Further to my earlier blog discussing the disappointing borrowing figures, I thought it would be worth writing a post on Alistair Darling's comments to George Osborne over the weekend, where he urged him to "act now" on the economy.
The former Chancellor mentioned various ways in which he thinks George Osborne could help boost growth, such as building a third runway at Heathrow and investment in housing. Labour peer Lord Soley estimates that a third runway would "add about £8 billion to the GDP of this country", while a report by FTI Consulting estimates that the absence of a third runway could result in £47 billion being drained from the economy. However, given that both the Conservatives and Liberal Democrats opposed a third runway at Heathrow in their 2010 general election manifestos it is unlikely to happen any time soon.
Spending on housing is a more likely possibility. The Conservatives made a commitment to the extension of home ownership in their 2010 manifesto (although the Liberal Democrats did not). But even assuming housing investment was undertaken it may take a while for the money to circulate round the economy and even longer to show up in the data. Even so, there should really be no excuse for not developing policies to keep housing demand in line with supply.
Regardless of the rights and wrongs of his suggestions, Alistair Darling's open letter served to further highlight just how much pressure George Osborne is under. And he is right on at least one thing, the government really does need to be developing a new strategy.
But what if it was the other way around? What if Alistair Darling was Chancellor? What would George Osborne be saying to him?
Of course, these are highly hypothetical questions, but we can take an educated guess. According to the Institute for Fiscal Studies, it is almost certain that borrowing under Alistair Darling would be higher than it is at present:
This of course does not necessarily mean the economy would any worse that it is now. Labour would argue that their plan would have been more growth friendly. Maybe. There is no way of knowing one way or the other. The Conservatives, on the other hand, would say that the higher borrowing would have seen Britain's AAA credit rating decline and bond yields rise. Perhaps. It could just be easily as argued that the main reason the UK has low interest rates and a AAA credit rating is because it has its own central bank. There is no doubt that markets take this into account. So again, there is no way of knowing one way or the other.
Now here's the interesting thing. If we compare the the deficit reduction plans set out by Alistair Darling and the coalition government in 2010 we can see the composition of spending cuts and tax rises each was arguing for:
One thing that instantly jumps out is that George Osborne is raising more in taxes each year than Alistair Darling would have done, although he raises less as a proportion of his consolidation each year. It is also interesting to note that Osborne is leaving most of the spending cuts towards the end of parliament. There may have been a logic behind this. In particular, the government probably expected the economy to be growing by this point, and it would most certainly not have expected the eurozone crisis to be as vicious and long-lasting as it has been. Indeed, in November 2010 the outlook was positive, and therefore most of the tax increases were introduced early and consolidation on the expenditure side was delayed. Thus, by the time spending cuts were introduced the economy was recovering and the government was not cutting the main source of income for the economy. But unfortunately for the government this strategy may be backfiring.
However, suppose it was Alistair Darling's consolidation plan that was being implemented. For simplicity, also assume that the economy was in the exact same situation as it is now. What would George Osborne be saying? Maybe something along the lines of:
Britain is now one of only two G20 countries in recession. If Alistair Darling wants to reduce the deficit he must get to grips with our borrowing and our debts. Instead of spending money we don't have the Chancellor should be cutting spending and reducing the regulatory burden on businesses. Furthermore, the government should be lowering taxes to put more money into the pockets of hard working people in this country.
Oddly enough Mr Osborne, this is the exact same advice many are giving to you.