Sunday, 21 September 2014

What’s so new about Osborne’s new British Economic Model?

James Silverwood discusses Osborne's economic strategy.

In June 2009 Shadow Chancellor of the Exchequer, George Osborne, delivered a speech in
which he set forth the economic policy strategy of a forthcoming Conservative Government. Osborne argued that the “challenge of the alternative government is now to provide the clarity, leadership and direction the country needs. To show that we have learnt the lessons of the last decade, and that we offer the country a new British economic model”[1] with the immediate priority of that model being to restore Britain’s international credibility by dealing with Britain’s fiscal deficit. Osborne would later argue that the key macroeconomic policies to secure economic recovery and rebalance the economy were “the same policies that David Cameron and I have been arguing for since the beginning of this crisis – monetary activism [and] fiscal responsibility”[2]. These macroeconomic elements of the new British economic model were adopted in office by the incoming Coalition government after May 2010. The commitment to reducing the budget deficit was central to the Coalition Agreement with George Osborne, by now Chancellor of the Exchequer, originally targeting a balanced or surplus current budget by the end of Coalition’s term in office and for public sector net debt to begin to fall as a share of GDP by 2015-16[3] (both targets which have subsequently been extended).

But what is new about the new British economic model? The most succinct answer is nothing at all. Public expenditure reductions have been a common macroeconomic response of successive British governments to economic crises, and crises more generally such as war, since the age of Napoleon.  Even during the supposed Keynesian era of UK economic policy after the Second World War less weight was placed on fiscal policy as a stabilisation tool than on monetary policy. Indeed one academic has questioned the ‘Keynesianism’ of fiscal policy in the post-war era, suggesting that in fact, fiscal policy was largely contractionary due to persistently large current account surpluses[4].  Public expenditure reductions were deployed with much vigour during the crisis hit inter-war period as consecutive governments strove to achieve balanced budgets and national debt reduction. The British experience of fiscal policy in the 1930s mirrored that of the United States (US) where the adoption of New Deal policies often obfuscates that the US did not implement policies of fiscal stimulus[5].

More recently public expenditure reductions (and tax increases) were used by the first Conservative government of Margaret Thatcher (1979-83) most famously perhaps in the 1981 budget, and perhaps equally famously, causing consternation from 364 economists whom wrote a letter to the Times to object. Furthermore, subsequent revisions to the government’s original medium-term financial strategy (MTFS) targeted a balanced budget, which was subsequently achieved in 1988-89 and 1989-90 when budget surpluses of 1.3% and 0.2% of GDP were achieved in real terms.

Where then does this leave monetary activism? If by monetary activism we mean the policies of cheap money and quantitative easing (open market operation) adopted since 2008, we can again, say there is nothing new in these policies at all. The adoption of cheap money policies has its antecedent in the interwar period when interest-rates were reduced to 2% in the spring of 1932. Furthermore, research by several scholars indicates that the British interest-rate framework was far more ‘politicised’ and ‘managed’ during the classical Gold Standard (1870-1914) monetary regime than the supposed autonomous mechanism of adjustment of the system was meant to allow for. Open market operations meanwhile, have its historical antecedent in British monetary policy from 17th century monetary arrangements between London and Edinburgh. Open market operations were also integral to the ‘management’ of the Gold Standard and were institutionalised by the Exchange Equalisation Act in 1932 permitting intervention in foreign exchange markets (which was subsequently re-enacted in 1979 and continues to operate in the present). Quantitative easing (an open market operation), often labelled as an ‘unconventional’ monetary policy, operates as a quasi-debt management and credit policy and is an extension of similar operations undertaken by the Bank of England in the 1970s and 1980s. As one study of monetary policies by central banks after the Global Financial Crisis concluded that ‘the policy responses to the crisis are not really unconventional in their essence. It is the specific market segment chosen as the focus of central bank operations that is, for the most part, novel – at least by recent experience. Moreover, rather paradoxically, some of these policies would have been regarded as canonical in academic work on the transmission mechanism of monetary policy done in the 1960s-1970s, given its emphasis on changes in the composition of private sector balance sheets”[6]. Given the emphasis of fiscal responsibility and monetary activism in the macroeconomic approach of the interwar National government, I would argue that the macroeconomic approach of the Coalition government, far from instituting a new British economic model, rather illustrates the re-emergence of Chamberlainism (Neville Chamberlain, Chancellor of the Exchequer, 1932-37).

The Coalition’s macroeconomic strategy therefore illustrates not a new approach to policy but consolidation back towards a macroeconomic orthodoxy with deep historical roots. Whilst this post has not been able to illustrate all aspects of that orthodoxy (for more information please see here and here), it is presented in the diagram below. There is nothing new about the new British economic model.

James Silverwood is a doctoral candidate at the University of Hull where he is researching the thinking underscoring British economics.

[1] Osborne, George (2009) A New British Economic Model, Mais Lecture, Cass Business School, London, 9th June 
[2] Osborne, George (2009) The Conservative Strategy for Economic Recovery, The Paths Back to Recovery Conference, London. 15th September 
[3] Osborne, George (2010) Financial Statement, House of Commons, 22nd June 
[4] Matthews, RCO (1968) ‘Why has Britain had Full Employment since the War?’, The Economic Journal, Vol. 78, No. 311 (September) 555 – 569. 
[5] Brown, Cary (1956) ‘Fiscal Policy in the Thirties: A reappraisal’, The American Economic Review, Vol. 46, No. 5 (December) 857 – 879. 
[6] Borio & Disyatat (2009) Unconventional Monetary Policies: An Appraisal, BIS Working Paper No. 292, November 2009


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