First published in the Telegraph on 25 February 2010
If you don’t work in the City or in economics, you may not have heard of the annual Mais lecture, which was delivered last night by George Osborne. But it’s a big deal, arguably the most important set-piece speech in the Square Mile calendar. And only once before has City University, the host, deigned to invite an opposition politician primed for election to deliver it.
On that occasion, the young thrusting pup at the lectern derided a government in crisis, its finances in a state, its economic reputation in tatters. He promised to cut the deficit, to intervene in markets where necessary, and laid out a “new framework” for running the economy. That man was Tony Blair.
Last night, George Osborne became the second opposition politician to deliver the lecture. His title? “A New Economic Framework”. That aside, the difference could hardly be more stark. In 1995, the economy was in recovery. With the deficit past its peak, the great transformation in macro-economic management had already taken place, when the collapse of the Exchange Rate Mechanism forced Britain to start targeting inflation rather than exchange rates.
Today, the economy is in a far more damaging spiral. The first leg of the financial and economic crisis, which stemmed from excessive private borrowing and the subsequent collapse of the banking industry, is over. The second leg, characterised by a crisis of sovereign debt in even the richest economies, is only just beginning. The Bank of England’s inflation-targeting approach is under question from sources as authoritative as the International Monetary Fund. The world economy looks increasingly vulnerable to a “double-dip”, tipping back into recession or stagnation rather than bouncing back to health.
More important, both political parties are committed to spending cuts of a scale never before experienced by the public. Ignore the fuss about economists’ letters: based even on Labour’s plans for public spending, the next half-decade will be the first time in modern history that a government has imposed five successive years of real spending cuts. The question is not about timing (the Tories would cut earlier and slightly more) but over who will push the cuts through. Labour perennially disappoints and misses its fiscal targets. What most recommends the Tories is the pedigree that suggests they will at least approach the task with some relish.
All the same, Osborne is terrified of imposing such deep and painful cuts. He privately despairs that he will end up as the most unpopular politician in modern history. Which helps explain his plan, spelt out last night, to set up a three-man Office for Budget Responsibility to advise him on how far to cut spending. The hope is that the OBR will attract the opprobrium when state-sector workers are laid off or given pay cuts, when VAT is raised, when the retirement age is increased, and when public-sector pensions are finally tackled.
However, as good a start as the lecture made, it failed to address the scale of the social task facing the Tories. Osborne mentioned the Conservatives’ plans to tackle inequality, but only as an afterthought. And that is precisely what the divide between rich and poor has been for decades: a worthy economic topic that is too big, nebulous and intractable to tackle. I suspect that this is about to change. We have known for some time that income disparities have climbed to the highest level since the Thirties. What is new, and worrying, is that whereas this gap narrowed as a consequence of the Great Depression – as the wealthiest lost money and the poorest benefited from the newly created social safety nets – this time the crisis has served to widen the chasm, not least because the plutocratic bankers were bailed out with taxpayers’ cash.
In part, inequality is a natural consequence of globalisation. When a company shifts factories overseas, the shareholders make more money, but the workers lose their jobs. Optimists claim that this wealth should trickle down to those unemployed workers as the shareholders go out and spend more, but reality has proved otherwise. According to Albert Edwards of Société Générale, homeowners have been distracted from noticing this disparity by housing bubbles that convinced them they were becoming wealthier. But that fantasy has been obliterated by the crisis.
The poorest today are, in absolute terms, less destitute than before, able to afford food, shelter, even satellite TV. But the disparity between them and the richest has risen. It is not merely, as Richard Wilkinson and Kate Pickett point out in their book The Spirit Level, that this damages health and encourages crime; in times of austerity, inequality can tear apart the social fabric. Take Greece, where the most frequent chant in this week’s riots was: “Make the plutocrats pay!”
So Ed Balls’s plan to pitch this election as a class war is, I’m afraid, on the button. Class, money and privilege will be unavoidable issues during the next parliamentary term. Rather than ignoring them, the Tories must take action. Better to start thinking about free-market reforms that share the wealth more equitably than to leave it to the Left to suggest that taxes on the wealthy are the only solution.