Policy Research in Macroeconomics

Is George Osborne a radical Chancellor? – far from it

By Ann Pettifor 

I was on Newsnight this week, to comment on the Budget. (You can watch it with the BBC’s iPlayer..our slot is about 35 minutes into the show.)

Newsnight’s Jeremy Paxman posed a question to the panel, which included Lord Lamont, ex-Chancellor, and Irwin Steltzer. He asked: is George Osborne a radical Chancellor?”

Radical, according to the dictionary definition means: “desiring or advocating fundamental or drastic reforms”.

I argued that George Osborne is not a radical. Far from it.  His imposition of austerity, in my view, punishes the weak and rewards the strong. No change or reform in that. Instead the government’s central economic strategy is aimed at appeasing the financial markets, in particular the international bond markets and ratings agencies, irrespective of the implications for an already severe unemployment situation, or for the wishes of the British people. In doing so, George Osborne follows a long line of predecessors in putting the interests of finance before the interests of society as a whole. In this respect, he is no radical.

The true Conservative radical, I argued, was Anthony Barber, Edward Heath’s Chancellor of the Exchequer from 1971-74.

The relentless process of financial liberalisation that is finally unwinding in such a brutal manner across the globe, was really set in motion on Barber’s watch (although his Labour Party predecessor, Roy Jenkins, had actually done much of the preparatory legwork.) This happened as a result of a specific event: the introduction of  ‘Competition and Credit Control’ – a strategy devised in the Bank of England to remove direct controls and hence free up lending (and the price of lending) and instead use only the Bank rate to regulate the whole financial system.

Implemented at the same time as the Bretton Woods Agreement was unilaterally dismantled by President Nixon and the US Treasury, the result was one of the greatest explosions of credit in banking history. Yet despite the inevitable onset of inflation in the 1970s as a result of this revolutionary experiment, and despite the social and political upheavals caused by that inflation (repeatedly blamed by economists on workers and trades unionists), each stage of financial liberalisation was regarded as a cue for further liberalisation. Jeffrey Howe and Nigel Lawson in particular contrived to unravel particular restraints on the finance system in place since the aftermath of the Great Depression.

While George Osborne made a populist appeal in his 2011 Budget Statement, for the

“rest of the country to become advanced leaders in …advanced manufacturing, life sciences, creative industries, business services, green energy and so much more”

he continues to desire for Britain that

“the City of London (remains) the world’s leading centre for financial services. ”

The two are mutually exclusive. The rise of the financial sector has coincided exactly with the decline in manufacturing.

Turning back the clock a little we can seek out a genuine candidate for true radical: Winston Churchill. Writing in 1924 he understood that the interests of the finance sector and manufacturing/creative industries/business services were different and conflicting.

“I would rather see finance less proud and industry prouder”

he wrote then. But Churchill was persuaded by financial authorities in 1924 not to go with his instinct, and instead to return Britain to the gold standard –  at the behest of the finance sector. He was to gravely regret his decision, which proved disastrous for the British economy.

As we have repeatedly argued, the present fiscal crisis is a consequence of first the cost of rescuing and subsidising the financial sector; and second: the cost of the subsequent rise in unemployment.

To pretend this crisis is one of the public sector is not radical, it is deceitful.

To meet the crisis with austerity, is not radical: it is foolish and even reckless.

But unsurprisingly there is no shortage of foolish and reckless Chancellors. According to this yardstick, George Osborne is most like Phillip Snowden, the ill-fated Chancellor of the Exchequer in the Labour Government of 1929-31. Snowden attempted to recover from the Great Depression with a policy of austerity. As a result he not only intensified and prolonged the most severe unemployment crisis in the UK’s history, but also caused public debt to rise. Then he commissioned an actuary, Sir George May, to recommend even more severe cuts.

The Labour government imploded.

This week, the OBR’s increased estimates for public debt outcomes– despite spending cuts, or in our view, because of spending cuts – indicates that George Osborne is following the same policy path as Philip Snowden. It will be a matter of time before we discover whether his government goes so far as the 1929-31 Labour government.

Only when the policy of austerity was eventually revised by his successor Neville Chamberlain, did the economy – and the public debt – begin to recover.

The truth is most Chancellors are only radical in a counter-revolutionary sense. They erected and attempt to preserve a system based on financial authority.

The true radical Chancellors were those who first overthrew this brutal and unjust doctrine. History is replete with examples on both the Tory and Labour sides, of Chancellors who took a stand against finance. But those who did so most decisively were Hugh Dalton, Sir Stafford Cripps and Hugh Gaitskell, the Chancellors of the post-World War Two Attlee government. They nailed their colours to the mast in their paper: “Full Employment and Financial Policy” (not available on the web, sadly.) In that paper they argued that “finance should be the servant not the stupid master….” of the economy. That  “blame for unemployment lies much more with finance than with industry.”

Building on the system constructed under Keynes’s direction during World War Two (and Tory Chancellor Sir Kingsley Wood deserve an honourable mention here) the Labour Chancellors set a financial policy that underpinned a genuine economic and social miracle, the New Jerusalem as it became known.  (For more, read Douglas Coe’s piece here.) It is no coincidence that Clement Attlee is repeatedly regarded as the most successful Prime Minister in British history.

To return finally to the Newsnight studio, Norman Lamont, currently a director of the hedge fund RAB; ‘a director of a number of investment funds’ and an ex-employee of Rothschilds, challenged repeatedly the idea that the finance sector had received any special treatment. He sees finance’s pre-eminence as a natural outcome, and therefore not to be disrupted by external influence – i.e. non-market forces. Unfortunately the feature ended at that point, with only my gasps of astonishment audible.

I hope the above makes clear that nothing could be further from the truth. There is nothing natural about the rise of the finance sector. It is a sector that needed Anthony Barber’s help with ‘Competition and Credit Control’ – to be rid of the restraints and constraints that enable finance to gamble, speculate and ultimately destroy economies. They continue to demand that freedom to do as they please not just from Chancellors, but from society as a whole.

And we, as a society, have granted them that reckless freedom.

Since 1971 finance has constantly benefitted from extremely special treatment; including the most extraordinary government subsidies and guarantees. This special treatment, these subsidies and guarantees have not been granted to industry. And yet one Chancellor after another has persisted in giving preference to finance. As a result – and I write this with total conviction – the world economy and society has been degraded to an extent that most of our policy makers simply cannot recognise; in ways that are simply not visible to the many smug and complacent members of the British establishment.

As in the 1930s and 1940s, genuinely radical policies are the only possible solution to today’s crisis. Sadly, with the honourable exception of one or two politicians, including Caroline Lucas MP, there are no radicals in the House of Commons. That may just reflect the fact that society has been quiescent in a project that has made finance master to our economy.  But there are signs, including the promised numbers at the TUC’s 26th March demonstration – that society is beginning to understand the harm done to individuals, households and firms, and to our ecosystem –  by Chancellors too timid to challenge the City of London.

Leave a Reply

Your email address will not be published. Required fields are marked *

This website collects cookies and analytic data. To use our website you must consent.
For more information read our Privacy Policy.