In macroeconomic terms the key features of George Osborne’s budget
delivered today are the rapid move to budget surplus, and a rapid
increase in the minimum wage. (It is best to ignore changes compared to
the March budget, which was a fiction of a dying coalition.)
The two are connected: the Chancellor gave the need to move to budget
surplus as a key motivation for cutting tax credits, and those cuts
undoubtedly inspired his surprise increase in the minimum wage which the
OBR think will cost 60,000 jobs. The pace of austerity over the next
five years is to a first approximation the same as over the previous
five, although it is planned to be a little smoother this time.
In 2010 the excuse for austerity was fear of the markets, although
these fears were later shown to be unjustified. Today the macroeconomic
excuse for austerity is more difficult to manufacture. We are told we
need to bring debt down so it will not be a burden on future
generations. But if Osborne achieves his goal of perpetual budget
surpluses, government debt will fall very quickly. That will mean that
the generation that began working as the century began will have
suffered both the impact of the financial crisis, and the subsequent
austerity required to bring debt down rapidly. In contrast the
generation that starts work in twenty years time can enjoy the benefits
of existing public capital without paying very much towards it. That
does not sound very equitable.
We are told that debt must be reduced quickly to prepare for the
uncertainties ahead. In the last crisis the immediate need was to
support aggregate demand, and the quickest way of doing that is cutting
interest rates. Interest rates are today nearly as low as they can go,
and the more austerity we have over the next few years, the lower
interest rates will be. This is because austerity is undoubtedly a drag
on growth, as the Governor of the Bank of England agrees. Moving rapidly
to budget surplus makes us more vulnerable to the next crisis by
keeping interest rates low.
The Chancellor is fond of household and business analogies when it
comes to government budgeting. Yet any business will tell you that the
time to borrow to invest is when interest rates are low and labour is
cheap. The Chancellor’s plans involve public sector net investment
falling to a tiny 1.4% of GDP, which is only 60% of the average level of
investment over the last decade. Whichever way you look at it, the
strategy of renewed austerity makes little macroeconomic sense. But this
most political of Chancellors has never worried too much about that.