George Osborne may have gained the confidence of global investors, but he's shredded it at home
Published 21/10/2010 | 02:18
Sometimes a politician only has to open their mouth for confidence to drain from an economy. George Osborne is only the latest in a long line to possess this baleful talent, as he proved with his emergency Budget in June.
Pretty much every indicator of consumer and business sentiment collapsed in the weeks after his announcements about painful cuts and fresh tax rises – especially the hike in VAT. Mr Osborne may have restored the confidence of international investors and the City in the UK, but only at the price of shredding confidence at home.
There is every reason to suppose that the Spending Review will do the same. Contrary to all the BBC hype about the Spending Review telling "YOU how YOU and YOUR FAMILY will be affected" it did nothing of the sort. It gave us some departmental limits and a few nuggets – such as the revelation that David Cameron may soon be travelling business class – but individual teachers, court staff, social workers and statisticians are no wiser about whether they will have a job this time next year. None of us know if our local library or swimming pool will survive. So there is much uncertainty around, and uncertainty also shreds confidence.
Hence the timely and heavy hint from Mervyn King, Governor of the Bank of England, on a rainy Tuesday night in Wolverhampton that he stands ready to inject yet more money into the economy. That is Mr Osborne's "Plan B" – where "B" stands for Bank of England.
Even those most bullish about the Bank's policy, which goes by the unlovely moniker of "quantitative easing" – would only make cautious claims for its effectiveness. They do at the Bank. After all, the Bank has already pushed £200bn into the system and kept rates at a 315-year low of 0.5 per cent, but the effect has only been to reduce market rates by 1 percentage point. Like old age, that is certainly better than the alternative. But if you have no confidence that you will have a job soon or, if you're in business, that sales and exports will really start to jump, then you will not borrow to buy a new car or new machine tools, no matter how easy the finance. Nor will you move to a bigger house or hire extra workers, or go out so much.
It is the lesson of the 1930s, the ineffectiveness of monetary policy, what Maynard Keynes called "pushing on a string". Ben Bernanke, historian of the 1930s slump as well as Chair of the Federal Reserve has warned the politicians that central bankers such as he and Mr King can only be expected to do so much.
Which leaves us where we are. Next week we will discover how fast, or, more likely, slowly, the economy grew in the third quarter; next year will see VAT and national insurance rise. Unemployment is set to rise. There will be strikes and maybe French-style riots.
Not much to look forward to, then. Perhaps the best that can be said for Mr Osborne is that, in a dog-eat-dog world where every nation is out for themselves, no matter that simultaneous austerity presages simultaneous penury - he is out-cutting most others. Thus, if the second round of global recession does transpire, the UK will indeed be better placed than others, simply because we have cut deeper and sooner. A nice world of internationally coordinated fiscal stimulus does not exist, or the G20 would have invented it by now. In an imperfect world the Osborne plan does have its merits, though rather tawdry ones.