While many to the right of the Conservative Chancellor’s current economic policy were hoping for supply-side reform to kick-start Britain’s ailing economy, the rhetoric of his Autumn Statement was distinctly Keynesian. Infrastructure spending was the order of the day as opposed to supply-side employment and planning deregulation, the abolition of the 50p tax rate and further reductions in corporation tax that many on the right believe will solve all the country’s economic woes. Those sympathetic to these arguments including the redoubtable John Redwood MP and friends, and commentators such as the Spectator’s Fraser Nelson, who has long since provided a strong critique of Osborne’s deficit plan from the right, were clearly not impressed by Tuesday’s statement. The clear questions that arise are what has led Osborne to change course, and why he has chosen to reject supply-side reform as a solution.
One of the main problems Osborne now has is that the initial ‘cut hard, cut fast’ policy was primarily premised on a rather dubious economic assumption: the idea that a plan of fiscal austerity is always the best means to fiscal expansion regardless of external conditions. The idea is usually referenced in conjunction with the work of the Harvard economist Alberto Alesina on the lessons of recent fiscal adjustments and in history. Around the time of the 2010 Spending Review, Tory economic spokesmen were constantly referencing this idea. Ex-Osborne Chief of Staff Matthew Hancock MP was the most prominent penning a Times article in September 2010 entitled ‘Stick to plan A and growth will follow’. In this he highlighted a 2003 study by the European Commission which found that of 74 consolidations examined, in 43 cases growth accelerated. Osborne has himself also quoted the case of Canadian austerity in the 1990’s on occasions.
While this study and Alessina’s work are robust in their analysis, it seems highly debatable whether the assumption that fiscal austerity is the best path to economic growth is the logical conclusion to draw. Other external factors are often ignored, for example the fact that the Canadian deficit reduction experience took place alongside a clearly very helpful ‘Clinton boom’ in the United States.
Regardless, Plan A has now been implemented in Britain on the basis that cutting hard is the best way to growth, and yet we are now teetering on the brink of recession once more. In light of this, Osborne’s decision to eschew the aforementioned supply-side calls from the right in last week’s Autumn Statement is particularly intriguing. Not only has he seemingly recognised that Britain has a huge demand problem as well as a deficit problem, but he also seems to have little faith that supply-side measures and monetary measures alone may not be enough in the short-term as external demand deceases rapidly. As I referenced on my last MHP blog, the superb Telegraph economics journalist Jeremy Warner, has consistently argued this, and highlighted back in October that: “in conditions where external demand is plummeting, no amount of supply-side reform, investment-friendly tax cuts, employment incentives or removal of red tape is going to prevent the economy sliding back into recession”.
Equally, Osborne is clearly not embracing heavy spending as a means out of recession. The Autumn Statement instead illustrates that the Chancellor is now seeking to plot a more mixed deficit reduction course which recognises a role for infrastructure projects as a means of stimulating demand. Indeed, away from the rhetoric that Labour would simply ‘spend their way out of recession’, this was much the point Alistair Darling made pre-election.