Osborne's budget challenge and the spirit of 97
George Osborne’s problem is how to rid himself of the spirit of ’97. Seeing as this year ranks second only to 1945 in the roll-call of Labour triumphs and Tory disasters, this may seem a very strange claim to make.
Beneath the party political veneer, the reality is quite different. 1997 was the moment when proponents of the free market could take more satisfaction in the state of economic affairs than at any time since before 1914.
Looking back, 1997 was right in middle of an eight year economic golden age, begun by Lamont taken forward by Clarke and sustained by Brown. Lasting until the Dotcom bust in 2000, this eight year period quite simply had the best record on both growth and inflation for 50 years.
But beneath the statistics a much more important ideological victory was won. That victory was the acceptance of a belief in the beneficence of the private sector: so long as the public sector did not mess it up, the economy would thrive. Any occasional setbacks originating in the private sector would be self-correcting. Only public sector mismanagement, especially excess spending, could do lasting damage. Brown’s Golden Rule, setting out how public spending would be constrained over an economic cycle, reflected that belief precisely. Labour’s explicit recognition of the belief confirmed its victory.
This is the spirit of ’97 to which Osborne harks back and which informs all that he has done. Both parts of the austerity thing, the political denunciation of Labour for being culpable and the economic obsession with the deficit and the debt since 2010, flow directly from this belief that so long as the public sector does not mess it up, all will be well.
This belief has the power of simplicity. But like all simple ideas, it leaves little room for retreat or correction should things go wrong. Apart from allowing the timetable quietly to slip – an option Osborne exercised last year – there is nowhere to go if it does not work out. Those who believe that public sector excess is the root of all evil are bound to do what Osborne has done.
Although there is no sign of it being likely, the big question for Wednesday’s Budget is whether Osborne can use the opportunity to construct a new narrative about what must be done, a narrative that begins to free him from ’97.
The reason why he must is that what was valid in the golden age is no longer so. As Dan Corry, Steve Barwick and I argued in our Fabian pamphlet last year, Brown’s golden rule was appropriate for its time. But since perhaps 2002, and certainly since 2004, its underlying premise, that the private sector can’t be a source of lasting economic disturbance, has ceased to be true.
The key development is the transformation of British companies into net savers, creating a corporate surplus year after year. This surplus reflects a fundamental weakness within the private sector, meaning that Britain’s companies are not serving as the engine of economy growth. Alongside this, Britain’s chronic balance of payments deficit (a surplus for the rest of the world) reflects the country’s inability, public and private together, to pay its way internationally.
The two surpluses represent fundamental challenges to Osborne and his successors which 30 years of liberalism have left us utterly ill-equipped even to think about. Abandoning the obsession with austerity is the easy part of bidding farewell to ’97. Deciding what to do instead is far harder. Invoking the need for growth is little more help than invoking the need for austerity. Whisper it quietly but the last time politicians faced up to these challenges was in the despised 1970s.