George Osborne has just given an excellent speech at the LSE on the economy. The theme of the speech was 'Conservative fiscal responsibility'. It was a speech that comprehensively demolished Brown and Darling's plans for a Keynesian spending splurge and then proceeded to clearly, and reassuringly, outline the steps he would take if in office.
It was so good to see Osborne have the intellectual confidence to take the fight to Labour and show their 1970s throwback policies are intellectually bankrupt. Margaret Thatcher did so in the 1980s and was so successful that Blair and Brown had to accept her economic thinking - rhetorically if not always in practice. But as Osborne pointed out in his speech, Brown has now given up on the rhetoric of sound public finances.
Osborne rightly said that Keynesian demand management had comprehensively failed in the 1970s. He said that big spending projects would not be finished in time to give any benefit and said the government had a lousy track record of completing big capital expenditure projects on time and on budget e.g. the schools building programme. He also invoked the experience of Japan. Between 1992 and 2002, Japan tried the Keynesian approach. The result after those 10 years was a debt burden which had increased by 56% and an economy which had only grown by 9%. What is more, the country was left with lots of white elephants after the ill-fated spending splurge.
The shadow Chancellor invoked former Chancellor Nigel Lawson in explaining his thinking on economic management. Lawson had said in his 1984 Mais Lecture that it is the job of monetary policy, not fiscal policy, to manage demand. The responsibility of fiscal policy is sound public finances. Hear Hear!
This had been the accepted economic strategy of successful economies for two decades. Even Brown said in his 1997 Labour Conference Speech that he had learned the mistakes of the past that governments could not spend there way out of recession. It is a shame the Prime Minister is returning to his old Labour, socialist roots!
Talking of Lawson, he popped up Wednesday at a House of Lords economic seminar and made the point that interest rates must be slashed but the Treasury should refrain from cutting taxes or increasing spending in the face of the coming recession.
Back to Osborne... he said that borrowing of course increased during a recession as the automatic stabilisers kicked in. It is the cost of recession... Brown's recession. It is an overdraft, not a plan for recovery. Cameron made this point the other day and Brown deliberately used the point out of context at PMQs, repeatedly saying that Cameron was in favour of borrowing and thus spending when Osborne was not, thus trying to suggest Tory economic policy was in disarray. Pathetic if that's all our Prime Minister can come up with!!!
Returning to his twin themes of "Conservative fiscal responsibility" and "fixing the roof when the sun was shining" Osborne said that the year before the 1990s recession, the Conservative government had a small surplus of 0.2% of GDP. However, a year before this recession, the Labour government had a deficit of 2.6% of GDP. Brown comprehensively failed to put contingency plans in place for a downturn, as the IFS said when Brown handed over the reins of the Treasury to Darling.
Osborne made the point that increasing spending is not cost free. It makes it harder for the Bank of England's Monetary Policy Committee (MPC) to cut interest rates as it leads to inflation. Increased spending funded by increased borrowing also ultimately leads to increased taxes or cuts in public spending so that the debt can be paid back. Fiscal loosening and increasing the size of Britain's deficit will not work to help a recession and more than that it will undermine the subsequent recovery by destabilising the system.
The shadow Chancellor then set out the Conservative's alternative plan to get the country out of recession which can be summed up as 'fiscal responsibility'. Cameron referred to this in his Conference speech when he said he was a 'fiscal conservative'. I have been critical of Conservative economic policy recently because i was concerned that the Conservatives had nothing to say about the economy other than that it was all Brown's fault. I argued that this was not enough especially as the other parties were offering alternatives - Labour spending and Lib Dem tax cuts - from what i saw as the do-nothing status quo advocated by the Tories.
I don't mind admitting that Osborne's speech today and Lawson's comments Wednesday have reassured me that current Conservative policy is not a do-nothing strategy as i unfairly characterised it. It is strategy that will put the country on the soundest possible footing and recognises that government action for its own sake is not what is required. A strategy of 'fiscal responsibility recognises the realities we face and seeks to put them right in a way that is best not only for the present but also for Britain's long term recovery and does nothing to jeopardise either. It is a responsible and sustainable approach which will not burden future generations with mountain's of debt. I was frustrated with the Conservative's Party's inability to articulate what it would do differently and had argued that the Tories should offer tax cuts to help the economy. However, Lord Lawson, a pro-tax cutter himself, argues that "by having big cyclical tax cuts now you would weakening your weapons for the future." Consequently, the fiscally responsible approach outlined by Osborne has won me round.
Osborne said that his approach would be 1) Let monetary policy work; 2) Do not make the Bank of England's task harder - by this he means by increasing spending which would heighten inflationary pressures thus making it more difficult to cut interest rates; 3) Timely, responsible, targeted fiscal measures to help families and companies through the difficulties of recession; 4) a new fiscal framework (the government has abandoned its fiscal rules and has not replaced them) which will see a balanced budget by the end of the economic cycle policed by an independent Office for Budgetary Responsibility; 5) Prepare economy for recovery by addressing the structural and geographical imbalance in the British economy. UK's growth (75%) was far too narrowly confined to just three sectors - housing, finance, and retail - which has meant Britain is especially vulnerable in a downturn.
For too long the parties have appeared too similar. No longer. The economy has finally provided clear dividing lines between Labour and the Conservatives.
As Osborne said: "So there's the choice in British politics: irresponsible borrowing now and higher taxes later under Labour; or the responsible Conservative plan. Let the Bank of England cut interest rates now and lay the ground for lower taxes later."
UPDATE: Angela Eagle is just on the BBC claiming Osborne is planning on cutting spending. Hello? Did you listen to the speech? What a pathetic response from the Exchequer Secretary to the Treasury. Is that all she can do - fall back on tired stereotypes. And why did the BBC interviewer not slap her down?
