With every fresh piece of dismal news on the economy, the case against George Osborne staying as chancellor grows stronger. The British economy has flatlined in the two years since he has been in Number Eleven and is about to go into another big downturn. He’s shown no inclination to get to grips with getting Britain’s economy back on track. But who should replace him?
Most Westminster insiders would tip William Hague. He has the gravitas for the job, and his Yorkshire burr would be a lot better suited to selling tough decisions than Osborne’s London public school tones. Or there’s the technocratic defence secretary Philip Hammond. Or even, at a stretch, Ken Clarke: he pulled the economy out of a deep hole in the mid-1990s and might be able to pull off the same trick again in this decade.
But in truth the best choice would be Nick Clegg, the deputy prime minister and leader of the Liberal Democrats.
There can be little doubt that Osborne’s strategy isn’t working. His plan was to get the deficit under control gradually, encourage the Bank of England to keep interest rates at 300-year lows, devalue the pound, and blast the system with endless rounds of printed money.
It hasn’t worked. The economy has slipped back into recession in the first half of this year and there is little sign that the second half will be much better. Every country that has hosted the Olympics has seen a downturn after the Games end as the sugar rush of construction and tourist spending wears off. There’s no reason to suppose Britain will be any different.
The government keeps blaming the crisis in the eurozone for Britain’s dismal performance. It’s a feeble excuse. Sweden is growing faster than we are and so are Germany and France. They can hardly be said to have been unaffected by events in Europe. So how come Britain is doing so much worse?
In truth, Osborne has failed to come to grips with the catastrophic legacy of 13 years of Gordon Brown who, as chancellor and prime minister, created an economy that was neither able to compete nor to pay its way. Osborne’s analysis seems to be that everything about the economy was basically fine until 2008 when the financial system crashed and the deficit spun out of control. Bring the deficit down and all will be well again.
It isn’t true. Britain was surfing on a wave of debt, while productivity growth was nonexistent. By 2008, Britain had joined Japan as the most indebted nation in the world. The government had grown in size, pushing some regions towards levels of state spending as a percentage of GDP that matched the Soviet Union.
The big banks had been allowed to balloon out of control, so their bloated balance sheets had the potential to bankrupt the country. Regulations were stifling small business. Taxes became uncompetitive globally, choking off inward investment – it was only as a tax haven for foreign billionaires that Britain attracted fresh money.
A wave of immigrants made firms dependent on cheap foreign workers and let them forget about training people or investing in new machinery. It would be hard to think of a better mix for destroying the country’s competitiveness.
So far, Osborne hasn’t shown any interest in tackling that legacy. Past Conservative chancellors did much more, much earlier. At the start of Margaret Thatcher’s government, Geoffrey Howe ditched the conventional wisdom of the time, cutting public spending, slashing taxes and raising interest rates. The financial system was restructured via steps such as lifting exchange controls. A bold start had been made right at the beginning of the government. Government support collapsed in the polls, but it worked and the government was eventually rewarded.
The coalition’s chancellor should be making a similarly bold start. The agenda would be different, of course. The big banks should be broken up. There should be a bonfire of regulations to kick-start an enterprise recovery. Corporation tax should be lowered to Irish levels to attract a fresh wave of inward investment.
The Bank of England should be reined in: creating more debt isn’t going to work so it should be refocusing on getting people saving again so that investment can be increased. Such radical steps would provoke opposition. Many Conservatives probably know that and realise they are held back by the demands of sharing power with the Liberal Democrats.
So put a Liberal Democrat in charge. Nick Clegg would be the best choice. Deputy prime minister is a non-job, with no real responsibilities. You can’t really prove yourself when you don’t have anything to do. But as he showed in the election campaign, he is an effective campaigner, not afraid to sell a tough message or make unpopular decisions. The main task right now is to tell people that the economy is in bad shape and that fixing it will be a long, hard slog – and the sooner a start is made the easier it will be. Clegg would be good at all of that. And most of all, he could sell reform to sceptical Lib Dems.
Right now, the coalition is failing on the economy. If it doesn’t get that right, all its valuable reforms on schools, welfare and policing will amount to very little. It might as well go for broke – and a bold choice for chancellor would be the place to start.