George Osborne’s Savvy Display Lacked Tough Political Action

Free of his pesky Liberal Democrat coalition partners, George Osborne was last week finally able to present a “totally Tory” budget – the first since 1996. With a Parliamentary majority, and a general election the best part of five years away, the Chancellor was well-placed to do what Conservatives are supposed to do, taking further steps to get our public finances in order. Except that he didn’t.

Since last week’s Commons set piece, Osborne has rightly won political plaudits. His package of measures displayed trademark strategic acumen and rhetorical guile. By putting welfare cuts front-and-centre and finally pledging to spend 2pc of GDP on defence, the Chancellor burnished his credentials among the Tory faithful, positioning himself for the party leadership contest which, it is widely assumed, will take place later this Parliament.

Yet with his “National Living Wage” – starting at £7.20 and rising to £9 an hour by 2020, replacing the £6.50 minimum wage – Osborne also outflanked Labour, shifting towards the centre-ground – just as Tony Blair did, to such devastating electoral effect from the opposition direction, back in the mid-1990s.

Beyond such eye-catching political gamesmanship, though, are some uncomfortable fiscal truths. As a result of last Wednesday’s budget, the UK government is on course to borrow £18.1bn more over the next five years than was assumed in Osborne’s pre-election budget in March. During that budget, and indeed in the Conservative manifesto, we were told the UK would finally run an annual surplus in 2019. As of last week, the date of that surplus has been pushed back (yet again, for the fifth time) to 2020.

So, if we do actually register a surplus five years hence, it will have taken the Conservatives no less than a decade since coming to office to register a single year in which the country lives within its means.

The Chancellor didn’t unveil £12bn of welfare savings last Wednesday, as expected, but just £7bn instead. It was also, as the widely respected Institute of Fiscal Studies commented, “a deeply disappointing budget for those of us who hoped the Chancellor might take the chance to improve, simplify and reform our creaking tax system”.

When he became Chancellor in 2010, George Osborne inherited a budget deficit in excess of 10pc of national income, the biggest in the UK’s peacetime history. Our public finances are now in better shape. It would be churlish, and wrong, not to give him credit.

Yet Britain last year still racked up a deficit equal to 5.7pc of GDP – the worse fiscal shortfall in the European Union except for Spain and Cyprus, despite our economy growing faster than other large EU nations. Even cash-strapped, recession-bound Greece proved better at living within its means last year, with a deficit of 3.3pc of GDP – albeit with some pressure from its external creditors.

The UK’s national debt now stands at almost £1,600bn – up from £950bn when the Tories took office. Servicing this huge sovereign debt burden is costing our country almost £40bn a year, money that could otherwise be spent on schools and hospitals or even be handed back to the people in tax cuts. And, as the Bank of England eventually raises interest rates, and we reach the limits of our ability to keep gilt yields low using quantitative easing and other forms of central bank “funny money”, that debt service burden can only rise, channeling to private and foreign creditors more and more of the public money that should be flowing instead to the front-line services upon which we all rely.

“The first budget of a new Parliament is one where you can do really whatever you think it right, irrespective of whether or not it is popular,” said Nigel Lawson last Wednesday, the Thatcher-era Tory Chancellor and still one of the sharpest minds at Westminster.

That’s why it’s disturbing that, at a time of massive international turmoil, with global markets on a knife-edge, our current-day Chancellor didn’t use this moment in the electoral cycle, and with the Eurozone starkly illustrating the potentially cataclysmic dangers of shouldering too much debt, to match his tough fiscal rhetoric with similarly tough fiscal action.

The Conservatives, after all, just won a majority, for the first time since 1992, on a budgetary programme rather tougher than that which Osborne delivered on Wednesday. Again, I acknowledge the Chancellor’s achievements and recognize his political savvy. But I can’t help thinking that, in retrospect, this fiscally somewhat complacent budget – one in which, I repeat, total projected borrowing increased by getting on for three times more than the headline welfare cuts – may be seen as a mistake.

I say that because, beyond Westminster, and the intricacies of our domestic budgetary measures, the world economy faces a quite astonishing array of systemic dangers – any one of which could derail the UK’s still rather fragile recovery and plunge our national accounts back into the danger zone.

This column has often warned of the dangers posed by the Chinese stock market and, in recent weeks, those dangers have come to the attention of a broader Western audience. That’s because shares in the world’s second-largest economy have plummeted more than 30pc over the last month, the People’s Republic seemingly experiencing an Eastern version of the 1929 Wall Street crash.

Given the extent to which the market surged prior to that, fuelled by a combination of Chinese savings quitting a fragile property market and speculative domestic and foreign cash, the Shanghai index remains no less than 80pc up on a year ago – despite the recent plunge. In other words, there could be much further to fall. That partly explains why the Chinese government has taken such heavy-handed, even draconian measures in a bid to prop the market up.

Not only has Beijing cut interest rates and used the QE share-pumping measures so popular among Western central banks, the Chinese authorities are also overtly pressuring domestic pension funds to buy stocks, while actually banning investors with large holdings in listed stocks from selling. The danger is that such interventions look like panic, sparking an even worse rout in the days to come.

The Chinese stock market is relatively small compared to the size of the economy. The so-called “free-float” – the amount available to be traded – is less than 20pc of GDP, compared to over 100pc in most Western economies. Having said that, a closed capital account means ordinary Chinese have few choices when it comes to stashing their savings. The main non-cash options are state-run banks (with negative real yields), a volatile property market (currently in the doldrums) and domestic stocks. And, we’re talking about a country with little in the way of formal social security, and where attending a fee-paying school is one of the few routes out of relative poverty.

As such, saving is a national obsession – and hundreds of millions of Chinese households have a considerable slice of their hard-earned nest-egg in stocks. That’s why Beijing is so determined to stop the market from collapsing – not only because of systemic dangers, given the fragility of some Chinese banks, but because a really serious share price meltdown could even spark Chinese civic unrest.

Even if that nightmare scenario is avoided, an on-going stock implosion in China could dent investor sentiment across Asia and beyond. That’s one reason, along with the on-going weakness of the US recovery, why the International Monetary Fund last week lowered its global growth forecasts.

And then, of course, there is Greece.

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