Is Osborne deliberately undermining UK growth?

The 2011q2 GDP figures came out yesterday and showed 0.2% growth. That's almost no growth at all, and is on the face of it, a disaster for George Osborne and the Tories (and indeed for their Lib Dem collaborators, whatever Vince Cable's protestations). Certainly the Telegraph - normally a loyal Tory supporting paper - ran a headline today that the Dave Cameron team was starting to get a bit jumpy with Osborne and had basically told him to "boost growth or else." I frankly don't believe that story - I'd be surprised if Cameron and Osborne weren't still best buddies - but there is no doubt that some of the Right, and their supporters, are starting to worry a bit. The conventional wisdom is that if a party screws up on economic policy it's very hard to win a general election, and conversely, if the economy's going well, it's very hard to lose. There are undoubted exceptions to this rule - the Tories won in 1992 in a recession, and lost in 1997 in a boom - but most of the other UK election outcomes since 1959 or so would bear out the hypothesis, in my view.

But is George Osborne that worried? I want to discuss two possible reasons why he might not be. One is my own theory, and the other comes courtesy of a Twitter discussion with my friend Chris Brooke of the Virtual Stoa.

My theory is that Osborne won't be that worried about slow growth for the next 2 years or so and he might actually be secretly pleased - provided that he does get strong growth after 2013 (at least until the election). This is based on my hunch that voters are more worried about the second derivative of output (i.e. whether growth is increasing or decreasing) than the first derivative (whether growth is high or low) or indeed the level itself (whether output is high or low). If Osborne has a choice between a scenario steady but anaemic growth from 2011 through to 2015 - at say 2 percent a year - and poor growth (or no growth at all) for 2 years followed by strengthening recovery for the next 2 years, by which time the economy might be roaring at 3 percent or more, my guess is he will take the second option. Why? Because the second option makes it MUCH easier to sell the story that "the pain is over and things are looking up" to the electorate. This was the trick the Tories pulled off in 1983, for example. The average growth rate in the 1979-83 Thatcher government was abysmal. But by 1983 there was a strong recovery in place and the narrative that the mess had been sorted out (admittedly combined with a severely divided opposition) enabled the Tories to romp home that year.

This is why the spending cuts have been "front-loaded" with the biggest reductions in 2011 and 2012 and it's also why Osborne has aimed to eliminate the structural budget deficit by 2014/15 rather than 2015/16 - to give himself an extra year of headroom to announce tax cuts. So Osborne is trying to "back-load" extra growth for 2014 and 2015 by depressing growth in 2011 and 2012. Cynical and manipulative? Of course. This is the Tories we're talking about here.

My personal view is that this won't work - at least not particularly well - because the hit to the economy from the austerity measures (which have still barely started yet) will be such a drag on growth - indeed, possibly turning it negative for a while - that it will completely derail Osborne's fiscal consolidation plans, probably increasing the size of the structural deficit and making tax cuts quite difficult without offsetting tax increases elsewhere. And if Osborne IS getting worried, it's probably because the (limited) fiscal consolidation so far has had such a negative effect on growth that he's genuinely terrified that more of the same will simply spend Britain spiralling into depression.

But now I want to examine Chris's alternative theory, which is that Osborne welcomes an extended period of low growth because it serves an important political purpose; in his view, it will convince the voters that tax-and-spend social democratic politics is simply unaffordable because the economy can't generate the tax revenues to make it work. And hence the small-state neoliberalism that Osborne wants will be the only game in town - so you'd better get used to it, suckers.

I can certainly see the argument for this - and it would fit with the narrative that the New Labour tax-and-spend approach was essentially a failure because it was fuelled by a horrendous and unsustainable rise in debt - first household debt (up to 2007), and then ballooning government debt (2008 and beyond). If the UK has - for some reason - hit some kind of plateau of permanently low growth, then obviously public spending, in the long run, would only be able to grow much slower than it did during the New Labour years. And Osborne's aim is to convince the voters that the only people who can be trusted to run an economy with low public spending growth are the Tories.

It's an intriguing hypothesis, and I'd go along with it to the extent that if growth does turn out to be paltry over the next five years, then Osborne and the Tories might try to turn a weakness into a strength by criticising Labour as unaffordable. There are echoes of the 1992 Tory election strategy - a surprise victory during a recession, remember - in this approach.

Having said that, I think this is a fall-back option for Osborne, not his first choice, for several reasons First, "this is the best we can do and we're the only people who can manage the economy in this situation of low growth" is harder to sell to the electorate than "things were in a mess and we've sorted it out - don't let the other guys ruin it again". Because of the implosion of Nick Clegg's "Fib Dems" - still flatlining at about 10% on YouGov - the Tories badly need voter converts, not just to maintain the 36% of voters they got last time. if the Lib Dems don't recover - or even if they recover, but only a bit - 36% is not going to cut it for the Tories. Unless they can pull off a true miracle of gerrymandering as part of the boundary changes and seat reductions, if the Tories get 36% next time and Labour gets 40 - or even, say, 38% - Labour's going to win. I don't think the defensive "social democracy is unaffordable" strategy will win many people over. A "V-shaped" recovery and 1983-style triumphalism stands a much better chance.

Second, Osborne stood up at the Budget earlier this year and gave us a load of guff about the economic recovery being "carried aloft on the march of the makers" or some such swaddle. At which point, according to q2 growth statistics, manufacturing promptly bombed, with all the q2 growth being accounted for by services. If you say you've got the policies to restore growth and then growth doesn't happen, after a while people cease to believe in you. Certainly Osborne has been parcelling out blame to almost anyone or anything he can find: global economic turbulence, trade unions, bankers, snow, hot weather, Kate'n'Wills, Nick Clegg, Internet Explorer 6, the guy with the grille on his head from ST:TNG, etc. But people look abroad and see that Germany is growing about 6 times faster than us and France 4 times faster, and they'll say "why the hell aren't the govt sorting it out?" which may well eventually lead to the possible further thought, "maybe they're just incompetent - and Labour could do better." So I think if George goes on blaming everyone except himself he just winds up looking ridiculous. Certainly on the Guardian front page this morning, Ed Balls is having a field day, and once Labour actually gets some policy together on the economy (come on guys, get on with it), I expect their economic competency rating to overtake Osborne's at some point before the next election.

Thirdly, a lot of the ConDem policy platform is based on "removing barriers to growth" - hence the rationale for tearing up the planning system, destroying employment rights, privatising most of our public services, etc. There's not much evidence that any of these changes will actually boost growth - although they will boost profits for the big private sector firms who fund the Tories. Actually, removing planning restrictions probably will boost growth in retailing due to economies of scale - but at the expense of killing traditional high streets and surrendering more of the countryside to huge "big box" buildings such as the Bedford Amazon depot. That could well produce growth in the Gross Domestic Product at the same time as a decline in overall well-being. But once again it's evidence of an attempt at a pro-growth strategy (admittedly from a very right-wing perspective), NOT a chancellor who doesn't care whether he gets growth or not. Otherwise why bother doing things like planning reform which (like the attempted forests sell-off) have the potential to severely alienate Tory voters in rural areas?

So overall, I think Osborne would very much like growth to happen - at least in the second half of the parliament - even though his macroeconomic policy is making it much less likely that it will happen. The reason for the contradiction between wanting growth and pursuing a macro strategy that undermines growth is simple: Osborne believes right-wing "voodoo economics". And in the end, that will probably sink him.

Now on top of this there is a very interesting long-run debate about whether growth at the post-war average (about 2 - 2.5 percent a year in real terms) is going to be possible in future, particularly given environmental constraints, and what that means for politics in the medium-to-long run. That's a very important issue but will need a blog post all of its own - and hopefully it will get one soon... bye for now.