George Osborne has just addressed the LSE on The Economic Policy of Recession. At the heart of his speech is the idea that control of the public finances is necessary to give the Bank of England the freedom to cut interest rates. In recent days his approach has won the support of former Tory Chancellors, Lord Lawson and Lord Lamont.
Mr Osborne concluded his speech with these words:
"There is now a clear choice in British politics. Irresponsible borrowing now and higher taxes later under Labour. Or the responsible Conservative plan, enabling the Bank of England to deliver a sustained cut in interest rates and lay the ground for lower taxes later. Helping families and businesses today by getting money into their pockets directly, instead of hoping that trickle-down public spending will work one day. Building a better economy for the future through economic change, not more of the same. And above all, preparing for the recovery through fiscal responsibility, not burying it under a mountain of debt before it starts.”
Other highlights of the Shadow Chancellor’s speech are pasted below:
Labour governments are all essentially the same: "On the wall of my office in Westminster is a set of cartoons from the 1970s depicting the economic calamities of the time. One shows Denis Healey sitting at a desk with his in-tray piling up with problems – home economy, unemployment, inflation, world trade recession. Another shows him raiding a child’s empty piggy bank. A third shows the manifesto promises of the Labour Government of the time overwhelmed by an economic avalanche. Visitors to my office used to look at these cartoons and remark how the world had changed. I now look at them and think how much is now the same."
The automatic stabilising role of fiscal policy: "Government borrowing rises automatically in a recession, as tax revenues fall and spending on unemployment benefits rises. This is what is meant by the term “the automatic stabilisers.” That is not a virtue, it is a necessity. So these “automatic stabilisers” should be allowed to function. That is what is starting to happen now. But we shouldn’t be fooled. This increase in borrowing is the inevitable consequence of recession not a strategy to fight it. It is an overdraft, not a plan."
Labour’s Britain in a poor shape to cope with recession: "The facts
show that our economy is in significantly worse shape to cope with this
recession than it was before the last one. In the last full fiscal year
before the recession of the early 1990s, Britain had a small budget
surplus of 0.2% of GDP. In the last full fiscal year before this
recession we had a deficit of 2.6% of GDP. That’s a difference of £39
billion in today’s money – in the wrong direction."
The markets may not let Britain borrow much more: "Even a modest dose
of Keynesian spending – say increasing it by an additional 1% of GDP –
means that in the end taxes will have to rise by the equivalent of
almost 4p on income tax. That’s not just a tax bombshell, it’s a cruise
missile aimed at the heart of a recovery. And in extremis, it can mean
you lose the confidence of the international markets. Gordon Brown
doesn’t understand that there are limits to borrowing, even after he’s
abandoned his fiscal rules. They are not his limits. Today everyone
assumes the only question is ‘how much more does the British government
want to borrow from the markets?’ Talk to former Chancellors and they
will tell you that at some point the question becomes ‘how much more
are the markets prepared to lend?’ That’s why there are limits to
borrowing – not political limits, but actual limits."
Trickle-down spending doesn’t tackle a recession: "Despite Labour’s
claims, there is no evidence to support the effectiveness of
trickle-down spending – the effect on demand of big government spending
programmes. Indeed the evidence from around the world suggests that
tackling recession with big spending does not work. The timing is
almost always too late. Value for money is often very poor. And public
spending can stand in the way of or push aside much-needed private
Tory tax reliefs will speed the recovery: "We have set out a series of
fully-funded and practical policies that would help families and
businesses immediately. These include: a council tax freeze; a chance
for small and medium sized companies to defer their VAT bills for up to
six months, so that they are not driven out of business by cash flow
problems; and a cut in payroll taxes for the smallest companies, to
boost employment. On top of these we would stop the planned tax rises
on family cars and small businesses. On their own, these individual
measures won’t stop Labour’s recession. But taken together they would
reduce the human cost of this crisis and speed the recovery – without
ruining the public finances in the process."