It’s the weekend after the general election in 2010. David Cameron has failed to win enough seats to win an overall majority.
Talks are going on among the Conservatives, Labour and the Liberal Democrats to see who can form a government. The coalition that saw Cameron become prime minister five days after the election was, Nick Clegg claimed, a matter of necessity. Suggesting that the Lib Dems were simply doing their patriotic duty, the deputy prime minister said the government was born in the “midst of an economic firestorm”.
Economic firestorm? In Greece and some of the other countries in the Euro zone maybe, but not in the UK. The economy had been through an extremely tough period in 2008 (the world financial crash) but by May 2010 it was on the mend. Growth had resumed in the autumn of 2009, and in the first two quarters of 2010 before the election the economy expanded by 0.5% and 1% respectively. In those two quarters, there was almost as much growth in GDP as in the subsequent two years with George Osborne as chancellor.
(Gross Domestic Product -GDP- growth is important as it is ultimately captured as income and wages by the population)
Nor were the other traditional warning signs of trouble flashing red. The pound had stayed rock steady throughout the election campaign even though the polls had been clear throughout that there would be no overall victor. Here’s what the Bank of England said in its May 2010 inflation report: “On average, in the 15 working days to 7 May, 10-year gilt yields (the benchmark interest rate for UK government borrowing costs to fund the overdraft) were at a broadly similar level to the average in the run up to the February report.”
So, no run on the pound. No sign of international investors dumping gilts. The economy is growing. Where’s the firestorm? The answer is that there was a crisis, but it was going on in Greece, not Britain.
The Conservative and Liberal Democrat version of the events that led to the coalition suggests that urgent action was needed to prevent Britain going the same way as Greece. This is nonsense. Unlike Greece, Britain was not a member of the euro – the five economic tests set by the previous Labour government had not been met. Unlike Greece, Britain had control over its own economy, with the Bank of England free to set official interest rates at whatever level it deemed appropriate for domestic conditions. The pound was free to find its own level. International investors understood all that, which was why in May 2010 the interest rate on 10-year UK government debt was 4%, while in Greece it was 12%.
Over the years, a great myth has been spun about the state of the economy in 2010: the crisis was entirely due to Labour profligacy; Gordon Brown’s profligacy had laid waste to the public finances; the UK was on the brink of bankruptcy making extreme austerity measures inevitable. The truth is that the coalition inherited an economy that was on the mend, overdosed it with austerity, and put back recovery for over two years.
The £90bn extra overdraft racked up by the coalition government last year is a result of the economy’s problems, not the cause of them.
(The Deficit is the difference between tax income and government expenditure – the National Debt is the total overdraft, now £1.36 trillion and forecast to grow, until the deficit is eradicated and expenditure balances with income.)
A fair summary of the state Britons are in was given in 2010 by a self-declared progressive politician: “For many years we have been heading in the wrong direction. Our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country (London and the South East), while we let other sectors like manufacturing slide.” That was, of course, David Cameron, in his first prime ministerial speech on the economy. He and George Osborne have focused instead on reducing the deficit. This is akin to having a massive leak coming through the ceiling and obsessing about the damage to the carpet.
The coalition’s economic record can be summed up simply. First, ministers snuffed out a weak recovery bequeathed them by Gordon Brown and Alistair Darling; then they launched a historic programme of cuts that put Britain into a historic slump; by 2012, with his own backbenchers in revolt, Mr Osborne abandoned austerity; from then on, aided by a steadier world economy, the UK has enjoyed moderate growth. When they should have invested, they cut. When they should have been pragmatic, they were dogmatic about austerity. The result has been the slowest recovery since the South Sea Bubble of 1720. The coalition’s economic record has been as abysmal as its self-presentation has been triumphant. Even as Mr Osborne has missed forecasts and blown targets, he has presented himself as the man with the long-term economic plan. What plan?
Yet this remains an economy creating insecure and low-paying jobs, hooked on property bubbles and household debt and where the budget deficit remains at 5% of GDP when, according to initial forecasts, it should have disappeared by now. It is true that more of us are in jobs than ever before, as figures show. But the real threat is underemployment – Britons who want more hours and more money, they can’t get either. In the past five years, workers have suffered the most severe fall in real earnings in history.