Economic dogma, George Osborne and Grenfell Tower

What has the horror at Grenfell Tower to do with economists? And what have the lives lost at Grenfell Tower to do with the government’s budget deficit?  A great deal, I will argue here. When on Twitter a few days ago I raised the issue of the shared responsibility that economists have for this ghastly tragedy, I was attacked. So let me explain. 

In the days before the Grenfell Tower inferno, mainstream economists complained that the economy was not at the heart of the general election campaign. What they meant was something quite different: that Treasury economic dogma about the need to cut the deficit was not at the heart of the election campaign. 

On the 5th June, Chris Giles, chief economist at the Financial Times, wrote: 

“For almost a decade, British politics has revolved around strategies for dealing with the UK’s outsize deficit. In 2017, Labour and the Conservatives have both gone quiet on their plans for public borrowing — even though the policy gulf between them is at its widest for a generation.

In the 2014 Conservative manifesto, the word “deficit” cropped up 17 times, while the campaign mantra was “the long-term economic plan”. In Theresa May’s 2017 version, “deficit” is mentioned three times, elbowed aside by the phrase “strong and stable leadership”. 

On the 15th June, the National Institute for Economic and Social Research (NIESR) tweeted a quote from their director Prof. Jagjit S. Chadha in an interview to a foreign news channel:

'All parties were silent on key questions of economic policy in the UK. The lack of debate has been embarrassing' he said.

Yet worse, the day after the Grenfell inferno, the till-recently Permanent Secretary to the Treasury (2005-2016) Nicholas Macpherson – now Baron Macpherson of Earl's Court – wrote an aggressive defence of HM Treasury's austerity economics under Chancellor George Osborne in the Financial Times:

That is not to say Mr Osborne and the coalition did not take some courageous decisions. No other British government has implemented such sustained cuts in public sector wages and working-age benefits, or such an increase in public sector pension contributions, in exchange for less-generous pensions. There were big cuts in police numbers, and to local authority budgets.

I am confident that this piece will have been written at the behest of the economists in the Treasury, in defence of the department's long-standing dogma.   The Treasury and the cohorts of like-minded mainstream economists are terribly and tragically wrong.  They are fundamentally wrong on the economics - also wrong to claim that there was no debate about the economy during the General Election campaign.

Debate about the economy during the election majored on public services like decent, safe social housing, the NHS and education. There were also debates about infrastructure investment and the nationalisation of the railways. And there were recurring references to monetary policy. These were derided by Conservative politicians as debates about “the magic money tree”.  

These were all economic issues. And it was these economic policy debates that caused Labour to do so well. 

From economic dogma to Grenfell

Treasury economic dogma –  that the budget deficit should always be slashed, even in a period of post-crisis weakness, and that public debt is problematic - is shared by most of the British establishment including the BBC’s economic analysts and commentators. (Interestingly, debates about the deficit never start with its cause: the Great Financial Crisis. No, the GFC is blanked out of all debate. Instead debates about the deficit begin: "in.....year the deficit was....".) 

The dogma was deployed in support of George Osborne’s political ambition to sell off valuable state assets to private interests; and to control and curtail the state’s services to British society, including the poor and vulnerable.  

Osborne, cheered on by the PM David Cameron and by his deputy the ‘Orange Book’ Liberal Democrat Nick Clegg, was determined to keep all government spending departments under his control and on a leash. This control extended to local authorities that provide and maintain social housing.  

The economic theory that supported this political ambition is often based on the ‘household fallacy’. The theory that like a household, government budgets must always be balanced. That like households, governments cannot borrow and ‘live beyond their means’. Finally, like households, governments borrowing is not supported by the monetary policies of central banks, or by present and future tax revenues. However, while the ‘household fallacy’ is popular with politicians of all parties, mainstream economists are embarrassed by it, and with some notable exceptions, do not advance the fallacy. 

The mainstream economic theory is as follows: a rise in the deficit (a predictable development after a slump such as that caused by the Great Financial Crisis of 2007-9) disturbs speculators in global capital markets. They worry about not making consistently high returns on their investments in UK gilts (government bonds). 

Second, Treasury economists are confident in their belief (shared widely by the economics profession) that public investment (in all circumstances) “crowds out” private sector investment. By cutting government spending, which they vainly hoped would cut public debt (it didn’t, the total debt continued to rise) Treasury economists and George Osborne sought to trigger a substantial expansion in private sector capital gains and activity. 

Third, the Treasury effectively denies that government spending or investment (on e.g. housing maintenance) has a positive benefit for government revenue budgets by e.g. increasing skilled, well-paid employment in the construction sector, and with it both present and future income and government tax revenues.  This positive outcome from government investment in both physical and human capital is known as the ‘multiplier’.  Because ‘austerity’ finally alerted economists to the disastrous impact of the ‘negative multiplier’ the UK Treasury does now acknowledge that public investment financed by borrowing can be expected to boost government tax revenues. But they do not believe it has any meaningful effect. Nor do they acknowledge that the benefits are such that public investment effectively pays for itself, over time. 

Before going any further, may I stress that I too favour reducing deficits and the public debt. Where I differ from Treasury dogma is in understanding that the deficit, like a see-saw, rises inevitably when the wider, private economy slumps or is weak. When the economy recovers fully, the deficit will fall – just as night follows day. To balance the ‘see-saw’ after a financial crisis as grave as that of 2007-9 requires government to focus on reviving both public and private investment, employment (skilled, well-paid employment) income and tax revenues in the wider economy. 

Full, well-paid and skilled employment is the best, and only way to cut the deficit, and bring down levels of public debt. 

Finally, it is vital for government to invest at times when Britain’s human, economic and energy security is at stake. Such a time is now. Britain’s housing stock is ‘leaky’, energy inefficient and dependent on foreign and sometimes unstable suppliers. Many properties are prone to flooding – and, as we have tragically witnessed, fire.  

To focus solely and relentlessly on the government’s deficit after a crisis and during a period of economic weakness, I would argue, is flawed economics pandering to political dogma. It is as if economists are deliberately peering at the economy through the wrong end of a telescope. 

Treasury dogma supported George Osborne’s ambitions

Treasury austerity economics/dogma coupled with George Osborne’s political aims, led inevitably to cuts in grants and support for local governments. (To avoid public outrage and flack, Osborne’s political cowardice instinctively led him to shift the burden and blame for cuts on to local politicians, just as he shifted responsibility for, and the costs of apprenticeships, on to private firms.)  

Under Osborne’s leadership budgets for both capital investment and day to day (revenue) spending on housing fell sharply, as Professor Rebecca Tunstall shows in this York University paper.   Housing revenue budgets fell by at least 41% and capital budgets by 54% between 2010 and 2015, although there was a modest increase in capital budgeting from 2013/14 to pay for new housing policies. 

“England was disproportionately affected by cuts to housing expenditure” writes Tunstall. “Spending per head in real terms fell 2009/10-2012/13 by 47% in England, by 28% in Northern Ireland, and by 24% in Scotland.” London experienced a cut of 50% in spending on housing and community amenities. 

Local authorities like Kensington and Chelsea were forced, if ever they needed forcing, into decisions to cut housing costs. These led ultimately to human tragedies – many thousands of which were private, personal tragedies that did not receive public attention. 

Treasury dogma also helped George Osborne succeed in his goal of enriching the private sector. There have been substantial financial gains for capital markets and landed interests from the sale and privatisation of public assets, including local authority land and housing. In what the Economist describes as ‘The Great British Sell-off’  Osborne flogged £26bn of the ‘nation’s silver’ in 2015 alone. He disposed of valuable and vital assets like the Royal Mail, Eurostar, Holloway Prison, the Royal Bank of Scotland, and Lloyds Bank.

Earlier Conservative Chancellor Nigel Lawson had sold off around £73 billion of public assets between 1983 and 1989. And during 13 years of Labour government Gordon Brown and Alasdair Darling sold off about £6.4 billion of public assets, including National Air Traffic Services in 2001 and British Nuclear Fuels Limited from 2006-9. 

As the conservative Economist magazine argued in May, 2016: 

“Any big improvement in the public finances (from asset sales) will usually be largely illusory; debt might drop, but selling will swap a future flow of income for up-front cash. The government balance-sheet will be restructured, not necessarily improved.”  

Then the Economist reminded readers of a letter from a local authority leader to David Cameron, then Prime Minister. 

“In a leaked letter to the county council in his local constituency, the prime minister, David Cameron, complained that local services were being cut without considering “savings” that could be made in the form of asset sales. In his leaked response, the council leader echoed the words of economists before and since, that “capital income cannot be used to support revenue costs—it is neither legal, nor sustainable, in the long term since they are one-off receipts”.

Such prudence was not a quality shared by Treasury economists, the Conservative Chancellor, George Osborne – nor by Conservative council leaders in boroughs like Kensington and Chelsea. 

The cap on local government borrowing for housing

After cutting government spending on housing, George Osborne closed down another avenue for raising housing finance: local authority borrowing. In 2012 a severe cap was imposed on the ability of councils to borrow to build and maintain social housing. 

These caps led to further cuts in housing maintenance budgets, which in turn led to the privatisation and outsourcing of maintenance, and to the ‘cutting of corners’ as alleged in the Grenfell Tower Case. This we presume, is one of the reasons why it is alleged that the Tower, a block housing 600 people and owned by Kensington Council, had no building-wide fire alarms, no sprinklers and cheap, flammable cladding. Caps on borrowing also led to a fall in the building of new social housing, and to the further privatisation of valuable local government land and property. 

John Perry, Policy adviser at the Chartered Institute of Housing explains George Osborne’s 2012 decision in 'Where is Housing Heading'?

“Caps on borrowing were imposed on each of 169 councils that had housing stock in April 2012, based on calculations under the old Housing Revenue Account (HRA) subsidy system….The impact of the caps is very arbitrary – some councils that need to borrow have no or limited headroom, others have significant headroom and may not need it. 

The caps were put in place because government knew that within a few years of the start of self-financing councils would easily be able to afford to borrow more. All council borrowing affects government debt. So even though councils have to stick to prudential borrowing rules, these further limits were judged to be necessary. They mean that few if any councils can borrow as much as they could afford to do sustainably within the prudential rules. 

At the same time, Housing Revenue Account borrowing is the only part of council debt that is capped. Furthermore, caps do not exist in Scotland, where councils can and do borrow within prudential limits, currently building almost to the same levels as in England (over 1,000 new units annually) even though Scotland’s population is only one-tenth that of England’s. The caps are also much tighter than when self-financing was originally planned by the last government – their Prospectus envisaged councils being able to invest in building 10,000 new homes per year.”  (My emphasis). 

On Thursday 15th June, the day after the Grenfell Tower fire, the BBC interviewed the leader of Southwark Council, Councillor Peter John about another fire at Lakanal House, Camberwell in July 2009, when six people died.  Councillor John pleaded for the government “at last” to increase councils’ powers to borrow against its own income-generating properties – so that local governments could carry out works on existing properties. 

“We are up near the top of the limit of what we can borrow” he said, in response to a question from the interviewer Martha Kearney: “Without that kind of money from central government, we cannot guarantee that fires like that at Lakanal House will not happen again…”  

“It’s not even [central] government money” he went on to say: “it’s our money, it’s our ability to borrow against our own housing stock. If the government lifted our ability to raise money against our own housing stock, we could do far more.” 

Conclusion

We can safely conclude that there is a direct link between Treasury dogma about the need for government to ‘cut the deficit” -  and the tragedy at Grenfell Tower. Economists that espouse Treasury dogma cannot therefore claim that the latest appalling tragedy has “nothing to do with me, guv”. 

From this we learn that economic theory, as applied to government policy, has consequences.  Life and death consequences.