George Osborne’s economic ‘recovery’ is built on sand
- The Observer, Sunday 26 January 2014
The chancellor is feeling good, very good. His critics are on the defensive. The IMF, warning only a year ago that he needed a plan B, has now had to revise upward its economic forecast for growth in 2014. Ed Balls, the shadow chancellor, will reasonably argue that his plans announced on Saturday to eliminate the deficit between current spending and receipts by 2020 makes more economic sense. They do and, on top, allow for much-needed public investment. But politically the signal is that an Osbornean commitment to deficit elimination is the right starting point.
Better still, the British economy is creating jobs at a rate that not even the Bank of England anticipated a mere six months ago. The incoming governor, Mark Carney, declared last August – “forwardly guiding” expectations, as he was – that he would only begin to consider raising interest rates when unemployment fell to 7%, a prospect the Bank then thought happily distant, something that might happen in 2016. There was only a one in 20 chance, its analysis showed, this could happen in the first quarter of 2014. Instead, now there is a less than one in 20 chance it won’t happen.
Mr Carney, interviewed in Davos, brushed off Jeremy Paxman’s challenges over what is plainly one of the Bank’s more egregious forecasting errors. The creation of 280,000 new jobs in three months was clearly good news, he declared. But it did not mean he would consider raising interest rates until it was obvious that the recovery across a range of indicators was more broadly based. He is right, even if embarrassed that the signalling of his intentions with one simple economic indicator is now murkier than he could ever have wanted.
For Mr Osborne, it is all grist to the mill. A possible rise in interest rates sooner than he thought, maybe before the election? He could not be more relaxed, his aides let it be known, so confident is he about recovery. He can afford magnanimity in his new role as economic seer and architect supreme of a recovery the rest of Europe must envy. Austerity via deep spending cuts works, he and his advocates would argue, as long as you keep markets flexible and tax incentives for enterprise strong.
It is remarkable what 12 months’ jobs growth can do to a politician’s reputation and self-confidence. However, the first corrective challenge has to be shouted from the rooftops. Capitalist economies have rhythms of economic activity – periods of rapid growth and periods of slowdown and recession. What has been amazing about Osbornomics is not that finally Britain is in the upswing phase of the economic cycle, but that it took more than five years to get here. Back in 2010, I thought I was being enormously pessimistic in predicting – against the consensus – that Britain would not get back to 2008 levels of output until 2014. It was ludicrous to try to cut spending and the deficit so fast in the wake of a near banking collapse and we would pay a high price in the longest period of depressed activity for more than a century. So it has proved.
I also suspected that ultimately the Keynesian policy of flooding the financial system with liquidity would eventually trigger the upward turn of the cycle, and that when it came it would be surprisingly fast as the economy tried to recover lost ground – what I have described as a “snap-back”. It is also obvious that in Britain, consumption and entrepreneurial animal spirits are closely linked to rising house prices: help-to-buy is a clever, off-balance sheet manoeuvre to stimulate consumption in classic Keynesian terms. There would be a recovery, with growth in 2014, as I have written, of around 3%. The question was, and remains: what kind of follow-through there would, and will, be.
But what has surprised me is the pace of job growth: 280,000 new jobs in three months last autumn and 450,000 over 12 months is beyond what seemed likely even given a strong snap-back. There is a dimension to this recovery that represents a strength in the economy that is underexamined and half-understood – a burgeoning network of high-growth, innovative, knowledge-intensive small or medium-sized firms clustered in “knowledge” towns along the M40, M4 and M3 motorways within 30 miles of Heathrow. There are also similar effects along the M23 around Gatwick and the M11, taking in Stansted and Cambridge.
The Office for National Statistics reports that 137,000 new professional, scientific and technical jobs were generated in the most recent 12 months; most of them were in these new “knowledge” towns, with smaller effects around Manchester airport and North Yorkshire near Leeds airport. Consultancy firm E and Y reports that Britain is the home to 485 multinationals’ headquarters (Germany has 86), and remains even in 2013 the largest recipient of inward foreign direct investment.
It is this nexus – technology rooted in great universities, innovative start-ups and small firms with loans collateralised against rising house prices, internationalisation via our great airports and all keyed into the buying power of locally sited multinational headquarters that is creating a new economy at a startling pace. This is happening spontaneously, independently of politicians. Indeed, elements of the Tory party and Ukip, wanting EU exit, are undermining one of its key supports – EU membership. Every week, another great company says it will review its commitment to the UK.
The rest of the job growth is hardly testimony to Osborne’s genius or a brilliant economic future. Estate agents burgeon – up 76,000 over the last year to nearly 600,000 in total. A fifth of the new jobs are part time, with most part-timers wanting to work full time. What’s more, nearly half of all the jobs growth was driven by self-employment: less an entrepreneurial revolution, more redundant workers trying to make a highly uncertain living as sole traders. The gap between London and the south-east and the rest of the country is becoming impossibly high, made worse, as E and Y remarks, by the abolition of the Regional Development Agencies.
Outside the country’s hot spots, the picture is of bits-and-pieces jobs, public sector employment in retreat, manufacturing employment stagnating and squeezed living standards. It is a reality that is vividly revealed in Britain’s trade statistics: in the most recent three months the current account deficit was more than 5% of GDP – and this despite the devaluation of the pound. The hot spots are too localised and built on too particular economic advantages. There is no pan-British economic strength, hence the paucity of exports. No country can finance a deficit this large for very long: it is a harbinger of deep economic dysfunction. Mr Osborne and his apologists delude themselves. There is certainly a full-throated economic snap-back, but the British economic model still needs wholesale reform.