While new observations shake the world of astrophysics, the chancellor regards it as a discovery that 'we don't invest or export enough'
We now understand from astrophysicists that the cosmos began with a big bang followed by inflation – as predicted by Albert Einstein. There seems to be a debate about whether it was a case of "inflation, inflation, inflation …", or whether inflation was followed by a reaction.
The parallels with the economic debate are interesting. We are familiar with business cycles – nothing to do with pedal cycles, but the tendency of economies to experience bursts of expansion followed by contractions. After the second world war, governments around the world assumed responsibility for trying to control such cycles, or at least to diminish the damage caused by what is now known as "irrational exuberance" (during the upturn) and a collapse of confidence (associated with a downturn).
It is now widely accepted that policymakers in the advanced industrial countries "lost the plot" during the years that preceded the onset in 2007-08 of the worst economic depression since the 1930s.
The coalition would have it that it was excessive public spending by New Labour that produced what they like to call "the mess they inherited". So far they have been getting away with blue murder in propagating this interpretation of events. By their logic, excessive public spending by the Labour party was responsible for the sharp increase in budget deficits throughout the western world. Sadly they have managed to fool quite a lot of the people quite a lot of the time; but I still hope that their shameless bluff will eventually be called.
It was the temporary collapse of the financial system that caused the budgetary crisis – successive British governments, for instance, had relied too heavily on revenues from the City; and since the crisis the consequences for the City of London have affected both budgetary revenue and the so-called "invisible" earnings previously relied upon to offset the chronic deficit on our overseas trade.
The big strategic mistake made by George Osborne when he arrived at the Treasury was to focus on the budgetary deficit and not the deficit in our overseas trade. He should have realised that a number of Thatcherite chickens were coming home to roost. The cumulative effect of the neglect of manufacturing is now being seen in our trading performance. And this is aggravated by the way we can no longer rely on the degree of export earnings we enjoyed during the boom years of North Sea oil and gas.
Alas, I fear that those of us who warned about the short-sighted view taken of the North Sea bonanza were ignored, and a far-sighted infrastructure programme, by means of a North Sea fund, was never adopted. The chancellor now evidently regards it as a discovery comparable to advances in astrophysics that "we don't invest enough" or "export enough". A stronger real economy would have gone a long way to ease the budgetary position.
The corollary of Osborne's mistaken decision to focus on the deficit – all those ludicrous comparisons of our situation with that of Greece – and to declare a second age of austerity was the impact this had on confidence and "animal spirits".
As if the blow from the financial crisis were not enough, he managed to depress confidence even further. Indeed, policy decisions such as the premature increase in VAT ensured that the burgeoning recovery he inherited was stopped in its tracks.
The government now worries that the economy may be some 12% smaller than it should be, and that output has been lost forever. They laugh at Ed Balls, but he was right about three years of "flatlining". To my mind there can be little doubt that the last thing the economy needed in 2010 was a contractionary fiscal policy to make things even worse. In common with the economist Bill Martin, I seem to be more confident about the degree of spare capacity in the UK economy than most. But if the pessimists are right, the contraction in business investment amid policies of "austerity" must surely have played a part.
We are promised yet more years of austerity by a chancellor whose "plan" to eliminate the deficit has so far patently failed. No wonder the budget was replete with diversionary announcements – the principal one, of course, being the decision to free new pensioners from the constraints of low yields on annuities.
I love the reaction of my old economist friend Dr Gerard Lyons, who said: "Everyone is worried that pensioners will be short-term in their thinking [when they come to collect their pension pot]. Welcome to the British economy!"
Now, every schoolchild knows that Osborne wants to succeed David Cameron. One predecessor of Osborne's who did move next door into No 10 was Harold Macmillan. Osborne's supporters think this budget will be remembered for "the pensions revolution". Macmillan's one budget (in April 1956) was remembered for the introduction of premium bonds – and his subsequent premiership saw the signing of the test ban treaty. But when a fellow Conservative once asked Macmillan what he would really like to be remembered for, "Supermac" replied: "The Clean Air Act."
Personally I should like to forget George Osborne's chancellorship.