I would not be the first to observe that there is a potential conflict between George Osborne’s role as Chancellor and his deep involvement in Conservative Party election strategy. The fact that this is often said does not mean it is real - it could just be a story told by those commentators who are themselves fixated by the battle between political parties. However there are two major areas where the Conservative part of the coalition government seem to be putting perceived election advantage ahead of prospects for the UK economy: immigration and Europe.
Jonathan Portes has clearly described the contradictions between an economic philosophy that stresses the importance of deregulation and a flexible labour market, and tight restrictions on the ability of firms to hire who they want if they happen not to be UK residents. In addition, making it difficult and risky for foreign students to study in the UK directly hits the exports of the education sector, which I have talked about before. Now perhaps immigration control is so deeply embedded in conservative philosophy that it trumps economic liberalism, or helping increase UK’s exports. Or alternatively, immigration is seen as a vote winner and so any damage that this will do to the UK economy can be set aside.
The Prime Minister has now finally made his commitment to hold a referendum on EU membership in four years time. This has been widely interpreted as a move to both appease the anti-EU wing of his party, and to stop the drift of voter support to the UK Independence Party. The opposition has claimed that this will create damaging uncertainty, and on this occasion they are almost certainly right. We do not need to just take the word of business leaders on this. A number of studies (e.g. here and here) have recently highlighted the role of uncertainty in influencing the macroeconomy. There can be little doubt that decisions by multinationals or export orientated domestic firms on where to locate or expand production are heavily influenced by whether countries are inside or outside trading blocs. Given the real risk that a majority in the UK referendum will vote to leave, investment decisions are likely be postponed at best, and diverted elsewhere at worst. Neither is what the economy needs right now. The economic benefits of promising a referendum on EU membership in five years time are hard to see. It is also hard to imagine why the Prime Minister had to make such a commitment, besides the political imperatives of Party unity and keeping votes.
So what is new, the cynic might say. Politicians have always been more concerned with winning elections than the economic health of the country. Well lets just suppose this is true, for the sake of argument. What is clearly true is that winning elections also depends on the state of the economy. To say the the UK economy is not looking too good right now would be an understatement. (Those who point to trends in employment in an attempt to suggest things are not so bad are really deluded. How can the fact that UK labour productivity is still well below levels before the recession, and has hardly increased at all in the last year or two, possibly be good news?)
Which brings me to the potentially conflicted Chancellor. Ministers are meant to represent their portfolio - and most of the time the complaint is that they do this too much, with too little regard to wider interests. Again the cynic might say that is natural enough, because their own personal political capital is bound up with the perceived success of that ministry. So a Chancellor who was totally focused on being a Chancellor, in a situation where the economy was doing badly, would be banging the table against anything that put a recovery at risk. Now perhaps George Osborne has been lobbying hard against immigration controls, and against the referendum commitment, although if he had I suspect we would know about it. A more plausible story is that he shares the Prime Minister’s view that on these two issues at least political advantage outweighs economic interests. But in making this judgement, he is acting as Conservative Party strategist and not as the UK Chancellor of the Exchequer.