By Paul Goodman
George Osborne will be held accountable for the economic analysis that he produces and for any forecasts which he makes. The independent Office of Budget Responsibility will be treated in the same way. So should Ed Balls.
Why, since Balls isn't Labour's Shadow Chancellor? (Unready Eddie, fearful of the Balls/Cooper double act, sent to first to shadow the Home Office and the second the Foreign Office.) Because the MP for Morley and Outwood made a good speech – as I said when it was delivered – about the economy earlier this summer.
Good, that is, in the sense that it was, as I put it, "a developed argument, backed up by facts and figures – not a facile jumble of soundbites and slogans". I wrote that the essence of Balls' case was that "spending cuts now will force a double dip recession soon".
In short, he made the most powerful, distinguished and coherent speech on the economy given by a senior Labour politician since the election. Balls is far too astute a politician to lash himself to the mast of firm predictions, but the essence of his case was as follows –
- Growth is in danger of stalling or stopping in the second half of this year. "The data for the second quarter for GDP may have been strong, but the signs are not encouraging for the second half of this year. Even in the days since the Bloomberg speech, we have seen increasing signs of economic slowdown in Britain, and UK consumer confidence, business optimism and mortgage starts are all down."
Osborne told the Commons on Monday that: "The OBR forecasts real GDP growth of 1.8% this year, 2.1% next year, 2.6% in 2012, 2.9% in 2013, 2.8% in 2014 and 2.7% in 2015. Growth this year is now expected to be considerably higher than was forecast in June."
- The private sector won't drive future growth. "Against all the evidence, both contemporary and historical, [Osborne argues that] the private sector will somehow rush to fill the void left by government and consumer spending, and become the driver of jobs and growth. This is ‘growth-denial’ on a grand scale. It has about as much economic credibility as a Pyramid Scheme."
Osborne said that the OBR's "central forecast is for sustainable growth of over 2% in each of the next five years, and employment rising in each and every year. Indeed, employment and gross domestic product are higher in every quarter and every year than in the June forecast." He added that this forecast "is very similar to the European Commission forecasts for the UK, which also happened to be published today. Indeed, the European Commission today forecast that Britain would grow faster over the next two years than Germany, France, Japan, the United States of America and the average for the eurozone and the European Union."
- The Government is cutting spending prematurely. "What undermines confidence is uncertainty over whether a sudden fiscal adjustment is deliverable and over the impact it will have on consumer and investor confidence. Time and time again in recent years, we have seen the markets lose confidence – usually in emerging market economies – because they see fiscal adjustment plans which look tough but lack credibility and end up being self-defeating. A vicious circle begins of slower growth, investor flight, further reduced projections for growth, a worsening fiscal position, and further loss of market confidence.
Allister Heath wrote yesterday that "the UK appears on course to resolve its budget deficit and has very little chance of suffering another recession, thanks in the most part to the coalition’s policy of austerity". The Financial Times, which doesn't always see eye-to-eye with the Chancellor, conceded yesterday that Osborne "looks wise" to have taken out "the additional insurance of a tighter fiscal stance given the scale of the crisis now engulfing the Eurozone".
All in all, Balls was almost certainly wrong about growth this year and probably wrong about private sector-driven recovery (though it can be argued that he set up a straw man, since the Government doesn't argue that growth will arrive unaccompanied by higher consumer spending). It's worth noting that the Financial Times now believes that on balance Osborne was right to have instituted a spending scaleback (and Balls, by implication, is wrong to oppose it).
Balls and others may yet be proved right to have warned of a double-dip recession – although the OBR's central view is that this won't happen, it "expects that in the slowest quarter of growth, the first quarter of next year, it will be 0.3%, rising back to 0.7% by the last quarter of next year" – but Ministers have never ruled the possibilty out either.
But the key question isn't: what economic policy will help avoid a double-dip recession? Rather, it is: what economic policy's the best for the medium and long term, as well as the short term? It'll be worth keeping an eye on how Balls's predictions turn out during the months ahead.