Implausible cuts

I have been watching Chancellors professionally for 25 years. During this time I've seen Budgets and Autumn Statements cheered and jeered by economists. But never have I known one to be greeted with as much incredulity as Osborne's effort on Wednesday. I've had numerous emails from City economists expressing the same sentiments as Stephanie Flanders and Rick - that his spending projections are "probably impossible" and in "la-la land".

This raises the question: what the hell is he playing at?

I think we can discount the possibility that he's laying a trap for the next Labour government - that when Labour tears up his projections they'll be accused of being soft on the deficit.

I don't believe this for two reasons. One is that politicians, being overconfident, rarely plan on being defeated. The other is that there can be no discredit in recognizing the impossible. A man cannot be blamed for cancelling plans to build a unicorn farm.

Another possibility is that he's setting a big hairy audacious goal - that he is, in fact, serious about cutting spending.

If he is, he's going about it in an astonishingly stupid manner. When James Collins coined the phrase BHAG he intended it to be a way of catalysing change. A BHAG is supposed to inspire people to think bigger, to ask how the goal can be achieved.

But this isn't happening. As I've said, Osborne hasn't prepared the ideological ground for a small state. And he's not making the organizational changes that small government requires. Quite the opposite. At least one government department - the Home Office - is acting as if we're in an era of ever-bigger government. He is ducking the challenge made by the IFS's Paul Johnson:

It is surely incumbent upon anyone set on taking the size of the state to its smallest in many generations to tell us what that means.How will these cuts be implemented? What will local government, the defence force, the transport system, look like in this world? Is this a fundamental reimagining of the role of the state?

If Osborne is serious, then his plans are mere cargo cult management, by which I mean this:

Step 1: Announce a target
Step 2: Magic!!!
Step 3: Target met

In this sense, what Nye Bevan said of Anthony Eden applies, mutatis mutandis, to Osborne: "if he is sincere in what he is saying, and he may be, then he is too stupid to be Chancellor."

There is, though, a third possibility, suggested by Stephanie. If you want to promise to return the Budget to surplus in the absence of strong economic growth whilst also holding out the hope of tax cuts, then as a matter of simple maths cuts of the size Osborne envisages are the only option.

But perhaps he doesn't intend to implement these cuts. Instead, he is merely promising to do so to appear tough and "in control of the public finances". And some political reporters are gullible enough to believe him. In the hyperreal economy, the point is not to reduce the deficit but to appear to reduce it. Maybe he's just following Machiavelli:

It is unnecessary for a prince to have all the good qualities...but it is very necessary to appear to have them.

Comments

[Luis Enrique]

yep

1. talk a good talk, get elected come May
2. have 5 years to come up with a ruse to get elected again, in almost certain knowledge nobody will care aboutr promises made 5 years ago

[Ralph Musgrave]

Assuming Osborne has a brain, he may be trying the "big lie" tactic: i.e. tell a big enough lie and no one notices. He is greatly assisted in that endeavor by the fact that most economics commentators (i.e. the macromedia brigade) and politicians have absolutely no idea what they're talking about when it comes to the deficit and debt.

If your audience can't distinguish between sense and BS, then you might as well give them BS.

[SimonF]

"This raises the question: what the hell is he playing at?": Politics

Despite what everyone on the left says he really isn't that stupid. Your post below is difficult enough for those who are interested to get their heads round let alone those who live by the concept of rational ignorance.

He's seen the polls and he knows most people think of the national budget like they do a household budget and no amount of banging on by economists is going to change that and if they try they just seen the shutters come up. That's probably why Ed Balls has to accept the approach, if only slower.

[gastro george]

Steps 1-3, marvellous.

But I suspect you're correct. He's relying on poor analysis and bullying - just see how he laid into the BBC on the Today programme, and notably reduced the time available for talking about the actual speech. Then for the pattern to follow this parliament. Miss your targets, manipulate a pre-election "recovery", and then go to the following election with the same message as this one.

[Icarus Green]

The guy is living in fantasy land because he IS literally living in fantasy land.

Look at his biography, look at his history, look at his party, look at his golf club buddies and acquaintances, look at his wife.

When one ensconces themselves in a Great Gatsby mental landscape there's no precondition to make decision that actually has any link to real world outcomes. Everything has been handed on a platter and will continue to do so.

How many times have you heard of a trust fund baby adding value to the world in any way? In art, music, academia, science or business?

I'm not unfairly marking out this man by the way. I believe most of the political class in both the US and UK suffer from Great Gatsby psychosis.

[cjcjc]

Stephanie Flanders' piece ends rather less critically than you suggest:

"The critics are right: the picture of Britain’s future that the Mr Osborne presented is deeply problematic and probably impossible. But it is also shows a relatively keen understanding of the constraints facing the country in a world of subdued global demand and persistent disinflation. I am not sure that every European finance minister can say the same."

[e]

@gastro George
Precisely, and beyond which he can rely on the BBC’s powerful competitors steaming in with flags for their ‘unbiased’ approach.

[gastro george]

"I am not sure that every European finance minister can say the same."

If she's referring to the EU, then she should know that Osborne hasn't the same constraints that the EU has, so she's being quite charitable.

[Richard Gadsden]

The other suggestion I've seen going around is that there's a lot of devolution coming up (not just Scotland, but Manchester, London, Wales, etc) and he's planning on finding a way of not counting money spent by devolved administrations. If the entire health and education budgets of Scotland and Wales come off the national books (by going onto the Scottish and Welsh books) then that looks like a huge cut in national spending.

[chris y]

To add to Richard Gadsden's point, one way of finding some of this notional money would be to devolve a massive tranche of responsibilities to the core cities and then tell them that it's entirely their responsibility to finance them. I imagine this is part, though not all, of his thinking.

[rogerh]

Perhaps Osborne is rational. There is a world-full of cheap money to borrow, it is practically impossible to cut the public sector, the big problem is lack of tax income and a week is a long time etc. So have a big spending splurge or at least say you will. Two advantages - win election and put a crimp in Miliband's options, the splurge might even work - a bit. If it ever came to serious cutting, well that is at least an election away and a different political universe - devolve to the cities, let them do it.

There is a problem I can't quite rationalise, house prices. Seems to me we are locked into high house prices. But any attempt to open up the house market risks knackering electoral chances as well as the banks as well as well as the feel good factor and tax income. So a bad idea. So will a gentle flattening off of prices through gradually eased supply work? Maybe, we shall see, perhaps the strategic thinkers are moving into position.

[Jeff]

Nach Krugman, if you think a man cannot be blamed for rejecting fantasy, you just haven't been paying attention to what has been happening to Obama for the last six years.

[AJ]

If you've got your own currency, you're still a safer place to stick all that Asian money than other parts of Asia, any emerging economy or the Eurozone, which could/will collapse.

So maybe the bond market vigilantes, who may never have existed and maybe never will, would get slightly worried at 200% debt/GDP, but UK is decades from that.

When you print a reserve currency, you have favoured nation status.

So my theory is that given Labour's reputation, deserved or not, for spending, and indeed borrowing, merely appearing to try to cut, when actually not trying, is still worth doing because it's a dividing line! which is something politcians adore. The only slight downside is that the BBC will take you at your false word, and call you an evil, service-slashing anti-statist.

George whispers very quietly: Have some free money, Britain - it's on me. The interest rate is so low it's as good as free to us too. You get the principal, we'll just cover the interest, and only that, forever.

[AJ]

The US also has this favoured status. Unfortunately so does Switzerland, and they don't want it, so by keeping the Franc lower against the Euro, they are keeping the Euro too strong against Sterling, USD, etc. The world doesn't see the Euro as a Deutschmark any more.

The problem with the Eurozone is not that Club Med countries cannot find creditors. So the Germans are controlling Club Med budgets needlessly as the deficits are no big deal, with the exception of Greece. But having huge national debts increases the temptation to return to, eg. the lira. and cause a domino collapse of the Eurozone.

[John]

From the Paul Johnson quote: "...anyone set on taking the size of the state to its smallest in many generations ..."

It may end up the smallest in many generations, but it will still only be a bit smaller than it was in 1997/98.

[Metatone]

Guess what John, our population has continued to grow.
So, yes, it will only be a bit smaller than 97/98...

[An Alien Visitor]

The whole economic debate for the Tories comes down to a single idea, Labour's profligacy (investing in the NHS for example) brought the world economy to its knees.

This coincided with a long held dream among the Tories, to attack public sector workers, and public services in general. During the whole New Labour era every argument with a Tory on the net ended not with Godwin's law but with the idea that Public Sector workers are living the high life at all our expense.

So the policies of this ConDem coalition are in part political but also an attempt to put a vision into practice, to attack public sector workers, and create the dream economy where there is no sick pay for workers, among other high ideals.

But this is not about shrinking the state, the true indicator of that is very very low tax rates for the mass of people. Anyone who says the state is being shrunk is an idiot of the highest order.

That brings us onto another argument, how can slashing vital public services be good for the economy? If slashing vital public services is good for the economy then fuck the economy is all I can say.

Yesterday 2 people were killed on a road near where I live, this was almost certainly down to the highway not being in a fit state, chalk that up as another victory for efficiency savings, chalk that up as another victim of the Condems.

[www.facebook.com/profile.php?id=772554672]

Yet a Conservative friend of mine is also confused by this budget: the stamp duty reform "back door mansion tax" as he calls it, and "total government spending massively increased but only on the things that old people use."

[An Alien Visitor]

"total government spending massively increased but only on the things that old people use."

And here is me thinking that we all used banks!

[Madasafish]

The answer I believe is far simpler. The OBS has forecast economic growth falling to just over 2% in 2016 onwards.

We have just seen the price of oil collapse over 30% in under 12 months. This will give a major boost to all consuming economies: and mainly the EC where economies are stagnant and growth is minimal.

If I were Osborne,. I would expect in the real world economic growth will fire ahead based on lower energy prices..so 2% growth could easily become 4%..

That extra 1-2% growth a year for 4 years would add roughly £60 to £120B to our GDP (4 to 8%).. and also significantly increase tax revenues..

So debt as a % of GDP lass, spending (controlled of course) falls as a % of GDP.. and fewer cuts are needed.

Simples..

(Oh that it would happen in reality)..

[EppingBlogger]

Since we evolved from being governed by the establishment to being ruled by the political class, say - perhaps the past 20 years, we have had the same disconnect between promises, forecasts, actions and outcomes. Blair suffered the same problem as identified for Osborne; he would announce a proposal and assume it had been done.

We must surely be moving to a stage when creditors simply refuse to lend to governments.

Can the treasuries of the world get away with high inflation to solve their own mess yet again. I am doubtful. The public and economic compenatorsa are much more attuned so blaming unions or gnomes won'rt wash again.

Politicians in Westminster are held in such low esteem that whatever form the financial crisis takes they will all be blamed. The consequences would be devastating if we had a physical crisis because no one would believe the PM if he appeared on the media asking us to support necessary solutions; such is the distrust, everyone I know wjould assume it was yet more displacement activity by the political class.

[Twinkle]

There's been a hollowing out of the middle class in OECD countries for many decades http://oecdobserver.org/news/fullstory.php/aid/3660/A_hollowing_middle_class.html

This has lead to wages falling behind price inflation. Since 2008 the world's richest 1% have decided it's essential take virtually all new growth to themselves.
This means the pace of wages falling behind has quickened.
The global economy is moving closer towards deflation aided by this and deflation is hard to stop. I'm not sure which way this will affect cuts but the big problem will be trying to prevent the fall into deflation.

[Ava P]

"We have just seen the price of oil collapse over 30% in under 12 months"

Speak for yourself! The petrol price is still at historic highs and the fuel bills are not exactly sinking.

[W. Peden]

Here's a possibility: the deficit reduction plans are real (or at least approximately real) but the issue is that, with UKIP doing so well, the Tories can't get away with plans for significant tax increases. Yet no deficit reduction package is likely to be remotely effective without tax increases AND spending cuts.

The budget speech made little sense to those of us stuck in the land of economic and political plausibility, but maybe we weren't the audience: Kippers were.

[An Alien Visitor]

Increasing taxes and cutting spending has already taken place. This should prompt the question, is this system fit for purpose anymore? Can capitalism deliver decent health, education and public services?

Listening to the apologists of capitalism, it would appear not.

If the supporters of capitalism believe it can no longer deliver then that should raise serious questions.

[Thomas Tidswell]

As Brown proved conclusively, he would "predict" a "growth figure" for the Economy and set his tax take accordingly. The fact that the "growth" was of money supply not real Economic ( Or is that the only type, today?) growth where more goods or services are made/supplied by less people. Then, hey presto, taps were turned on, money supply grew, people felt wealthy borrowed more and more and more and RBS created more and more spurious derivatives and Gold futures were being wound up and up and up. And all the money ran out of the Banks as Europe played "Chicken" with America's Fed' .......and lost.
Osborne is trying to save his pension because if the Vandals and Goths ever get into power and rip the lid off the Establishment, there won't be any need to know where the bodies are buried because most of the Establishment will float down the Thames, dead.
If you want a grandstand seat to watch Osborne and his mates floating facedown , vote UKIP!