It’s been a gloomy summer. Stock markets around the world have plunged on worries about the lack of economic growth. Political wrangling in Washington has added to the uncertainty. And eurozone leaders have failed to grasp the nettle of what needs to be done.
Here in Britain – where we’ve had spending cuts and tax rises that go further and faster than any major country – unemployment and inflation are rising and the economy has barely grown since last autumn. But far from being a “safe haven”, as George Osborne complacently claims, over the last twelve months the only G7 country to have grown slower than us is earthquake-hit Japan.
A year ago George Osborne boasted that he was “cautiously optimistic” about the economy, while David Cameron claimed Britain had been taken “out of the danger zone”. They not only thought the economy could withstand cutting further and faster, but insisted it would boost confidence and job creation.
At that time I warned, in my Bloomberg speech, that there was a hurricane building and this was not the right time to rip out the foundations of the house. Back then it felt like not many people were making this argument, but today many of those the Chancellor was able to cite in support of his plan are getting more and more worried.
The new head of the IMF Christine Lagarde has echoed Labour’s warnings that cutting too quickly will hurt the recovery and jobs and that there is scope for reducing deficits more steadily to support growth. While diplomatically saying in public that the government’s policy remains “appropriate” for now, she warned Ministers will need to act if slow growth and high unemployment continues.
The deputy head of the OECD has also said there is merit in slowing the pace of deficit reduction if weak growth continues, which is exactly what the OECD’s own forecasts suggest. And even the founder of the world’s largest investment fund has called for a change of course.
The flatlining economy and rising joblessness is clearly bad news for families and businesses, but it’s also bad news for getting the deficit down. As Christine Lagarde has rightly said “growth is necessary for fiscal credibility” and the lack of growth means the government is already set to borrow £46 billion more than they planned.
So in the face of all this bad news, what should George Osborne do? The reckless thing to do is plough on regardless. The cautious thing to do is act now before it is too late.
While George Osborne sits on his hands, President Obama realises the urgency. And while Obama is boxed in by the Republicans in Congress, his jobs plan last week had all the components of what a plan B should look like – tax cuts to help low and middle income families, action to support job creation by businesses, and investment in infrastructure to boost jobs and strengthen the economy for the long-term.
In Britain, George Osborne has done the opposite – raised taxes on low and middle income families with a big hike in VAT, done nothing to support job creation and axed Labour’s school building programme which was keeping thousands of construction workers in their jobs.
George Osborne needs to admit each of these were mistakes and urgently get a plan for jobs and growth in Britain. For starters, the government should use the billions raised from repeating Labour’s bank bonus tax to build thousands of affordable homes and get young people off the dole and into work. And instead of cutting the 50p top rate for the very richest, a temporary VAT cut would boost the economy and help families and pensioners struggling right now.
The Chancellor’s insistence that there is no alternative to his austerity is sounding less credible by the day. He is politically boxing himself in to an economic plan which is simply not working. The sooner he listens to advice – not just from Labour, but his friends at the likes of the IMF and the OECD – the better.