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10 years on, will history repeat itself?

Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament on June 22, 2010.

June 22, 2020 - 7:00am

It didn’t feel like it at the time, but the Osborne Budget of June 2010 — unveiled 10 years ago today — really was one of those moments on which history turns.  The decision to undertake major fiscal consolidation, and to do it mostly through spending cuts, was arguably the most politically consequential choice made in a decade of high-stakes political calls.

Ten years on, it’s all too easy to judge that decision a mistake: the human costs of paring back important parts of the state are now apparent. They may help to explain why almost everyone in politics now agrees there must be no return to “austerity” when (if?) the coronavirus crisis eases and the state starts to trying to rebalance after this year’s huge spending.

That consensus shows how politicians, like the rest of us, often navigate by looking in the rear-view mirror. Today, leaders are determined not to repeat the lessons of the last crisis, by not doing what was done last time.

Fair enough, but they might consider why Osborne and Co. made the decisions they did. This was not all about ideology, a Thatcherite drive to shrink the state. The Cameron-Osborne project up until 2008 had been about embracing the New Labour settlement: remember “sharing the proceeds of growth”?

The actor in the 2010 Budget that deserves more attention is the bond market. Back then, a lot of perfectly serious people worried that the UK could find itself unable to borrow all the money it needed from the markets. Big bond-buyers such as Pimco were bearish on gilts; the Treasury worried about uncovered gilt auctions, where the markets declined to buy all the bonds on offer.

For some of the politicians involved, healthy fear of the bond markets was one of the lessons they’d taken from their predecessors, especially the Clinton generation. It was common at the time to hear people recalling James Carville, the Clinton adviser who said in 1990:  “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

These days, UK politicians seem to have forgotten their fear of the bond markets, assuming that the UK can borrow and borrow at rock-bottom rates without consequence, not least thanks to the Bank of England.  That’s an understandable view, I suppose: the markets have so far been very accommodating. And basing economic policy on fear of bond traders did give us austerity and all that flowed from it.

You can see how the current generation of British politicians don’t want to let a bunch of traders and fund managers set their economic policy again this time. But is that wise?

Just because the bond markets proved to be paper tigers last time, does that mean they’re nothing to worry about this time?  Everyone knows that it’s dangerous to assume that “this time is different”. But there are also risks in assuming that because something benign happened last time, it will happen again this time.

James Kirkup is Director of the London-based Social Market Foundation


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4 years ago

Osborne’s austerity had nothing to do with the bond market. They are pets not wild animals. The aim of austerity was to justify closing down the central government maintenance grant to the local authorities and so force them to liquidate their public land holdings book into the commercial sector. To the extent that UK plc still possesses public assets then this government will find continue to find ways to pass them to its rentier clientele, but the cupboard is running bare. What’s left? hospitals, maybe some infra like roads, military estate… That secular current account deficit ain’t gonna pay for itself.

4 years ago
Reply to  hgppevans

Rentier clientele?

‘Pass them…’. So someone buys a State asset, like a motorway for example, for £x millions with their own money – that is not having something ‘passed’ to you – and then creates a good which has value to others. Others – consumers -voluntarily pay to use it because they profit from its value.

Taxpayer gets, or should get, the benefit of the money from the acquisition.

How is this rent collecting?

Rent collecting is not creating any value yourself, but taking a slice of value created by others, for no effort on behalf of the rentier.

The whole Government apparatus is a rentier. It creates nothing of value for which anyone would voluntarily pay – hence taxes collected by coercive powers of the State – which skim off the productive value of others.

What doesn’t stick to their fingers, is distributed as bribes in exchange for votes.

Paddy Taylor
Paddy Taylor
4 years ago

Most people do not understand the Bond Markets (myself included) or the pressures they exert on Govt policies. But we have allowed a fiction to become received wisdom about the 2010 Osborne budget – that it was driven by ideology. I’ve criticised Austerity myself, and argued the need to release funds for certain services – particularly social care and mental health. But across the UK media, there has grown a reflexive insistence that Austerity was a uniquely Tory policy, it is as ill-informed as it is dishonest. But, as ever, many seem more comfortable when the narrative is framed that it is evil Tories, driven purely by malice and greed, inflicting austerity on people with some sort of twisted, sadistic relish. That certainly appears to be the received wisdom among those who get given their news by the BBC and Guardian.

Maybe, just to add a little perspective “¦”¦

According to all the promises from the pre-Corbyn Labour leadership, we should perhaps be grateful we had Tory ‘Austerity’, rather than Labour’s – who promised to cut harder and deeper than the Conservatives.

What might we have expected to be different under a Labour Govt? In 2010 Alistair Darling announced – on the pages of the Guardian, although they pretend not to remember – that “Labour’s planned cuts in public spending will be “deeper and tougher” than Margaret Thatcher’s in the 1980s”, …they promised “two parliaments of pain” to repair the black hole in the state’s finances.

The Guardian reported that the “Institute for Fiscal Studies said hefty tax rises and Whitehall spending cuts of 25% were in prospect during the six-year squeeze lasting until 2017 that would follow the chancellor’s “treading water” budget yesterday.”

Not much had changed in Labour’s position by 2015: “A Labour government would deal with the deficit by cutting public spending by most Whitehall departments every year as part of a “tough and balanced” approach to restoring Britain’s economic fortunes, Ed Miliband will announce.”

Alistair Darling announced before the election a cumulative decline of 11.9% in departmental spending on public services over four years, a cut of £46bn in inflation-adjusted terms. Given that Overseas Aid and NHS funding were both ring-fenced that worked out to a 25% cut in spending across all other Whitehall departments.

They announced those figures, yet the media seem to have developed a collective amnesia over this.

So Darling’s promised reductions would have amounted to more than Osborne cut.

When the Coalition and then Tory Govts took over, the country was in a parlous financial state. Drastic measures were needed if we were to avoid a complete financial collapse. ALL PARTIES RECOGNISED THAT FACT.

Of course it is easy now to look back and say we could – and probably should – have gone another way, but at the time ALL parties with a credible chance of getting into Govt were promising a similar future filled with painful cuts to services.

To deny that is simply dishonest. To pretend it was only the Tories that would have “inflicted” austerity on the country is also dishonest.

And was it such a failure? What was the stated aim of the Cameron/Osborne Tory Govt? It was to reduce the deficit. This was achieved. How, then, can anyone call that policy a failure? It, quite demonstrably, achieved its aim. The deficit was reduced: It doesn’t sound too much like failure to any honest, objective onlooker.

When we talk of Austerity, it is worth comparing the genuine and punishing austerity measures imposed on various EU member states. The Greeks had measures forced on them by the ECB that led to a 25% drop in GDP. Ireland saw public spending cut by 15% in a year. Meanwhile, here in the UK, when people screech about vicious Tory austerity killing people – it is sometimes worth remembering that what they mean by “Vicious austerity” are those “merciless and savage cuts” that saw public spending wantonly slashed from £780 billion in 2017 to only £820 billion (pre-covid) last year.

Vivek Rajkhowa
Vivek Rajkhowa
4 years ago

If we’re to be afraid of traders in suits rhen we see lost, perhaps the time has come to kill the traders.

Andrew M
Andrew M
4 years ago

“This was not all about ideology, a Thatcherite drive to shrink the state”.

I’m always incredibly suspicious – automatically disbelieving in fact – when someone writes about some element of history claiming that there was a single cause for it and not several contributory causes. Of course shrinking the state was part of the motivation – a cause dear to many of the elected Conservative MP’s, their funders and the beneficiaries of their policies.

4 years ago

‘ Ten years on, it’s all too easy to judge that decision a mistake: the human costs of paring back important parts of the state are now apparent.’

Examples please, not claims, with supporting empirical evidence.

Andrew Baldwin
Andrew Baldwin
4 years ago

Before 2010 the UK had a sane and sensible policy concerning upratings, which were based on the Retail Prices Index, a household-oriented measure of consumer prices. The Bank of England’s target inflation indicator, the UK HICP, somewhat confusingly relabelled the UK CPI by Gordon Brown, was a macroeconomic measure of consumer prices well suited to the quite different objectives of inflation targeting. Then in 2010, the Office of National Statistics, changed its methodology for collecting clothing prices in a way that substantially increased the formula effect, in the sense of the difference between the RPI as it is, and the RPI replacing the Carli formula used to calculate elementary aggregates and the more generally accepted Jevons formula. From 0.4 percentage points in 2006 to 2009 it went to 0.6 percentage points in 2010 and it rose again to 0.7 percentage points in 2011. This definitely created problems for Osborne and the short-term solution was obviously to base upratings on the RPI adjusted for the formula effect, equivalent to basing them on the short-lived RPIJ series that was introduced in 2013. New issues of gilts should also have been linked to the RPI adjusted for the formula effect. Instead of doing this Osborne chose to switch to the CPI for upratings of public sector pensions and some benefits. However, the RPI remained in force for uprating rail fares and student loan repayments are linked to the RPI, not the CPI. The changes made appeared to be obviously motivated by narrow budgetary considerations rather than principles, and couldn’t conceivably last forever, so it is remarkable that 10 years later, essentially the same system is still in force. Remarkably, new gilt issues are also still also linked to the RPI. And when Osborne’s system is replaced, it seems likely to be replaced, not by a return to the earlier useful distinction between household-oriented and macroeconomic indices, but by a J.R.R. Tolkien approach: one index to rule them all and in the darkness bind them. This was in fact the recommendation made by the House of Lords Economic Affairs Committee in its curate’s egg of a report on measuring inflation. Osborne and the coalition government have a lot to answer for.