Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Britain's Chancellor of the Exchequer George Osborne reacts as he greets Italy's Finance Minister Pier Carlo Padoan in Downing Street in London April 30, 2014. (LUKE MACGREGOR/REUTERS)
Britain's Chancellor of the Exchequer George Osborne reacts as he greets Italy's Finance Minister Pier Carlo Padoan in Downing Street in London April 30, 2014. (LUKE MACGREGOR/REUTERS)

Austerity saved Britain? That's poppycock Add to ...

The transformation of George Osborne from the would-be destroyer of the British economy to its purported saviour has been remarkably swift, awe-inspiring and only somewhat credible.

Barely more than a year ago, the chancellor of the exchequer – finance minister to you and me – in Britain’s Conservative-Liberal Democratic government was on the verge of presiding over a triple-dip recession. Today, he’s overseeing the Group of Seven’s fastest-growing economy, one that will probably soon displace France as the European Union’s second-largest market. Germany suddenly has an economic rival worthy of the name.

Britain’s turnaround has been the envy of France, Italy and Spain, whose own turnarounds are barely perceptible and wholly incapable of bringing down their double-digit jobless rates; Britain’s own jobless figure has just dipped below 7 per cent. Britain’s message is that austerity works, that if you do as we did – cut, cut, cut – the fiscal cleanup will trigger surging growth. So keep calm, carry on.

If only the bounce-back theory were so simple. The baby-faced Mr. Osborne, now adored by the election-bound Conservatives, preached austerity with all the fervour of a repent-now-or-burn-in-hell priest. But he never really practised it.

An examination of Britain’s financial ledger shows that nation’s austerity was more myth than reality and that Britain is being saved not by fiscal restraint so much as the opposite. Borrowing is high, the budget deficits are intact and quite plump by EU standards, while giveaways to the rich, homeowners and other vote-wielding denizens of the middle and upper kingdoms have been fairly lavish. All of which makes you wonder why Mr. Osborne became the whipping boy of anti-austerity economists such as Paul Krugman.

Britain suffered greatly in the 2008 global financial meltdown and some of its biggest banks – Northern Rock and Royal Bank of Scotland, among them – would have vanished were it not for government bailouts. The gutting of the banks, the lack of diversity in the British economy and the deep recession in the euro zone punished Britain as much or more than any of the big economies on the other side of the English Channel. The jobless rate shot up to 8.1 per cent in late 2011, the highest in 17 years, and youth unemployment went to 21 per cent.

In spite of the recession and the rising jobless numbers, Mr. Osborne took a lot of heat from the opposition for using relentless austerity to make a bad situation worse. Austerity deepens recessions, as Greece and Spain found to their distress, and it was apparently doing the same in Britain. “We’ve lost business investment, we’ve lost jobs, we’ve lost growth, we’ve lost living standards,” shadow chancellor Ed Balls would bellow.

This time last year, even the International Monetary Fund, co-sponsor of the bailouts of Greece, Ireland and Portugal, joined the austerity backlash. IMF chief economist Olivier Blanchard said Mr. Osborne would be “playing with fire” unless the chancellor eased up on austerity. Not long later, the British economy emerged from stagnation – the triple-dip recession never happened and upward revisions conveniently eliminated the second dip. Mr. Osborne put on his cheesy I-told-you-so grin. Today, Britain is growing a tad faster than 3 per cent. As growth picks up and unemployment drops quickly, interest rate hikes are probable next year.

But to call Mr. Osborne’s strategy a victory for austerity and an inspiration for the other EU countries whose fiscal house was chewed to near destruction by spending termites is a stretch. Mr. Osborne hardly swung the axe. What he did was cut the planned rate of increase in spending. According to The Guardian, the government’s total spending in 2009, the year after the financial collapse, was £634-billion ($965-billion). Next year, it will be £732-billion. While preaching austerity, he cut corporate tax, eliminated the planned gasoline tax rises and launched the “help-to-buy” scheme, which offered house buyers subsidized loans to meet their down payment requirements.

Evidence that Mr. Osborne’s bark was worse than his bite can be found in the budget deficit figures. While they have come down from about 10 per cent of gross domestic product at the height of the financial crisis, they remain high because the government is still borrowing a lot of money. Last year, the budget deficit was 5.8 per cent of GDP; this year, it is forecast at 4.7 per cent. Among the big EU countries, only Spain’s deficit is bigger. Even Italy has been running far smaller deficits than Britain.

With the recession gone and most of the economic numbers, from manufacturing to employment growth, pointing in the right direction, the Conservatives’ chances of winning the 2015 general election can only improve. Mr. Osborne’s popularity is higher than his party’s. He is the champion of austerity. It was a neat trick. If Mr. Osborne had really been a deficit slayer, Britain probably would still be in recession.

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular