by James Kirkup
Monday, 22
June 2020

10 years on, will history repeat itself?

The Osborne Budget of June 2010 was not driven by ideology alone
by James Kirkup
Chancellor of the Exchequer George Osborne holds Disraeli’s original budget box as he leaves 11 Downing Street for Parliament on June 22, 2010.

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.

Join the discussion

  • 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.

  • 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.

  • 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.

  • To get involved in the discussion and stay up to date, become a registered user.

    It's simple, quick and free.

    Sign me up