I have for a couple of years been arguing that George Osborne's economic policy might not be such a failure as his critics suggest. Asking whether the economy is growing might not be the right question when countries are foundering across Europe but Britain can borrow at rock-bottom rates. But I have always said that Osborne's position will get a lot more difficult if he doesn't bring the deficit down.
From memory, 2011-12's deficit was about 126 billion, down from about 136 billion in 2010-11 (In Labour's last year in office the shortfall was nearer 150 billion). A couple of months' recent figures however show significantly higher borrowing than the Chancellor planned, raising the spectre that the 2012-13 deficit might start pushing back up again. Of course what's important is the inflation-adjusted figure rather than the nominal one, or perhaps better still the deficit as a percentage of GDP. But whichever way you look at it Osborne is sailing close to the wind, and the bond markets will take a dim view if it turns out his tenuous grip on the deficit is slipping.
Given circumstances in the Eurozone I can't see any British chancellor having a hope in hell of getting the economy to grow at the moment, but having flayed Osborne's critics, notably the clueless Aditya Chakrabortty, for failing to set out a coherent alternative strategy, here, at absolutely no cost, are my top tips for things an imaginative Chancellor could do to - I was going to write make things better, but let's restrict ourselves to not making things worse than they would have been otherwise.
1. The much vaunted infrastructure projects. The difficulty with using QE as helicopter money to shower on individuals is that they tend to spend it on imports. Better use it to fund big projects that will help us in the future. I don't much like the Heathrow Third Runway or new roads, but I quite fancy the Severn Barrage. We are going to be woefully short of electricity generating capacity in the near future, and Blair should have been doing something about it in the Noughties instead of blathering on about Cool Britannia. New nuclear power stations, preferably thorium-powered, wouldn't go amiss either. If we still had anyone who knew how to build them.
2. State run mortgage bank. No, not like Freddie Mac and Fannie Mae (mortgage guarantee schemes thoroughly abused by commercial lenders), but a bank to allow existing mortgage holders to transfer at low rates of interest. If the bank (we could call it RBS) were funded by means of QE, the Government would get the interest paid on the loans, and commercial lenders would have to do something else with their money to get a return - lend it to small businesses, perhaps.
3. The nuclear option. QE has been used thus far as a bond-buying scheme, with old bonds bought up by the Bank of England. In theory that means HMG has to pay the BoE the coupon, or interest, on those bonds, and repay the capital sum when it falls due. I'm guessing that's happening in practice too, only because if it weren't I'm sure we'd have been told about it. But if it is, why is it? The BoE dances to the Government's tune. Or it should be doing. Why can't it just tear up the bond and say, "Well we'll forget about that"? That way the BoE could use QE quietly to buy up debt from banks and pension funds and just as quietly cancel it. It wouldn't do much to cure the deficit (though it would reduce the burden of interest HMG pays daily in millions); it would however reduce the enormous debts HMG is currently amassing. You issue debt, the central bank buys it using QE then quietly cancels it. There must be a problem with this, but I can't see it. City types should feel free to write in and note their objections.
As for what Osborne shouldn't be doing, I can only think of one thing.
1. Borrow money and pump it into the economy. Consider. The Bank of England has over the last couple of years created about £375 billion by way of QE. Now undoubtedly things would have been even worse if it hadn't, but even this enormous sum has not been sufficient to keep us out of recession. Our current annual deficit is about £125 billion. So even if HMG succeeded in borrowing double its current deficit (and we'll come to the size of that if in a moment), it would still be only half way to getting hold of the £375 billion that made no perceptable difference when it was bandied about by the BoE. But actually there is no chance whatsoever of HMG succeeding in borrowing an additional £125 billion from the gilt markets (over and above the £125 billion or thereabouts it's likely to be borrowing anyway this year). The markets would think the Chancellor had gone crazy. Interest rates would go up. The ratings agencies would downgrade the UK several notches. Funds would be available if at all only at astronomic rates. In a nutshell then, there is no sum the Chancellor can borrow big enough to do anything other than give a barely perceptable nudge to the UK economy. The Balls and Chakraborttys of this world are guilty of a category error. They think there is always a simple and painless solution to a problem. Sometimes there is, but this isn't one of those times or one of those problems.
