Assessing Osborne

‘Osborne appears to have achieved the miraculous. He has combined budgetary overspending with a reduction in cost of the debt burden'

With the general election now only weeks away, George Osborne must be glad to have been Chancellor of the Exchequer for a full parliamentary term. But he is unlikely to remain Chancellor in the next government and it is time to assess his performance. How have the nation’s finances fared in his five years as their custodian?

First, no previous full-term Chancellor has incurred debt on such a scale. On average the government has borrowed £100 billion a year since 2010. Although his immediate predecessor, Alistair Darling, ran up debt even more quickly in the crisis years of 2008 and 2009, Darling at 11 Downing Street was overshadowed by Gordon Brown at 10 Downing Street. In effect, Gordon Brown’s stewardship of the public finances lasted from May 1997 to May 2010. In that 13-year period the public debt typically rose by under £50 billion a year, slightly less than half the rate under Osborne.

Second, interest rates in the last five years have been the lowest in history. When Osborne was appointed Chancellor in May 2010, the Bank of England’s rate was 0.5 per cent; if and when he leaves the Treasury in May 2010, the Bank rate will still be 0.5 per cent. As the Bank rate had never been under 2 per cent before May 2010, Osborne has in this respect been the most fortunate British finance minister ever.

Interest on central government debt was £44.8 billion in 2010, when the present government came to power. Last year it was higher, at £49 billion, but the increase of under 10 per cent compares with a leap in public debt of almost 50 per cent. Moreover, despite all the disappointments on the productivity front, national income and output have grown in money terms since the Conservative-LibDem coalition was formed. So the ratios of interest payments to the national income and the overall tax take have declined.

Osborne appears to have achieved the miraculous. He has combined budgetary overspending with a reduction in cost of the debt burden. Future taxpayers will certainly be grateful for his government’s success in selling large amounts of long-term debt at remarkably low interest rates. In the 2014/15 financial year about £30 billion of long-dated gilts with an interest coupon of beneath 3 per cent are likely to have been bought by investors. The proceeds from these transactions will be used in part to redeem the 3.5 per cent War Loan stock and the small 4 per cent Consolidated Loan stock.

The larger and more famous Consolidated stock (Consols) has a coupon of 2.5 per cent, and will continue in existence; it dates back to the efforts in 1752 of Sir Henry Pelham, one of Osborne’s illustrious forerunners, to consolidate a ragbag of assorted debts into one easily managed issue. Few current gilt market participants can remember October 1976, when, after a big run on the pound, rampant inflation fears caused the yield on Consols 2.5 per cent to leap to 16 per cent. For a few days the yield was indeed above the nominal price of the stock. (Today 2.5 per cent Consols carry a price of over 70 and a yield of just above 3.5 per cent. If the next Chancellor decides to redeem this too, he or she will have to pay £100 for every £100 nominal in existence.) 

Why mention the dark days of October 1976? The point is that Britain, like any other nation, has citizens who are taxpayers and must stump up taxes to pay the interest on the government debt, and citizens who are bondholders and benefit from the interest payments. Anyone who had trusted the British government’s financial probity in the late 1940s or 1950s, and who had bought Consols at a price of well over 50 and a yield of under 5 per cent, was ruined between then and the mid-1970s. The price of government debt collapsed, while inflation ate into its real value. An investor in long-dated British government debt in, say, 1951, who maintained a holding for 25 years, saw its real value slashed by over 90 per cent.

The first post-War generation of British governments cheated the citizen as bondholder. Will the next generation of British governments give priority to the interests of bondholders, by pursuing responsible budgetary policies, keeping the public debt down and preventing inflation? Is that what the political parties are promising in their 2015 manifestos? Or will the temptations to spend, to borrow and to devalue, which were so irresistible until sound money arguments revived in the 1970s, again be irresistible in future? Investment advisers may today, with a straight face, recommend purchases of British government bonds on yields of under 3 per cent. Their clients need to be reminded of the financial devastation inflicted on their grandparents by Britain’s Chancellors of the Exchequer in the 25 years to 1976.

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