Budget Questions

David Mellor was right to say that governments cannot deliver growth; growth comes from the ambition and the enterprise of the people. This is very true, but not quite complete. Governments can certainly introduce policies which inhibit and restrict growth. Conversely they can create conditions where growth is more likely. There is a third way, favoured by Labour. Governments can manufacture false growth by creating pointless jobs. This is the human equivalent to printing money. It can work in given circumstances for a short period, but like printing too much money, or manufacturing and then stockpiling cars that will not sell, too much of it leads to disaster.

It is this disaster which is at the heart of our national crisis. Labour binged on public sector employment using borrowed money to pay for it, creating a state which was too big for the private sector to sustain. Had there been no world crash, this domestic crash would have happened anyway. What makes Osborne’s job difficult is that he has two problems to resolve; economic growth and remodelling the economy. This cannot be done without a slow down, any more than a bus can take a corner at speed. However after the corner, speed can be built up again quickly, but only if on the right road. Without getting bogged down in detailed figures, which can always be argued at budget time, the central question is this. Is the budget leading the country in the right direction? Yes it is. Will it end the pain? Not yet.

Labour is trying to claim that under the Brown government recovery was well under way and the Coalition is ruining it. This is a delusion. The same one which believes money printed has the same value as money earned or that stockpiled cars are as good as sold. The only way to increase spending is to borrow more. The hope is that somehow the higher level of economic activity will pay for the extra borrowing. It is a lovely idea, but time and again it has not worked.

Meanwhile the government is trying to reduce the state, reduce housing costs by halting excessive house price inflation, switch the engine of the economy from services to manufacturing, increase saving and reduce borrowing. After the pain, a far more viable economic model will emerge and recovery will be on a firm foundation. Labour’s road is founded on sand. Soon or later it would become uneven, then lumpy then finally collapse. Not every detail of Osborne’s budget is right, but the shape and purpose is.

The biggest cloud now on the horizon is inflation. It is true that inflation erodes the value of debt. It is also true that it soon prices inflating economies out of world markets. At the moment China’s economy is inflating at 5% p.a. Some of this inflation is being exported to us. Commodities, energy and taxes account for most of the rest. We are not yet in the grip of wage inflation and because of this the Bank of England hesitates to act. It must not delay much longer. Inflation is like fire. If not dowsed early, it suddenly gets out of control.