Wednesday 25 November 2015

George Osborne's Gamble

In war, there's only a short amount of time your weaponry has an edge over the enemy. Labour has spent the last couple of months shelling the Tory trenches with the party working tax credit shells. This week, the new 'police funding' gun has been pressed into service. Both pasted the Tory position to the point it became strategically vulnerable and, this afternoon, the chancellor pulled his forces back to a better fortified position. The u-turn on tax credits and the u-turn on police cuts now means the Tories are out of range and its up to the boffins to come up with something new. Unfortunately, the dropping of John McDonnell's Mao bomb missed its target by some distance and threw our follow up assault into disarray.

Enough of the tired battlefield allegory. Given the media's mood music, you could be forgiven for thinking that an omnishambles-style catastrophe was in the offing. Unfortunately, it was the very opposite. Despite being forced to backpedal publicly on the cuts to tax credits, and the reverse on police, Osborne had a very good statement. It was cheeky because, like before, he wrapped himself up in the same Labour clothing the Tories had, pre-election, denounced as communist overalls. Muscular because he blithely skipped from unfunded spending commitments to ruinous cuts, yet managed to project himself as if he was delivering a budget for a strong, growing economy; not the imbalanced and precarious mess it is presently. This was a confident chancellor, one who visibly enjoyed taking the stand and occasionally tickling the Commons' ribs with comedic asides. Looking askance, that's probably what people not normally interested in politics picked up on when they watched tonight's new bulletins.

Of course, Osborne is fortunate. He's lucky. Some might extend that luck to the character of the opponents facing him on the benches opposite. His programme, however, is premised on an "unexpected" windfall of projected tax receipts - as divined by the Office for Budget Responsibility. If someone on zero hours contracts signs themselves up to spending commitments over the next year on the assumption they'll get steady work, that's something of a risk. To stake a programme of government on the same is taking a bit of a risk. Yes, the economy is doing okay, but what Britain needs is economic policies that shore up the home market - not measures designed to pull money out of it. Around the corner is instability stoked by war in the Middle East, slowdown in China, stagnation in the Eurozone, and the ever-present costs of climate change. It won't take much for the smug grin on Osborne's face to get wiped off, but it's not the likes of him who'll pay the price for his fall.

1 comment:

Boffy said...

Actually, I think McDonnell's Mao gambit may be seen in coming days and weeks to have been quite clever. In the short term, the Tories and media have used it to emphasise his "Red" nature, but they were doing that anyway, so its a bit of a wash. But, not only did it mean that it got a talking point and highlighted the extent to which the Tories are selling off the family furniture to the Chinese, but McDonell was making the point that, although he is being attacked for his "Red" credentials, it is the Tories whose economic plan depends on the kindness of Mao's inheritors in the Chinese Communist Party!

It is them who are buying up the family furniture, as well as buying up vast amounts of newly built London property for speculation, just as they have speculated in the past, and continue to do buying government debt, and UK shares. Osborne is reliant on the heirs of Mao in Peking, and in the People's Bank of China, continuing to print money to prop up the financial markets and property market in China, so that the overflow of that speculation into UK property, and stock and bond markets continues, rather than that it floods back out causing a massive crash like that seen recently in China.

Osborne has bought short term respite at the cost of near term disaster for his budget plans. The £27 billion windfall depends on increased tax revenues, yet last month the opposite was the case, the worst condition since 2009! Moreover, it depends upon low levels of inflation and interest rates.

Yet, if the other requirement strong economic growth - which depends on strong global growth - is achieved (and I think that is likely over the next couple of years), then with all of the liquidity pumped into the markets, that is likely to result in higher inflation, and possibly much higher inflation, as happened in similar circumstances back in the 1960's.

Things like oil prices, food prices and so on, fell partly because of large scale investment, and rising productivity, but they have actually fallen to levels below the price of production of these commodities because supply increased too much (as it always does under such conditions) leading to over supply. Next year that will correct, and the prices of oil, food and so on will rise, globally.

With wages rising globally, and productivity growth starting to slow, and with oceans of liquidity, that is likely to result in sharply higher inflation, as some emerging market economies have already found out. In many of those economies, interest rates have risen sharply, and that is coming here too in the not too distant future.

So, when next year, there is higher inflation, and higher interest rates, the basis of Osborne's Budget will be smashed apart, maybe even by the time he gives the next one in March, but certainly by the time of the next Autumn Statement.