Getting it Badly Wrong

I have been speculating about the election results, but perhaps a more important issue for the next six months is what is going to happen to the economy.

My view is that it has been drastically mismanaged since George Osborne embarked on his failed austerity project in 2010.  Conventional economists predicted this failure back in 2010, and it always seemed clear that either Osborne didn't understand conventional economics or he was putting his ideological belief in a smaller state ahead of sensible economic policy.

The result was that the UK undertook a sharp fiscal tightening at the same time as maintaining a very loose monetary policy.  The timing of this meant that growth was very poor, tax revenues declined and budget deficit worsened; the opposite of what Osborne set out as his objectives.

Several years later the political authority for yet more austerity is crumbling, as even the Tories are beginning to admit.  Indeed the scrabble among the hitherto defenders of austerity in the Cabinet to back pay rises for the public sector workers they so despise is one of the most striking aspects of the post election landscape.  This collapse was probably inevitable as it was clear that austerity could not continue forever.

Over the last several years a demand for better wages has been building up and is now turning into a recruitment and retention crisis for key workers.  At the same time institutions such as local government have been cut back to the point where they have difficulty functioning at all (as Kensington has graphically illustrated).  This looks like public services going toward catastrophic break down, which force ministers to spend more money at just the moment when that would be most damaging for the economy as it will fuel a surge in inflation _ the opposite of the Keynesian approach.