The Gathering Storm

There is a storm coming… like nothing you have ever seen… and not a one of you is prepared for it.

Curtis, Take Shelter

During the six years that George Osborne was Chancellor of the Exchequer, he often used the metaphor of “fixing the roof” to describe his economic policy. Even as late at June 27th this year, in his last major speech in office, he again made reference to the roof:

I said we had to fix the roof so that we were prepared for whatever the future held. Thank goodness we did.

As a result, our economy is about as strong as it could be to confront the challenge our country now faces.

George Osborne

Ah well, that’s good! The roof is fixed, right? Hoorah!

Wrong, but don’t worry – it’s much worse than you think.

George didn’t talk a lot of sense while he was Chancellor, so it shouldn’t come as a massive surprise he finished on a low note. During his six years, George didn’t so much “fix” the roof as he did “patch it up with tissue paper and spit and then go on a big marketing campaign to inform everyone about how good the roof was.”

He frequently compared the economy with a family living beyond their means. Cutting spending, we were told, was responsible and spending money was not. It was though, an entirely false comparison. If a parent in a family earned £20,000 a year they could cut their weekly shopping bill, their Sky TV subscription, their dining out, they could buy cheaper holidays etc. and they would still earn £20,000.

The wider economy doesn’t work like that because, in the economy, my spending is your income and your spending is my income. When the government cut spending, they directly impoverished their citizens, avoided a proper recovery and left the economy in a far worse state than it would have otherwise been. Many economists spent the Osborne years calling for a fiscal stimulus to get the economy back on track but he ignored them – after all politicians don’t like listening to experts.

Worse still, George’s cuts weren’t targeted on those who could afford it. They weren’t even spread around equally. George’s cuts were directly targeted at the poorest in our society. The rich didn’t have to worry about the cuts to the NHS or education – they could afford private alternatives. The rich didn’t have to worry about cuts to social housing, legal aid, libraries or public transport. Austerity has hit the poorest and most vulnerable the hardest and you know what? All of this, and the promised irradiation of the deficit hasn’t happened. Interest rates are still at the zero lower bound and our economy is still weak.

Here we are, six years after the Tories got into power, and that well-marketed roof isn’t looking particularly robust. That roof is in fact, in far worse shape than it was before the last financial crisis and if I were a weatherman right now, I would not be forecasting sunshine.

This week the Bank of England cut the base rate from 0.5% to 0.25% and announced further quantitive easing. It is far from enough. Cutting interest rates makes saving less attractive and borrowing and spending more attractive. That’s why rate cuts are used to boost the economy. At the end of 2007, on the eve of the financial crisis, the base rate was 5.5%. When we needed to boost the economy we had some room to manoeuvre. It’s a luxury that we no longer have.

The cut this week from 0.5% to 0.25% made big news but to put it into perspective, in response to the financial crisis, we cut rates by 5%. We no longer have that wriggle room because we are up against the zero lower bound. Yes, we could make rates negative but that just makes hoarding cash in your mattress the more attractive option. That doesn’t help.

If we had had a proper fiscal stimulus and the economy had properly recovered from the financial crisis we would by now have interest rates within normal levels and ready to respond to negative shocks. But we didn’t and we don’t.

If I were being generous, I might call all of this incompetence. I hope that’s all it is, but I fear something far worse has happened. Since coming to government, the Tories have pursued policies that they knew would put the poor and vulnerable at risk. And they did this simply because the alternative was asking the rich to pay more tax. It’s clear that our economy has suffered overall but the vast majority of the pain has been weighted towards our poorest.

One of these days, and probably sooner than you think, we are going to see the true price of austerity.

And when it happens, I don’t think it is going to be pretty.

RedEaredRabbit