Listening to George Osborne today, I was left with the overriding impression that he genuinely believes he has done the right thing for the British economy, and that his efforts are bearing fruit. As a piece of political theatre it was compelling, and Osborne's skills as a politician are often lauded. But as an economist, I was aghast. It was not so much an attempt to re-write history as to ignore all the mistakes that have been made.
Leaving aside the various tweaks and gimmicks – like capping rates at 2% instead of RPI inflation, which will be a difference of around 1% – the best announcement in today's statement was the decision to remove employers' National Insurance contributions for young people. Regular readers will know I have suggested similar moves in the past, notably when the likes of the IoD were banging on about daft tax cuts and mindless QE in 2011. But, as ever, today's policy announcements have had little impact on the economic outlook, according to the government's official OBR watchdog. Osborne's policy decisions amount to a massive £2bn impact this financial year – in reality, just 0.1% of GDP. After that, the decisions have so much impact I'd need to use more decimal places.
So what is the reality of where we are today, compared with where Osborne thought we should have been when the coalition came to power?
In June 2010, the OBR's forecast was for the economy to grow by around 14%, in total, between 2010 and 2015. Based on its latest forecasts – despite the massive 'doubling' of growth this year, a fine effort at spin-doctoring statistics – the current figure is likely to be just 7%. To put that into context, that's a shortfall of about £109bn, in today's money. Every single year. Still feeling happy about the growth numbers?
What about borrowing? Again, in June 2010 the cumulative public sector borrowing requirement over this parliament was forecast to be around £450bn. Now, it will be £580bn, or 29% higher. Despite a range of dodgy deals, including grabbing the assets of Royal Mail's pension fund but basically ignoring the liabilities, nicking the Bank of England's earnings from QE (which could mean it needs recapitalising at a later date) and various other schemes, Osborne's promise to balance the books this parliament is in tatters – instead, we may have a balanced budget by 2019, if we're lucky.
To be clear, these worse outcomes are not because Europe or the banking crisis turned out to be much worse than we thought. By April 2010, we already had a good idea that the recovery in Europe would be slow and painful; and the immediate holes in the UK banking sector had been filled, but we knew that credit would be in short supply for years. To get a sense of the real degree of economic 'surprise' since 2010, we just need to look at Germany and the US. Germany had a similar 2008/9 recession to the UK, in terms of peak-to-trough fall in GDP. But, thanks in no small part to government spending helping employers to keep workers on the books, unemployment stayed low. Osborne opted for the slash and burn approach instead.
In the US, policymakers delayed fiscal consolidation more by accident than design – but it meant that when the spending cuts did hit this year, growth had built up enough of a head of steam to cope. US GDP growth this year will be pretty close to what we'll see in the UK, despite massive spending cuts towards the start of the year and the American government shutting down for three weeks. Delaying the required adjustment, until growth properly took hold, was the right thing to do.
The simple fact is that Osborne got his bet wrong. Austerity has already taken much more out of the UK economy than he expected, and at a time that it wasn't ready for it: the mantra that he cut 'too far, too fast' is a good description. The Chancellor's big gamble is that we will forget his past mistakes; flush with a bit of long-overdue growth, his essential message is that policy worked.
He is wrong. UK productivity is still about 15% below its pre-crisis trend (again, very poor compared with the US or Germany). And this is fundamentally the reason why people's pay packets are rising more slowly than inflation, if they are rising at all. Labour's main message – that people will be much worse off in 2015 than in 2010 – is still bang on the money. What is worse is that people will be more worse off than they should have been, if only the Chancellor had got policy right.