When stuck in a hole, stop digging

CHANCELLOR George Osborne on Tuesday had to admit his plans for cutting the Government spending deficit are not going as planned. Growth forecasts are down, inflation is up, and unemployment is rising fast. Even his fellow Tory finance people are warning that Osborne’s drastic spending cuts are choking the economy. The Financial Times is predicting that by the time of the next general election there will be a £30 billion black hole in the economy and the country is expected to go into recession at any moment.

Osborne is saying he refuses to change course — but at the same time he has introduced a few changes aimed at getting growth in the private sector going.

He is going to make £30 billion available to underwrite bank loans to small businesses in an effort, so he says, to create more jobs. But what does this mean? Banks will lend money to small businesses — but they will not necessarily invest it in jobs in this country. Many small entrepreneurs get their goods manufactured elsewhere in the world.

If the business fails, the tax payers will reimburse the banks. The businesses will still owe the money to the banks but the only people guaranteed to profit are the banks.

Osborne is also going to invest a piddling amount in combating youth unemployment and increase free childcare provision for children over two. He says this will enable more young mothers to go back to work. But the budget is limited to about 200,000 places, where millions are needed. And the free provision will be for just 15 hours a week.

The children will indeed benefit from early learning opportunities but the mothers will not be able to get much of a job for just 15 hours a week — just enough to cut some of their tax credits if they are lucky.

And Osborne is going to invest in a few infrastructure plans — including a new school building programme. The first thing he did on coming to power 18 months ago was to cancel a big school building programme set in motion by the Labour government. Contracts and plans that had been negotiated at great cost were abandoned and hundreds of thousands of pupils left to learn in seriously substandard buildings. Now all those plans and contracts will have to be started again from scratch — and with the possibility of a real recession around the corner no guarantee that any of the repairs will happen.

Osborne is also going to impose a pay cap of one per cent over the next two years; he is not going to cut VAT. With inflation running at just under five per cent this is a massive pay cut for all workers — hardly the sort of measure to get people spending and get the economy going again.

Osborne says he is going to underwrite the banks giving mortgages on the basis of five per cent deposits to 100,000 would-be home buyers. As with the small business loans, this will only benefit the banks in the long run. And it is risky — it was giving mortgages to people who had little hope of keeping up the payments that sparked the great American sub-prime mortgage collapse. And as jobs are being cut in swathes in both public and private sectors who can be sure they will be able to keep up the payments?

Osborne would do far better to ignore the banks and the business people by putting Government money, in the form of wages, straight into the pockets of millions of workers in direct labour schemes. This money will be spent in Britain’s high streets and give a direct boost to the economy.

And of course Osborne has totally refused even to contemplate taxing the very rich. This could really help deficit reduction and if the country does go into a recession he may be forced to do this — but by then too much damage will have been done.