and conditions are back to 2009. Hardly surprising really – Germany will sink further yet because domestic demand has been appropriated by The State to give to Greece.

  • El_Sid

    You keep saying it’s the worst recovery ever, but I’m pretty sure it’s not. Do your sources have numbers for the Long Depression from 1873? Recovery from that was hampered by emerging superpowers sucking up resources when you might normally expect commodity prices to drop during a recession – sound familiar? You would not expect the prices of oil, grain and other inputs to be close to their all-time highs during a “normal” recession, but the industrialisation of the BRICs is probably the main reason this recovery is so slow.

    • TomTom

      Probably not because labour data for 1873-96 was patchy and the statistical basis for the long depression was poor. The basic problem was Tariffs in Russia, Germany, France because of grain imports from USA and Australia undercutting European prices. Only Britain had an open door policy – and the USA had the McKinley Tariff which cut off British exports to the USA so it simply blasted the British economy as work was transferred to cheaper production in Germany. Go look at Listers Mill in Bradford and the German copies of its velvet – and the 1890-91 Strike that led to the formation of the Independent Labour Party in Bradford. It was a different kind of Depression because it was NOT a CREDIT Depression which is very different

      • El_Sid

        The big tariff increases only came in some 5-10 years after 1873 (McKinley didn’t happen until 1890) and were a response to the underlying economic shift of countries like the US and Germany having large populations that were prepared to work hard and sell their labour cheaply to make better lives for themselves. That let them undercut the established countries and so economic activity moved overseas. The US farm worker was the Indian call centre worker of the time, that German velvet was the outsourced iPhone or Chinese plastic toy.

        You could also regard the excess credit as a by-product of the emergence of the new powers, the exporting countries have to recycle their money somehow. The US and Germany had both seen massive credit bubbles during the railroad boom, you could regard Jay Cooke’s bankruptcy as the Lehmans of 1873, and Strousberg as the Bear Sterns. Much of the credit sloshing round the world ended up in Vienna, which is where the implosion had perhaps the worst effect on the banks, which led to a classic credit crunch.
        Obviously it was a different time and history never repeats itself directly, but the more you look at 1873, the closer it seems to 2008.

        • TomTom

          I agree with you insofar as China has been the wildcard ever since Clinton gave it MFN Status and distorted factor prices in The West just as Jimmy Goldsmith said it would in his book “The Trap”. It is China that has caused global imbalances because Western Governments failed to DEFLATE their economies to compensate for Chinese relative price differentials on labour. To have unemployed benefit claimants employing Chinese workersis bizarre and has never happened before in the history of the planet; then again Unskilled Workers have never lived so prosperously as in the Uk today at any time in world history

  • Fat Bloke on Tour

    If you want to understand what has happened during the thirty wasted months of the dog boiling, totally inept ConDemNation watch the film “Ace in the Hole”.

    Everything will suddenly become clear.
    Sniffy is playing the part of the washed out journalist.
    It really is that simple.

    • Dimoto

      Fat Bloke – your current identity is “Telemachus”, repeat “Telemachus”.
      Report to control immediately for urgent discipline and re-programming !!

  • Repeal the Act!


  • Jenny Barnes

    The message that comes across to me from the graphs is that the economy was recovering reasonably well, in line with previous recessions, till about mid 2010. Now what was that changed in 1H 2010?

  • Swiss Bob

    The lunatics who came up with the Community Reinvestment Act and the bankers who securitised all the crap debt have succeeded in the biggest heist/fraud in history and no one responsible will ever be brought to account, the charts confirm the continuing theft to repay these ‘debts’.

    • TomTom

      Stop blaming the US and think of Northern Rock responsible for >50% Mortgage Lending in Britain 2006 – it was busy securitising Mortgages and selling them and it was not in the USA. RBS and HBOS were lending 10% US GDP in the USA – who regulated them ? Barclays was dying to commit hara-kiri and buy ABN-Amro but its share price fell and RBS bought it cash…..not a US issue at all. Who lost control of Government Liabilities with PFI ? was it the US Treasury ? Just who let British Banks expand so they were bigger than the GNP of Britain ? No other country has such a ratio of Bank Liabilities to GNP – Britain is No1

      • TomTom

        Oh, and EVERY major fraud in financial markets took place in London

        • Dimoto

          Wot ? even Madoff (US$ 64.8B is quite a lot) ? Enron ?

          • TomTom

            For years the London operation for Bernard Madoff’s firm was a
            little-known outpost of his New York trading group. Now, authorities
            said it played a role in how Mr. Madoff carried out his alleged fraud………….

    • El_Sid

      The Community Reinvestment Act is a lazy target, and attacking it is to ignore the facts. Only 30% of institutions were subject to the CRA, and they had lower default rates than the institutions outside its scope. The problem were the independent mortgage companies that weren’t subject to the CRA, but which Northern Rock modelled itself on – lower lending standards because the loans were going to be packaged up for other people to take the risk, the 125% loans, all that kind of thing. Don’t blame the CRA for the crash.

      • HooksLaw

        it is argued that the CRA was a factor in lowering standards everywhere

        • El_Sid

          At best it’s second-order effects, it wasn’t a primary cause. I don’t buy his arguments that there aren’t any counter-factuals – Australia and the UK didn’t have a CRA, but they still had lax lending. These things happen in credit bubbles, the credit has to go somewhere.

          If you’re looking for primary causes in statute of why a crash happened in the noughties rather than at any other time, the Commodities and Futures Modernization Act 2000 and FSMA are the obvious contenders.

          Obviously there’s a whole load of other factors, and the Bank of England Act 1998 would also be up there – I suspect the Bank would have noticed that what AIG FP was selling was financial derivatives rather than “insurance”, the FSA was too stupid to do so. The Bank would probably have taken action over the rising customer funding gap rather than just bleating about it powerlessly. But that’s all water under the bridge.

  • TomTom

    Fraser you remain obsessed with the notion the politicians have a solution and I think you are trapped in a delusion. This country has open borders and offers free English lessons to anyone wanting to move on to Canada or USA and that is the attraction for many foreigners to move here and take low skilled jobs even if they are higher skilled. That makes youth unemployment impossible to solve unless the birth rate domestically falls because they cannot compete. Even at graduate level they cannot compete if foreigners are not carrying tuition fee debt. The economy is so open that in the halcyon days Macmillan-Wilson the economy could grow at 3% before the BofP became a problem….now it is nearer 1%. Growth in Domestic Demand means Imports. There is no prospect of Manufacturing here because any plants are sub-scale unless part of a larger group globally. There is no Government interests in Manufacturing only in Money as an abstraction which Banks symbolise and Manufacturers do not. There is simply no prospect of the current Political SYSTEM resolving these issues and anyone <60 should reflect that State Pensions will not be paid, Private Pensions will be turned into Equitable Life MkII, and Health and other Services will be franchised out and subject to User Fees, The Future is one of inexorable and inevitable decline and the Kabuki Theatre in Westminster has simply not worked out a script to amuse the public as it happens. There are NO major factors in Britain's favour – even Germany will not be a major economy in 15 years time

  • Nick Reid

    ” Slow-motion deficit cuts (Brown wanted to halve the deficit over four years, Osborne’s doing it in five)”

    I wish you would stop repeating this irrelevant point. Sure Brown/Darling “wanted” to halve deficit over four years but there wasn’t a chance in hell that they would have been able to do so.

    Even on their own numbers they were relying on boom-time levels of economic growth which were hardly likely to materialise post banking crisis; let alone the current levels of growth severely impacted by the Eurozone crisis and the near doubling of the oil price since 2009/10.

    • Sweetpea

      We’ll never know if the Brown/Darling plan would have worked. What we do know is that the Cameron/Osborne plan definitely has not – targets missed, promises broken – “trust” and “Tory” remain mutually exclusive terms.

      • Nick Reid

        Of course it’s impossible to know exactly the counterfactual. But the oil price doubling (and thus helping send inflation up to 5%) and the Eurozone crisis would have happened regardless of whether Osborne or Darling were in charge. So we can be 99% certain Darling’s forecasts of 3% GDP growth wouldn’t have happened and that leads into missed targets on jobs, deficits, taxes etc.

        • HooksLaw

          its really wicked of you to remind people about the burst in commodity prices, it ruins their prejudiced blinkered outlook.

        • Sweetpea

          And so the Tories are the victims of international factors beyond their control, whereas the previous Government was wholly responsible for the (international) banking crisis? Incidentally, the oil price (May 2010 v December 2012) has increased significantly, but it has not doubled – and while it would be wrong to blame Osborne for the inflationary pressures brought about by the increased cost of fuel, he was solely responsible for the increase in VAT (contrary to the Tories’ pre-election promise) which also helped to increase inflation (and the cost of petrol/diesel). Finally, while you are confident that 99% of Darling’s growth forecasts would have been proven wrong, in reality we know that 100% of Osborne’s growth forecasts have been wrong.

          • Nick Reid

            To be fair I have never said that the banking crisis was wholly the responsibility of the Brown government. Clearly the weak regulatory environment and too low interest rates in the UK didn’t help, but it was clearly a global issue. However the UK’s reliance on financial services made the UK particularly hard hit and not “best placed” as Brown said.

            “Near doubling” of oil price would be more accurate. But $70 to a peak of $128 is pretty near to doubling !

        • Dimoto

          We can be absolutely certain that the Darling plan would not have worked.

          Because, had Brown won, the cautious and moderate Darling would have been on the back benches, with Chancellor Balls implementing his early, primitive, “stimulus” ideas, no doubt at all, soon to be followed by a major financial crisis.

          Not sure whether or not, that might have been a better long-term outcome (probably only if it would have seen the permanent departure of Balls from British politics – but we know that no Brownite gang minister ever accepted responsibility for anything).

          I look forward to reading, in a couple of years time, Fraser Nelson’s lame memoir attempting to reevaluate Brown and his gang as misunderstood geniuses, full of integrity.

      • HooksLaw

        See above and look at the German economy.

      • mikewaller

        This is to totally misread the situation. The real mistake has been for fools on the Tory right to have shown such visceral hatred of the LDs by taking every opportunity to rubbish them. Of course, the underlying hope has been that things would somehow right themselves and the Tories would get all the credit. There never was a cat in hell’s chance of that because even if we didn’t have a huge financial crisis, much of the work ordinary Britons did in the past has gone/is going East or South West at nearing the speed of light.

        So our one and only hope was to make the Coalition work in order to keep out the economically kamikaze Socialists. Had we done this, as it is now abundantly clear to everybody with any sense that the thing ain’t going to be fixed this side of 2015, we would then have been able to demonstrate the sheer extent of the crisis by announcing that in the National interest the two parties would take some account of each other’s electoral interests in the General Election. Properly handled, this could have served to drive into the heads of an electorate understandably reluctant to take on board just how dire things actually are, the importance of holding onto Nanny’s hand. After all, as soldiers are supposed to have said when Kate Adie appeared, “God, things must be serious”. Ditto with an enduring Coalition between two such different parties. Fat chance of that now!

        • Sweetpea

          Mike – thanks. I’m sure this made perfect sense until you put it in writing.

          • mikewaller

            Sorry, I do tend to make assumptions about the cognitive abilities of Spectator readers which sadly seem to be increasingly wide of the mark.

    • HooksLaw

      Brown wanted to halve the overall deficit. Osborne wanted to cut completely the structural deficit.

    • Dimoto

      And as for Osborne “being rude to Balls”, Fraser Nelson could do with (just occasionally) being rude to Balls, rather than treating as some sort of serious figure “worthy of respect”.

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