After six years as Britain’s austerity championing Chancellor of the Exchequer, George Osborne has now left the Treasury and with it, the British economy. But what will be his legacy? How will history judge his economic record?
Mr Osborne undoubtedly bequeathes to his successor, Philip Hammond, an economy in a much stronger position than when Osborne took the reigns in 2010. Growth since then has more or less kept pace with the US and has outstripped the eurozone. At the time of his somewhat unexpected departure from the government, Britain was one of the fastest growing economies in the G7.
Employment is at a record level and unemployment stands at a mere 5%, largely due to the UK’s flexible labour market. Whilst Osborne has missed his own deficit reduction targets, both the UK’s deficit (the gap between tax receipts and government spending) and debt are at a lower level today than they were five years ago, but at what cost to Britain’s overstretched public services?
Perhaps one of Osborne’s best (and most enduring) acts as Chancellor – which recieved universal praise – was his decision to establish the independent Office for Budget Responsibility (OBR) in 2010. One of the biggest economic institutional reforms since Bank of England independence in 1997, the OBR enhances the credibility of fiscal policy, primarily through its responsibility to provide the government’s official forecast for the economy and public finances, as well as performing a crucial role in scrutinising and assessing the long-term sustainability of the UK’s public finances.
However, Osborne’s reforming legacy in bringing about institutional changes to the regulation of the banks, enhanced power for the Bank of England and increased freedom for pensions, are deserving of praise.
One of Osborne’s most controversial – and first – decisions in 2010 as Chancellor was his commitment to abolish the budget deficit by 2015. This was to be achieved through austerity in the form of deep public spending cuts and tax rises.
In the run-up to the 2010 general election, all three main political parties agreed that the budget deficit must be reduced. Where they differed (and in particular Labour and the Tories) however, was on questions of scale and speed of deficit reduction, rather than necessity. As the old adage goes, ‘it’s not what you do, it’s the way that you do it’ that perhaps truly matters. In this respect, Mr Osborne arguably allowed political discourse to trump economic logic in the unnecessarily speedy reduction of the deficit, especially at a time of unprecedentedly low interest rates.
As was argued at the time by the then Shadow Chancellor Ed Balls, Osborne’s plan to eliminate the deficit by 2015 would ultimately prove self-defeating, owing to the fact that what was needed was targeted and smart fiscal stimulus (in the form of infrastructure investment) to shore up economic growth which would thereby lead to an increase in tax revenue.
Only once the recovery from the global financial crisis had been fully secured, Labour argued, should deficit reduction then begin, without it compromising growth. Indeed what was to follow in early 2012 (dubbed by Ed Miliband as Osborne’s ‘omnishambles’ budget) was a stall in economic growth and Britain entered into a brief, albeit it negligible, ‘double-dip’ recession. In a humiliating defeat, Osborne also lost Britain’s triple A credit rating, which he himself had claimed to be a test of the government’s “economic and political credibility”.
The result was Osborne being forced to into a humiliating revision of his self-imposed deficit reduction target. With an ostensibly firm change in direction of economic policy under Hammond, the argument that deficit reduction leads to growth seems to be in an untenable position. This view has been firmly corroborated by the research department of the International Monetary Fund who conclude that “episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output”.
Osborne also leaves office having done little to tackle Britain’s long-term productivity puzzle. Despite having pledged to have a “laser focus” on productivity, through his so-called productivity plan.
In view of the spectacular failure of Osborne’s 2016 budget (which was to be his last) it should be no surprise to see the Chancellor out of the Treasury. Widely seen to be inherently regressive, it included measures such as a scrapping of tax credits and cut in disability payments (PIP).
In a speech that signalled the final nail in Osborne’s political coffin, the new prime minister Theresa May said, a few hours before knowing that she would win the Conservative leadership election, “[w]e need an economy that works for everyone … It is apparent to anybody who is in touch with the real world that people do not feel our economy works that way at all.”
Similar sentiments were echoed by Iain Duncan Smith following his resignation after the March 2016 Budget as Work and Pensions Secretary: “I hope as the government goes forward you can look again, however, at the balance of the cuts you have insisted upon and wonder if enough has been done to ensure ‘we are all in this together'”.
However, as with his close political ally and friend, David Cameron, Mr Osborne’s legacy will conceivably be largely dominated by their doomed decision to call a referendum on Britain’s membership of the EU.
And yet, the economic gains that have been made by Osborne over the past six years are as nothing when looking at the British economy from a longer-term perspective. Fundamental weaknesses and imbalances still remain: failed full realisation of Osborne’s cherished northern powerhouse agenda, persistent productivity paralysis, continued underinvestment in infrastructure and insufficient export-led growth all remain stubbornly prevalent.
In the face of Britain’s decision to inflict economic self-harm following the vote to Leave the EU, there will be many significant challenges in the months and years ahead that will test the resolve of Britain’s new Chancellor. However, leaving the British economy in Philip Hammond competent hands, we can all, albeit it temporarily, breath a slight sigh of relief.