The Alternative 2013 Spending Review, Or What Mr Osborne Could Have Said If He Understood Macro-economics

The Spending Review by George Osborne delivered on 26 June 2013 had been widely trailed and contained no surprises. It was more of the same – more cuts in the funds of Government departments, more consequential loss of jobs from these cuts, more austerity piled onto the current austerity, more targeted victimisation of the poor and underprivileged, more economic misery inflicted on a depressed economy and on an under-consuming population. Osborne’s budget had no significant redeeming features whatsoever. Action to stimulate economic growth was minor while the continuing and deeper cuts were major. The budget for the National Health Service was maintained in real terms but the needs for that service are now much greater than the provision that the real terms budget permits. Meanwhile the move towards the privatisation of the NHS – which Cameron said he would never do – gathers momentum.

More precisely, Cameron said during the last election campaign that the NHS was “Safe in his hands.” If challenged now, he might say that privatising the NHS will not damage it. Does anybody believe that?

The Coalition procedure for bringing about the privatisation of the NHS is now clear. It has six stages:

– Deny the NHS sufficient funding to provide the services legally required

– Blame the people running the NHS for consequential service failures

– Use these service failures as a pretext for transferring services piecemeal to the private sector at less cost to the government

– Threaten the existing NHS public service providers with prosecution for service failures so as to limit information about service decline and usefully shut up whistleblowers while pretending to act in the public interest

– Do not require the incoming private service providers to maintain similar service standards to the NHS and do not threaten these new providers with personal criminal prosecution for service failure

– And finally, provide a cheaper and worse service through private health service providers, with better quality and preferred access available only to those who can afford to pay more.

That procedure may be tactically brilliant but seems to me to be close to criminally underhand.

The three-stage procedure for getting Government departments to accept cuts of between 5% and 10% is equally interesting. That process is:

– Ask government departments to consider how they would cope with 15% budget cuts
– Require lesser cuts of 5% to 10% in the actual announced settlement
– Ensure the press publication of the cries of gratitude because of the implementation of a lower percentage cut than that threatened.

That procedure has a close similarity to how some kidnappers treat their hostages. Kidnappers have sometimes threatened their hostages with major injury or even murder and then only inflict minor injury. The hostages are then duly grateful for the reduced damage, not recognising that the kidnappers are entirely responsible for the evil they do and the situation the hostages are experiencing in the first place. The people of Britain and their essential public services are being treated as if they were government hostages, required to be grateful that the damage done by the government is not worse than that initially promised.

But suppose Mr Osborne really understood Shimomuran economics and actually wanted to improve the functioning and performance of the British economy. What could he have said? For comparison purposes, here’s my version of a constructive speech from a competent chancellor.

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The Alternative 2013 Spending Review Speech

“I stand before you today a chastened and humble man, certainly better advised than I was previously, even if I am only a little wiser.

“On the way to the House of Commons this morning I had a Pauline conversion, a vision of a civilised and progressive Britain where all of its children could be free from want, excellently educated, and achieving their full potential within a much more prosperous and fairer society.

“This government now wishes to act in the interests of all the people of Britain. We now propose to take quick action in order to end the mistaken programme of austerity and to stimulate greater private and public investment in the interests of all our people. Given this U-turn in the Government’s thinking is so complete, and one of the greatest changes of direction in Britain’s history, a brief explanation of the situation in which we now find ourselves is now necessary.

“The Bank of England has, during the last few years, created credit on a massive scale. The total credit created by the Bank of England to support the banks has amounted to about £375 billion – about 25% of the United Kingdom’s Gross Domestic Product of about £1.5 trillion. That money, under the most excellent leadership of Mervyn King, was aimed at improving the liquidity of the British banks and has achieved that objective. We did not borrow any money from abroad or from domestic sources to fund that credit creation, so none of that created credit is owed to anyone.

“This Government wishes to acknowledge its great obligation to Mr Mervyn KIng for his wise guidance of the BoE during recent years and hopes he will continue to advise us from another place when he retires from his present position at the end of this month.

“Unfortunately the Bank of England’s “Quantitative Easing”, which is what they call their credit operations, has done nothing so far to improve the productivity of British industry. The monies provided to the banks have been financial credits, not investment credits. When this Government belatedly realised that more could be done, an additional line of £80 billion of credit was established to improve investment in British industry. Unfortunately the take-up of these investment credits has been very disappointing because we put nothing in place that would ensure their use. The plant machinery in the factories of our SMEs is still generally outdated and requires widespread updating in order to enable effective British competition with the rest of the world. It is a Government objective that this should now be done.

“We have had ma]or recent discussions with the leaders in the Confederation of British Industry, with the TUC and the EEF and with Britain’s banks to ensure we can all agree on the need to act together to restore the effectiveness of Britain’s economy. All these high contracting parties are fully advised about, and in complete agreement with, these fresh government proposals. We are also very concerned about the need to help the poorest people of Britain and we are holding discussions with several charities to see how best the government can quickly help those in greatest need. We are particularly grateful for the research conducted by the Joseph Rowntree Foundation and their useful recommendations about how best to tackle poverty, and we will be bringing forward proposals during the lifetime of this parliament to assist the achievement of that shared objective.

“Britain must adopt an open conspiracy to make this country great again. There is no shortage of talent in Britain and we wish to place our businesses on an equal footing with those in the best of the rest of the developed world by giving our companies equivalent access to investment credit funding. We really are all in this together. We cannot have a third-rate financial-industrial system which fails to fund our industries because it has no priority to do so. The Government now has such a priority and the banks must comply.

“These new proposals are nothing less than a New Deal for Britain. This is a New Deal for British industry, which will be able to find the required development capital at their local helpful and co-operative bank, with the banking system willing and able to provide the long term debt necessary to fund greater business liquidity, higher fixed investments and more working capital. A New Deal for the British people, who will be more able to find work in a more rapidly growing economy to pay for all the essential needs, and most of the developing wants, of their families. It is not accidental that we are using the words of President Franklin Delano Roosevelt to describe our activity because his administration, from 1938-44, was the first to act as we are now doing. May our actions be as effective in achieving better economic development as his were.

“The main measures, which will go into effect immediately, are:

“First, with regard to the Bank of England (BoE), new legislation will be passed as soon as possible to define a new mandate for the Bank of England to give the bank the prime purpose of acting to promote the economic growth of the United Kingdom. The BoE will now re-discount a further £150 billion of bank loans to British industry, and that money will be earmarked for use by the recipient banks as long-term investment credit for British-based commerce and industry. These loans will have a term of not less than ten years and an interest rate of 2%, to promote British industrial development.

“Second, an Economic Planning Agency will be set up in Whitehall reporting to the Prime Minister to monitor the effect of these new measures and that Agency will report monthly to the Prime Minster and the Cabinet on economic progress and on any other measures which seem desirable to promote economic growth.

“Third, a financial ombudsman will be created to ensure that British Banks do not turn down useful and commercial business investments as they seem to have done for more than a century. If the existing banks do not wish to become investment credit banks, the government will consider legislation to enable the creation of new local savings banks to collect local savings to fund small and medium sized enterprises, new local authority banks to ensure greater commitment by banks to the community from which their savings originated, and new regional and national investment credit banks to ensure a complete matching coverage of funding institutions with local, regional and national funding needs.

“These new institutions will mirror the more competent SME funding arrangements and other existing industrial funding arrangements in Germany. These new banks will be guaranteed by government, as if fact all banks are in the last resort. There can be no foreign objection to the British Government taking steps to ensure that British domestic industry has access to equivalent financial facilities as these that have existed, and which continue to exist, to fund foreign industry abroad. Given access to equivalent funding sources, we are confident that British innovation and British industry will no longer lose its place in the world and will flourish through the fresh opportunities now made available to it.

“A few numbers will help illustrate the extent of the transformation we plan to bring about. The £150 billion of initial bank loan rediscounting by the Bank of England will, my economists calculate, create a final new level of commercial and industrial funding of about £300 billion because of multiplier effects in the banking system. From our provisional calculations we expect these funds to be initially used to provide an improvement of about £100 billion in business liquidity, about £100 billion in early new plant and equipment investment and about £100 billion in funding higher levels of capital and goods work in progress. It is forecast that if the usual level of tax take of 42% applies to the new investment and to work in progress, government revenue receipts could increase by about £84 billion – an excellent return to government from a better economic understanding and the initial movement of many electrons in the banking system.

Furthermore, that new investment would produce a permanent increase in output of about an extra £100 billion a year, equal to a permanent increase in GDP of about 6.7%, and a permanent rise in government revenue of about £42 billion a year. We think these changes will occur within two years.

“We will be monitoring the final figures for how all this turns out. Some of our economists have argued that, because an extra job in manufacturing industry has historically created another job in the service industries, the final effect will be twice what our initial calculations imply. Others have said that restoration of the economy to a higher growth path will enable the underperforming assets and spare capacity in our industries to respond to the higher levels of demand created by this stimulus, and the final results will be much higher than twice our initial estimates. We think both of these observations have some merit.

“Of one thing we can be certain: the British Government will no longer chase the depression down into a spiral of decline. These measures now proposed, along with other similar measures in the future, will end the long centuries of British economic decline and will place our industries on a higher growth path involving greater prosperity for all our people. Unemployment will fall to a low level. Social security payments will automatically reduce as fuller employment becomes the norm and Government income will cease to be disappointing, ending the need for austerity in government expenditure and all of its ill effects on our people.

“Let the word grow forth at this time, and from this Government, that Britain stands at the beginning of another financial-industrial revolution which will propel our innovative people and our skilled workforce once more into the front rank of world developments.

“We no longer believe that it is appropriate for University student fees to be levied in England and Wales. These proposals will be shelved immediately and the debt obligations to the universities will be honoured. It was never a good idea to make students pay out of their future earnings for higher education, because it inhibits the flowering of the potential of many of our people from poorer backgrounds. Education is one of the main escalators of the gifted. The high wages created by degrees – averaging about an extra 25% throughout the life of an average graduate – place the group of graduates among the highest contributors to the public purse. The main beneficiary from higher education is the Government, which receives higher taxes from the extra earnings of graduates. Investment in education actually offers one of the highest future returns to current expenditure by government. In these circumstances it makes no sense to reduce future government income by discouraging the availability of higher education to all of those who can benefit from it.

“The bedroom tax will be abolished. That tax was causing much more pain than benefit. Housing Associations and local authorities will have access to a new source of investment credit funding to provide low cost housing in our communities and to provide the funds for the construction industry to build new housing to solve the current housing crisis.

“We are aware that new technology in the workplace frequently requires less labour. Sufficiently higher investment, however, often requires more labour and we are interested in seeing that the labour displaced by new technology can be absorbed into industries with higher investment. Ideally the labour displacement effect due to more productive investment in established industries should equal the additional labour demands of new industries. The government will be funding more research into this topic in due course.

“We will ensure the provision of the essential funds for the modernisation of Britain’s infrastructure and the protection of its people. The capital monies required by the improvement in precautionary sea defences will be reinstated and will be increased to meet the projected need.

“One item of wage legislation will be enacted. Future wage and salary increases will be divided, with half of the annual percentage increase paid weekly or monthly and the other half paid as a lump sum every 1st November. This measure will limit inflation and provide earners with lump sum funds which research has shown are more likely to be saved, which in turn will increase the emergency funds of families for holidays or to meet unexpected expenses. It will also usefully increase the saving of British families, and in our restructured financial system that will increase bank funds for industry. That measure has proved very effective in Japan, where it may have been another policy initiative originating from the Japanese master economist Osamu Shimomura, and we think it will be as effective in the UK as it was in Japan.

“A few words about the developing international situation are appropriate. The IMF recently recommended that Britain needed to adopt a Plan B because the austerity programme was failing to deliver its stated objectives. This New Deal is our plan B.

“This new policy is completely consistent with the successful examples of higher growth in the economies of the USA from 1938-44, Japan from 1946 to the mid 1970s and China from the mid1970s. We commend this approach to our colleagues in the European Union and the ECB, and to our American and Indian friends, and to all these foreign governments who wish us well. We wish you well also. We hope our example can encourage you to act similarly.

“The ECB has so far created credit of about two trillion Euros to fund the ailing economies of southern Europe. We are all members of the European Union now. These people are part of us. We suggest the ECB should consider, as a matter of the utmost urgency, the provision of new investment credit funds of about 8% of the EU GDP, or about 900 billion Euros to help assist the economic recovery of Europe. These funds would be proportionate to the size of the European economy and the scale of the European need.

“The Japanese Prime Minister, Mr Abe has a parallel programme to ours in Japan. He is, through the Bank of Japan window operations, providing a massive injection of capital – about $1.4 trillion dollars or about 30% of Japan’s GDP – via the Japanese financial system into their industrial sector in order to modernise the plant and equipment in Japanese factories. That seems to us to be likely to work. We are not yet quite so brave, but as our programme develops, we will take further and surer steps in the light of our economic progress.

“The major lesson of our modern economic experience is that wealth can be created and destroyed. I do not need to waste any words by telling you how wealth can be destroyed by unwise bank lending – we have all suffered from that. More importantly, no-cost investment credit can be created and supplied as business loans that are repaid out of real increases in output, and these loans create a continuous stream of future wealth through the use of improved plant and machinery and the employment of labour. Investment credit at the Bank of England on a sufficient scale is the best wealth-creating response to the wealth destruction of the credit crunch. That is the central focus of this spending review.

“Finally I apologise on behalf of this Coalition Government for the unnecessary suffering created by our previously mistaken policies. We know this financial statement is really a mini-budget and is probably too late to affect our fate at the ballot box but we have at least provided an effective recovery platform from which our successors, whatever their political hue, can make further progress.”

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That’s my idea of what Osborne could have and should have said. The contrast is painful.

It is very clear that Mr Osborne, like his leader David Cameron, the Prime Minister for the rich, is not up to it. He does not know enough economics, and his mindset is too narrow and too poshly aloof, too smug and self-satisfied for him to be capable of listening to other viewpoints, let alone adopting a more competent and constructive resolution to Britain’s current economic problems. Just because the solutions to these long standing problems are beyond him and his advisors does not mean they are beyond everybody. There is a very faint glimmer of hope in the budget in the form of the intention to change the remit of the Bank of England so that it could act to promote economic growth. The Japanese Government did that with the Bank of Japan in 1942, and the French government did something similar under de Gaulle in 1946. But it is a deathbed conversion at the point when most voters would prefer the end of this hopeless Coalition government to any belated “jam tomorrow” conversion.

The recent document about the need for infrastructure investment (see “Investing in Britain’s Future” at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209279/PU1524_IUK_new_template.pdf) seems to be more of a political plea for a second term in office for this failed Coalition government than demonstrating any urgency or any marked desire for the higher economic growth which would invalidate the need for the current Coalition government’s austerity programme. “Investing in Britain’s Future” could be usefully re-titled “What we could have done, but didn’t do, but we might do after 2016”, and resembles an epitaph for a failed government more than a practical prescription for future action. Above all, that new document illustrates the appalling fact that this Coalition Government came to power in Britain without any constructive idea in their heads about how better to govern Britain. Their Thatcherism Phase Two, 1930s policy, will not do, and is entirely inappropriate to modern Britain. It was never going to work and it has taken them over three miserable years for the Government to realise that, with more misery and pain promised as long as they are in office.

When Japan wanted to learn how to grow rapidly, they sent their businessmen and economists to America in late 1945 and early 1946, to find out how the Americans had produced their economic miracle and to replicate it in Japan under the slogan “Western Technology, Japanese Spirit.” Which they did. When the Chinese wanted to learn how to grow rapidly, they sent investigating economists, businessmen and political leaders to Japan in the mid 1970s to find out how to copy Japan’s growth-accelerating formula and to discover how to transform China into a prosperous modern economy. Which they did.

The eighth paragraph of the G8 Final Communique, From Lough Erne 2013, said that

“Our urgent priority is to promote growth and jobs, particularly for the young and long-term unemployed. We will continue to nurture the global recovery by supporting demand, securing our public finances and reforming our economies to deliver growth..”

There was nothing in Osborne’s financial statement which addressed that urgent priority to promote growth and jobs, particularly for the young and long-term unemployed. Nor do any of his actions support demand, secure higher public finances or reform the UK economy to promote growth. Quite the contrary – nil out of four.

An incoming Labour Government could certainly turn Britain’s fortunes around if they so choose. The team of Miliband and Balls are going to have a greater opportunity to remake Britain than has existed since the reforming Labour Government of 1945.

It is now too late, much too late, for this “dog of a (Conservative-led Coalition) Government” to mend its ways. They are going to stay as they are, economically inept and monstrously complacent, until they are booted out of office. If they had not passed the bill awarding themselves a five year term that would probably have happened already. It is more than half-time in their five year term. The only thing that keeps them in power is their legally created capacity to cling to it.

The contrast between what a British Chancellor could say if he was adequately informed and sufficiently intelligent, with the stumbling bumbling of this uneducated fool is almost too great to be bearable. Judging him by results – and if you judge people by their results, you will never do them wrong – Osborne, whether you call him George or Gideon or Jeffrey, is by far the worst Chancellor Britain may ever have had.

As Keynes said in the 1930s

“It is not an accident that it is a Conservative Government that have got us in this mess. It is the natural result of their philosophy.”

Of course it is. Osborne is trying to apply the Conservative “solutions” of the 1930s to the problems of the 2010s. These so-called “solutions” – wage cuts, the shrinkage of government activity, the attack on people’s living standards, the high unemployment and social misery inevitably resulting from these mistaken policies – did not work then. They are no more likely to work now.

What a shame! What a lost opportunity!

What an idiot!

© George Tait Edwards 2013

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This post was written by George Tait Edwards