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.