Stagnating growth is starting to spook the very economic institutions that the chancellor previously looked to for support
How will history judge the first year of the coalition? A year ago in this column, I lamented the position of the Liberal Democrats and their 180 degree U-turn from a professed need for an urgent budgetary stimulus to an emergency austerity package. Deputy prime minister Nick Clegg's prediction in April 2010 that riots could result if a future Conservative government sought to slash and burn swathes of the public sector without a popular mandate seemed risible at the time, but has proved tragically correct. More and more, it appears that their joining the coalition represents the single greatest betrayal of electoral trust in modern times.
It is becoming clear there was a wide variety of motives for those who rioted a fortnight ago. Though there was a wide spread of ages involved in the disturbances, it was marked how many young people took part. Some spouted about "taxes", "government" and "the rich", as if some of the doom-laden analysis of their generation's prospects ? that they will have to work harder, for longer, for less ? had translated into blunt political messages.
Moreover, within the veritable tsunami of opinion that has followed was an interesting strand that has linked a lack of responsibility on the streets to the selfishness of the bankers that resulted in the crisis of 2008. An intriguing question is whether the "light-touch policing" of the riots was a reflection of the now-discredited "light-touch regulation" of the markets. In any case, the massive public bailout that ensued is now being largely paid for by the populace at large. It is a case of private crisis, public penance.
Chancellor George Osborne's grand strategy to address the malaise of the huge budget deficit is to attempt its abolition in one parliament. The savage spending review agreements in the autumn of 2010 looked too good to be true, and so it has proved. Department after department is reviewing its budget as reality bites. Perhaps the most wobbly was the settlement for defence, which was shambolic at the time and completely undermined by Libya just weeks later. The embarrassing climbdown over health will cost more in the long run. Then there is Ken Clarke's humiliation over cutting prison spending, which will now surely go up in the aftermath of the riots ? and does anyone really believe that it is sustainable for a Tory government to make huge reductions in the police budget after the riots? Savings will not be as great as planned. The strategy is unravelling.
The other part of Osborne's plan is to foster the conditions for massively increased activity from the private sector to take up the slack. Though it appears some relatively minor growth measures are starting to emerge from the Treasury with the announcement of further enterprise zones (not a patch on their 1980s precursors) until now the approach has solely comprised historically low interest rates ? which are outside of Treasury control in any case, and under pressure from stubbornly high levels of inflation.
But stagnating growth is starting to spook the very institutions that the chancellor previously sought to enlist for support. As the new boss of the IMF, Christine Lagarde, said last week: 'We should remember that markets can be of two minds: while they dislike high public debt ? and may applaud sharp fiscal consolidation... they dislike low or negative growth even more.'
The dire growth forecast for the US, the surprise slowing in Germany and the moderate rate reported from China all add to a gloomy global economy that the UK would find very tough to compete in even if the economy had been radically rebalanced towards exports, which it has not.
It is becoming undeniable that we are in the middle of a crisis. William Keegan and I teach about the notorious ones of the postwar period at Queen Mary, University of London. The devaluation of 1967, for example, is an almost negative image of today, when a three-year pro-growth strategy piloted by James Callaghan collapsed in the face of repeated exchange rate and balance of payments crises, to be followed by three years of real austerity under Roy Jenkins. A belated U-turn is harder the longer it is left.
But the early years of Thatcherism offer more of a lesson. It is clear that Osborne is aping Sir Geoffrey Howe's ideologically motivated approach ? albeit in hugely different circumstances, sailing straight into the choppy winds of economic turbulence (to adopt Osborne's repeated nautical metaphors) and incurring general criticism along the way. The infamous open letter to the chancellor back in 1981 is repeated today as just about every respected commentator expresses reservations over policy.
Received wisdom now has it, however, that though Howe and Thatcher's approach was brutal, and more destructive than it needed to be, it was basically right for the difficult times, and created the conditions for the UK's long 1992-2008 boom. Today, even though all the analysis points to a misguided and needlessly damaging economic policy, as an academic one must remain open to the idea that, against all the evidence, Osborne may be proved right ? that he has an understanding others do not, or that something may turn up. That is the serendipitous straw the coalition is clutching at.
Dr Jon Davis lectures in contemporary British history at Queen Mary, University of London. William Keegan is away
Source: http://www.guardian.co.uk/business/2011/aug/21/lessons-of-history-are-clear-this-is-a-crisis
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