The shadow Chancellor, George Osborne, could be in charge of the British economy in just over two months. So it is well worth looking at what he stands for.
Last Sunday he came up with the stunning idea
“to sell shares in the nationalised banks to ordinary Britons at a discount in order to reward them for seeing their money as taxpayers rescue the troubled financial institutions. Young people and those on low incomes will get even steeper discounts as part of an aim to “recapitalise the poor”. “The bankers have had their bonuses,” Mr Osborne told The Sunday Times, and Conservatives plan “a people’s bank bonus for the people’s money that was put into these organisations.”
Let us look at the enthusiastic reaction to their economics frontman in comments on Conservative Home:
“Sell the shares by all means, but by open subscription at the top price possible. I want my money back and I don’t expect to pay to get it back.”
“Oh god. So stupid from Osborne. … Every penny must go to cutting the deficit. The deficit is either the number one issue or it isn’t. The Tory leadership must make their mind up.”
“David Cameron needs to get tough and boot out this grinning buffoon and Conservative vote loser”
Ian Cowie, personal finance editor of the Daily Telegraph is scathing:
The State owns about 41pc of Lloyds and 73pc of RBS – formerly known as Royal Bank of Scotland and including subsidiaries such as NatWest and Coutts. But what about the views of the owners of the rest of the equity in these banking groups; including 3m private shareholders at Lloyds and 195,000 individual investors at RBS?
They only own a tiny minority of the shares by value but they hold a substantial proportion of the votes which are likely to be cast in the next General Election. Few will be pleased when they realise that whatever discount to the prevailing market price Mr Osborne offers any buyers to make his “people’s bank bonus” attractive must cut the value of existing shareholdings.
So, for example, if the State were to sell its stake in Lloyds at a 20pc discount to the market price today, the disposal of such a large line of stock at a fifth below the going rate would be likely to cut a tenth or so off the current price of 52p . The same discount applied to RBS today would cut its price from 36p to something like 32p.
So George Osborne’s wheeze would cut the value of stock held by around 3.2 million individual shareholders, most of whom can be assumed to be conservative voters.
Remember that just three years ago, RBS was trading at 600p and Lloyds at 400p a share. According to the National Audit Office, the effective price at which the State obtained its stake in Lloyds was 74p and it paid an average of 50p for RBS.
Now looking at the current share price, and the price paid by the government to shore up the banks, it is clear that some public money was jeopardized by buying before the share prices hit the bottom of the trough. But nevertheless based upon historical trends, the government’s stake was bought at a bargain price.
There are two ways forward with this. The best way would be to leverage off the advantage and bring the banks permanently into the state sector, thus increasing the economic footprint of government and providing a direct mechanism for the state to control and boost borrowing, especially to small and medium size businesses who are unable to raise money by more sophisticated means; thus pushing productive investment.
But more cautiously, they could simply wait until the banks’ share price rises again to nearer their historical norm, as they will, and then sell at a profit.
This hare-brained scheme from Osborne of a fire-sale of bank shares is worth looking at because its rashness undermines the attempt he made this week at the annual Mais lecture to present himself as a serious economic figure, which if we judge him by the press reaction, he achieved with some success.
Clearly, there are very serious weaknesses in the UK economy. Sterling had been sustained at too high an exchange rate for far too long, to the benefit of the financial sector, but to the detriment of manufacturing jobs in the English regions and Wales, and Scotland. The level of private debt was and still is unsustainable; and the financial markets have been out of control.
Most damagingly, the government’s direct stake in the economy has become relatively peripheral, so it is reduced to only fiscal measures to nudge the economy. It is worth comparing to the economies who have been least affected by the recession, China and Brazil, where increasing state investment in the productive economy provided sufficient stimulus, based upon an existing substantial state sector. (This is, of course, a criticism George Osborne would not make)
Naturally, given these real problems then all George Osborne needs to do to sound sensible is to acknowledge some of them, and his question “where will future growth come from” is a very good one; and one which the current Labour government struggles to answer.
Nevertheless, central to Osborne’s vision is cutting the deficit. This week he warned that Britain will face “savage and swingeing” public spending cuts and a loss of economic sovereignty unless a start to reducing the record £178bn fiscal deficit is made this year. Osborne says that financial markets will panic unless a “credible” plan to reduce the deficit is introduced this year.
This is a controversial position, for example,
“according to analysts at UBS AG, the British Pound may fall below parity with the Euro and drop to $1.05, the lowest level against the Dollar since the mid-1980s, if the government tackles the country’s debt burden too early.
Mansoor Mohi-Uddin, chief currency strategist at UBS in Singapore, said yesterday that, “if the next government was to prematurely curb the fiscal deficit, without the economy reaching a surer footing, the consequences for sterling would be grave”
There is a very real danger that cuts in the public sector, quite apart from their effect on services, will kill the fragile economic recovery. Generally the measures taken by the government, the bank bail-out, the car scrappage scheme, the cut in VAT rate, the quantitative easing were effective in preventing the recession deepening into a depression, and were effective in preserving the jobs and prosperity of millions of working people.
The Tories opposed or pooh-poohed these sucessful measures, and advocated suicidal laissez faire.
As socialists we need to be clear that state intervention was effective, and we can see from other countries where greater state intervention was used, more state intervention can be even more effective.
Of course neither the Labour Party and the Tory Party are presenting socialist economic policies, but that doesn’t mean the differences between them are unimportant. The response from the government to the banking crisis was significantly better from the point of view of ordinary working people and our families than the policies of the Tories.
The pro-market prejudice of New Labour – including Gordon Brown – has been dealt a savage blow by the events of the last eighteen months. Now is the time to press our advantage and argue for the broader labour movement to again adopt policies in favour of social ownership and state direction of the economy, allowing the economic priorities to be placed under democratic popular control.
That means that we all need to see the Tories as a great danger, a Tory government could close the window that has opened, as well as blighting the lives of a generation.