Opinion: Liberal Democrats must stay firm on deficit reduction

Osborne -  Some rights reserved by altogetherfoolGeorge Osborne will stand up in the House of Commons on Thursday to announce the government’s intentions for public spending for the 2015-16 financial year in circumstances he neither anticipated nor wished for.

As a result of weaker economic growth and a revision to the estimates of the capacity of the British economy, the structural deficit that the coalition had hoped to eliminate by the time of the next election will exist well beyond it, meaning further spending cuts and tax rises.

Liberal Democrats must spell out distinctive ideas on how to continue deficit reduction.

Liberal Reform has a number of suggestions for George Osborne this week, and for our party on the road to the General Election in 2015.

First, the difficult issue of social security spending. The welfare budget ballooned during the second half of the Labour administration and by the time of the 2010 election had become unsustainable, particularly given the permanent loss of economic capacity caused by the crash of 2008.

Many of the coalition government’s reforms in the area of welfare were necessary and we applaud the work that Steve Webb has done in his department, recognising the need for cuts but doing his best to protect benefits for the most vulnerable.

Looking ahead to 2015, Nick Clegg has said that we have to look at the remaining benefits for the well-off. Liberal Reform would be clearer: social security should be for the poor, vulnerable and disabled, not for the wealthy, including pensioners. Labour’s boomtime handouts to the rich have to end.

However, we disagree with Clegg’s assertion that further cuts at the top of the welfare budget justify further reductions at the bottom. It may be necessary to cap increases for some time, but no more cuts should be made to out of work or disability benefits.

The party also needs to consider whether it is sustainable to leave the health budget untouched. In making savings, though, we need to be imaginative and open-minded: if the evidence suggests that efficiency can be gained through private sector involvement, we should accept that; it is better than blunt budget cuts.

So, what should we protect?  At the very least, schools, universities and science. They are the areas of spending that can most directly help us create the liberal society we want to see.

On international development we are open-minded. It is a small part of government spending, but we are inherently uncomfortable with the idea of arbitrary targets for spending. The quality of that spending is more important than its quantity.

Circumstances demand, though, that all other departments must make further reductions.

We would resist Tory calls to protect defence spending, which has reduced by a relatively small 8% between 2010-14. Trident is an obvious area for savings in the medium term, but not in the 2015-16 window. As the Public Accounts Committee has warned, the defence equipment budget looks unaffordable, and we would start there.

On taxation, we would argue that the tax rises already implemented, most notably the VAT increase, are at the upper end of what is acceptable, both in what the British people are prepared to tolerate and in the economic damage that any tax rises cause. The UK tax take as a percentage of GDP remains roughly at its medium-term trend level, with increased spending responsible for the large deficit we still see. It is therefore spending where attention needs to be focused.

The fiscal consolidation planned for 2015-16 will be much more difficult than that started in 2010, coming as it does on top of significant savings. With many efficiencies already made, the public sector will have to be creative and open-minded in coming up with new, less costly ways of working that retain and improve the service levels that people demand. That will no doubt be difficult, but it is what being a responsible party of government demands.

* William Hobhouse is on the board of Liberal Reform and is co-founder of the Lib Dem Campaign for Manufacturing.

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58 Comments

  • Conspicuously missing from William’s article is consideration of the other spending cuts coin, namely the massive increase in spending that is due to be announced under the infrastructure and capital projects banner.

    Given that effectively circumstances haven’t changed since 2010, I recommend that from the £250bn shopping list, only those projects that can either demonstrate that they are essential and/or will return more than they spend by 2030 get considered, as only these projects are potentially capable of contributing to deficit reduction. Yes this may mean that various vanity and pet projects get binned, but a business like government, focused on reducing unnecessary spend, would of binned them in 2010.

  • Bill le Breton 25th Jun '13 - 10:23am

    William, the admirable Simon Wren-Lewis, Oxford Professor of Economics, and if his recent posts at Mainly Macro (http://mainlymacro.blogspot.co.uk/ ) are anything to go by, one of the sanest people in the county, has just blogged about the ‘intellectual bankruptcy of the austerians’, follow above link, in which he writes:

    “It is both amusing and tragic to watch the advocates of fiscal austerity try and deal with the fact that the thin intellectual foundations for their approach have crumbled away, while at the same time the empirical evidence of their folly accumulates. I say thin not for dramatic effect: the economic textbooks tell us that this policy was foolish in the first place, so the austerians were always arguing something like ‘forget the accumulated wisdom of the past century, on the basis of two or three papers we know better’.[1]

    That footnote reads, “There may also be an element of Keynes famous academic scribbler in this too. (“Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”) There was a period – in the 1980s – when those economists studying at masters/PhD level might have been taught that the undergraduate textbooks were wrong, and that Keynesian economics was doomed. That proved to be a temporary aberration, Keynesian economics rejuvenated itself and in most departments it was restored to its rightful place at the centre of macroeconomic wisdom. But perhaps some of those now running policy did their PhDs during the 1980s, and never kept up with what happened subsequently.

    The big question is ‘what do business people know about economics’? They know about business – that is their qualification – why on earth do we suppose this qualifies them to talk about ‘deficit reduction’, ‘monetary policy’ or the slope of the aggregate supply curve?

  • Anthony Hawkes 25th Jun '13 - 11:36am

    I think the point that Bill le Bretton makes is quite key. While austerians would like us to believe that there is no other way, it does seem as if we have made an odd choice. We frame the spending debate in terms of deficit reduction while experts like Professor Wren-Lewis make us look at the bigger picture and ask why did we choose austerity in the first place.

  • Matthew Huntbach 25th Jun '13 - 12:31pm


    The welfare budget ballooned during the second half of the Labour administration and by the time of the 2010 election had become unsustainable,

    It needs to be recalled that a major factor in welfare spending increasing is the development of medical techniques which enable people to live far longer than used to be the case, and to be much less likely to die before or shortly after retirement. Another is the running down of council housing, meaning that people who once would have been housed in this way, at a cost-only rent, are now housed in privately rented accommodation, paying rents several times what the equivalent council housing is rented out at, subsidised through Housing Benefit.

    The suggestion, frequently made by right-wingers, that the “ballooning” welfare budget indicates an increasingly powerful state, or is due just to incompetency from the Labour government, is wrong. More state pensions being paid out because more people live longer does not mean a more powerful state. The boom in Housing Benefit payment comes from the state being LESS powerful, in the sense that it isn’t the landlord to as many people as it used to be.

    It is a pity that these central issues rarely seem to be mentioned in discussion on these issues, and in the right-wing press it is generally hinted (though they can’t actually say it, because it isn’t actually true) that it is mainly due to asylum seekers and lower-class people with large numbers of children living lives of luxury. No-one seems willing to admit that the biggest villain in this ballooning is Margaret Thatcher, whose encouragement of the selling off of council housing led to the consequence of what was once just a temporary arrangement (families in need housed in high-cost private rented accommodation) becoming permanent for many. It is inevitably written up to give the impression the money goes to the families to spend on luxuries, rather than the reality which is that it goes straight to the private landlord.

  • Simon McGrath 25th Jun '13 - 1:46pm

    @Bill le Breton – you seem to be under the impression that the Coalition Government is not carrying out a Keynsian stimulus. Given that the deficit it still £100bn a year this is clearly not correct.
    @Prateek – the last Government spent and spent in order to build a client state where as many people as possible were depending on the state either as employers or because they were on welfare. From pocket money for 16 year olds to child trust funds they handed out the (borrowed) money as fast as they could. Public spending as a % of GDP rose from 38% in 1997 to 47% in 2010.

    On the subject of compettion in healthcare you are looking at it the wrong way. Given that everyday experience is that competion does bring down prices surely the onus should be on those opposed to competition to show that (assuming quality targets are set) it doesnt save money. As for the benefits of competition there is plenty of evidence, for example :

    http://cep.lse.ac.uk/pubs/download/dp0988.pdf

  • ‘Looking ahead to 2015, Nick Clegg has said that we have to look at the remaining benefits for the well-off. Liberal Reform would be clearer: social security should be for the poor, vulnerable and disabled, not for the wealthy, including pensioners. Labour’s boomtime handouts to the rich have to end’.

    Rather than opposing ‘welfare for the rich’ how about we deal with the gross inequalities in this country so the rich are not as rich as they are? That way people like you would not find it so offensive the rich getting benefits, they wouldn’t be so rich. Why is this issue never approached in this way? The problem is not universal benefits but a small elite who hold a huge amount of wealth.

    Do you also favour in withdrawing free healthcare to the rich? If not, why not? Isn’t is just a handout for the rich? Where do we draw the line?

    The truth is as soon as universal benefits become means tested some people who are entitled to them will miss out, often because they are vulnerable, while those get them will be stigmatised and they will be turned into a political football for parties looking to turn on a group of people who can’t fight back. Despite these practical objections, perhaps the best argument is that some of us want to live in a society where all are valued as equal citizens. Liberalism is not just about the individual rights but also about civic rights – we are citizens as well as individuals.

  • Nick Thornsby Nick Thornsby 25th Jun '13 - 2:51pm

    Year Tax Spend Tax Spend
    £bn £bn % GDP % GDP
    1997-98 293.6 322.0 34.8 38.2
    1998-99 313 330.9 35.2 37.2
    1999-00 336.6 342.9 35.6 36.3
    2000-01 358 341.5 36.2 34.5
    2001-02 365.6 389.2 35.4 37.7
    2002-03 372.6 420.9 34.1 38.5
    2003-04 398.3 455.2 34.4 39.3
    2004-05 426.5 492.5 35.1 40.5
    2005-06 457.1 523.7 36 41.2
    2006-07 487.8 550.2 36.2 40.9
    2007-08 514.3 583.7 36.1 41.0
    2008-09 500 630.8 35.3 44.5
    2009-10 485.7 671.5 34.5 47.7
    2010-11 522.4 692.4 35.3 46.8
    2011-12 542.9 693.6 35.5 45.4

    Looking at the data, both in nominal terms and as a proportion of GDP, it’s clear to me that increases in spending since 2001 played a far greater role in increasing the deficit than the (by comparison) relatively small falls in tax revenue between 2008-2010.

  • Malcolm Todd 25th Jun '13 - 2:53pm

    Simon McGrath
    “he last Government spent and spent in order to build a client state where as many people as possible were depending on the state either as employers or because they were on welfare.”

    — again and again, you trot out this nonsense. Have you a shred of evidence that that was the government’s intention? Of course not, because it’s absurd, like most theories of democratic politics that ascribe the most dastardly secret motives to politicians rather than accepting that they may simply be driven by different belief systems from our own.

    Perhaps I’m wrong. Perhaps you really do want to cut welfare because you want the poor to be so ground down by their poverty and in fear of losing what little income they possess that they daren’t speak out against injustice or exploitation, whether exercised by the state or their employers. That’s what much of the Left will assume on reading your comments. I think they’ll be wrong too; I think they’ll also be spouting paranoid rubbish because they just can’t believe that you see the world so differently, so assume you must “know” the same things they do and are therefore motivated by class hatred or pure self-interest.
    But I could be wrong.

  • Bill le Breton 25th Jun '13 - 3:30pm

    Simon, I can’t think of any economist who uses the size of the ‘deficit’ to gauge whether austerity policies are being implemented. It is another example of a crude ideological approach by those wishing to make a political rather than an economic case.. It is like trying to judge whether a train is accelerating or decelerating with a just the measurement of the time the train started and the distance traveled to this moment in time.

    Would you like to start with the IMF?

    In its Fiscal Monitor http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf it focuses rightly on:
    • Cyclically adjusted balance (CAB): Difference between the overall balance and the automatic stabilizers; equivalently, an estimate of the fiscal balance that would apply under current policies if output were equal to potential.
    • Cyclically adjusted (CA) expenditure and revenue: Revenue and expenditure adjusted for temporary effects associated with the deviation of actual from potential output (i.e., net of automatic stabilizers).
    • Cyclically adjusted primary balance (CAPB): Cyclically adjusted balance excluding net interest payments.
    For the UK see page 78

    Cyclically adjusted balance in 2010 was -8.5%
    Its forecast for 2013 is -4.0%

    That is a considerable change. Which I would have thought you’d have wished to celebrate rather than deny. See the report for intermediate years. You only need to deny it has happened because it patently hasn’t produced the results you irrationally expected.

    Another rational view is to look at Government Final Consumption Expenditure, the advantage of which is that these figures exclude transfer payments, which are really irrelevant for assessing the degree of austerity imposed by a government.. Why? Because transfer payments are highly cyclical, so they don’t reliably indicate an increase in government expenditure, and they don’t place a direct burden on economic resources.

    Some figures (but only up to 2011) are found here::
    http://www.tradingeconomics.com/united-kingdom/general-government-final-consumption-expenditure-percent-of-gdp-wb-data.html

    Again, it’s austerity in action.

    So can we stop resorting to a political carnard and use economic arguments please. Austerity is happening in the UK and it has done serious and unnecessary damage – viz. the continuing worsening of the deficit and the paucity of the recovery. Do you really want more?

    Personally, as I have consistently said here, I am skeptical of the case for fiscal stimulus especially when the Monetary Policy Committee is intent on off-setting any such stimulus in pursuit of the Quad’s monetary target. But I don’t think that in anyway causes me to devalue the way Professor Wren-Lewis approaches policy recommendations, which in my opinion we should adopt as Liberal Democrat policy.

    The Tories want desperately to believe that we are in the equivalent of 1982. Our leaders want desperately to believe they are right, because they can’t argue for change without it seeming that we want ‘yet more concessions’. Both are clinging to a fragile recovery to tell them it all will come good as it did in 1983 – 87. So, no change is possible and we must wait a year before 2014 arrives with its evidence.

    Dispiriting.

  • Bill le Breton 25th Jun '13 - 3:48pm

    Nick, How did we vote on the Budget in those years? Did we suggest and campaign for lower spending to such a degree that it would have made any difference?

    As the good Professor who I keep quoting today says, elsewhere, if Labour were incompetent in these matters, then most people were. http://mainlymacro.blogspot.co.uk/2013/06/fiscal-legacies-and-competence.html

    It is far more important to realize that the far greater error was the Bank of England keeping interest rates too low during those middle years – because they were basing their policy on inflation figures that were not properly factoring in the reduction in process from technological gains and globalization. The low rates providing bountiful tax receipts and developing an air of invincibility.

    The benign disinflation, thanks to China, India, Micro-soft, Apple et al, in making the Bank think it was keeping to its target, paved the way for the Great Bubble, the over zealous spiking of which sent the UK and others into the Great Recession.

    Here is where the charge lies against all at Westminster, Whitehall and the Bank of England..

  • Matthew Huntbach 25th Jun '13 - 3:55pm

    The figures quoted by Nick Thornsby do not show the huge increase in expenditure as a % of GDP during the period of Labour government, as claimed by Simon McGrath and also by the Liberal Democrat leadership with the way it’s aligning us as the National Liberal wing of a permanent Conservative dominated coalition against Labour. What they do show perhaps is spending becoming less productive in terms of its effect on the economy, so requiring more taxation to keep it at a steady state.

    If one thinks about it, one can see why. Throw someone who is paid £X by the state for a state-controlled job, and do you cut the deficit by £X? No. First the state loses the tax it took from that £X. Then the state has to pay unemployment benefit, maybe housing benefit. Then the person who is made unemployed is going to stop spending, so all those services they would have spent the money on lose jobs, so the state loses the taxation on them. The deterioration of state services caused by throwing that person out of their job costs in the long term. People who didn’t lose their jobs are fearful they might be next, so they cut spending as well.

    It seems to me that austerity isn’t working, because all it’s doing is shifting spending around to crisis management. Departments are told to cut £X in expenditure, and they do so regardless of the £Y in extra state spending it costs elsewhere. When I was a councillor I saw this happening time and time again at local government level.

  • Nick Thornsby Nick Thornsby 25th Jun '13 - 4:06pm

    @ Bill le Breton

    My point was not really about what we were doing in those years but a response to Prateek’s point that the deficit was mainly due to a collapse in tax revenues. That’s just not how I read the data.

    @ Matthew Huntbach

    Spending increased from £322bn in 1997 to £692.4bn in 2010 and from 38.2% to 45.4% of GDP (at a time when GDP also increased significantly).

    Whether one considers that a “huge” increase is subjective. It looks pretty big to me.

  • Nick Thornsby

    I think you will find that in 2007-2008 we had a spending of 41% GDP – the number clearly increased after due to the massive drop in tax receipts. I assume you policy was to let the banks fail and massively cut public spending in the 2008-2010 period?

    This spending as %GDP was much lower than in the Thatcher years (48.1% in 82-83) and I can tell you that the difference in the quality of our infrastructure in 2007 was much better after years of Tory neglect

    Labour made many mistakes but the arguments you are making are not ones I would expect to hear from a LD to be honest

  • Eddie Sammon 25th Jun '13 - 6:47pm

    I am glad that Liberal Reform disagree with Nick Clegg over the desirability for more welfare cuts for those at the bottom. However your motion seems to contradict this objective because it appears to call for more monetary stimulus, which would squeeze those on the three year 1% benefits uprating even more.

    Furthermore, Mark Carney has already called for a Japan style doubling of the monetary base, which would pulverise many pensioners who have bought fixed income life pensions. It would be immensely cruel to see the government take away a massive chunk from your life’s saving. We must ensure this does not happen.

  • Nick Thornsby Nick Thornsby 25th Jun '13 - 8:53pm

    I’ve now posted the data from my earlier comment on my blog in a format that one can actually read http://nickthornsby.wordpress.com/2013/06/25/uk-tax-revenue-and-public-spending-1997-2012/

    What it shows is that while tax revenues went down as a result of the crash of 2008 (from a high of £514.3bn to a low of £485.7bn) and recovered to their pre-crisis level within 2 years.

    Spending on the other hand was already rising rapidly as we entered recession and rose from £583.7bn in 2007-8 to £693.6 in 2011-12.

  • Andrew Tennant 26th Jun '13 - 8:19am

    @Bill Le Breton
    Anyone who has ever worked in the public sector knows that vast swathes of taxpayers money are wasted on sustaining inefficiency and paying for services with little public demand and/or little prospect of providing a return. Surely far better that such expenditure is identified and reallocated or the funds returned to taxpayers so that they can make their own spending decisions and use it to fund that that will make a greater difference to their lives? Money spent by individuals creates just as much demand in the economy as does individuals’ money spent by the state on their behalf. The difference is that individuals will direct their money towards that which they prioritise and our economy will increase focus on that which individuals want.

  • John Edwarde 26th Jun '13 - 10:26am

    ”On taxation, we would argue that the tax rises already implemented, most notably the VAT increase, are at the upper end of what is acceptable.” So writes William Hobhouse.
    His remark is not to be disputed, but where is mention of that Lib Dem call of years, for local government taxation to be achieved through local income tax?
    The areas of government expenditure which are neither formally ring fenced nor regarded as untouchable because they have borne so much strain already is becoming worryingly small. Of those that retain the status of being ripe for more cuts, local government stands out, and with so much of local government expenditure being an obligation placed upon it by central government, councils are surely heading for a position where there is no choice over whether council tax rises or not. Council tax has been unfair in its application since day one. More valuable properties attract a lower percentage of their value in annual tax than less valuable properties. Local income tax would be a splendid way of ensuring a more fairly distributed strain on those who pay for local services. In determining how much tax we pay, the question, ‘what do you earn’? seems a much fairer one than, ‘how much is your house worth’?
    We may fail to prevent further local tax increases but at least we gain equity.

  • Matthew Huntbach 26th Jun '13 - 10:55am

    Nick Thornsby

    @ Matthew Huntbach

    Spending increased from £322bn in 1997 to £692.4bn in 2010 and from 38.2% to 45.4% of GDP (at a time when GDP also increased significantly).

    Whether one considers that a “huge” increase is subjective. It looks pretty big to me.

    As bcrombie has already pointed out, there was a sudden increase as a % of GDP at the time of the financial crash in 2007. Up till then it had remained fairly constant. So I think this suggests it’s the financial crash that’s the issue rather than a general tendency of the Labour government to raise taxation as a % of GDP, which is the line our party leadership is pushing.

  • I think the following is quite clear from Nick’s figures:

    1. There was a structural deficit before the recession. On Nick’s figures this is around 3.9% of GDP (or £69.4bn/year).

    2. Tax income fell as we went into recession, from 36.1% of GDP in 2008 to to a low of 34.5% of GDP in 2010. Obviously GDP shrunk over this period as well so in cash terms it went from £514.3bn to £485.7bn. This is a drop of 1.6% of GDP or £28.6bn/year.

    3. Over the same period public spending rose from 41% of GDP to 47.7%. In cash terms this is from £583.7bn to £671.5bn. This is an increase of 6.7% of GDP or £87.8bn.

    4. Yes, there was strong inflation over this time due to a) our currency losing value, b) Quantitative Easing, c) shock price increase but these factors will affect spending and taxes equally.

    5. For each pound lost in tax revenue during 2008-2010 an extra £3.07 was spent.

    6. In 2010 the government spent £185.8bn more than it raised. This is made up of a pre-recession deficit of £69.4bn/year, an extra £87.8bn/year of recession related spending and some £28.6bn/year of lost tax revenue.

    7. If tax levels had magically recovered to pre-recession levels in 2010 it would have seen a mere 15.4% of the annual deficit removed. Therefore 84.6% of the current deficit is made up of either structural or cyclical spending.

    Please let me know if you disagree with any of my assessment. I don’t see how though, if you accept it, you can argue that the government’s spending has been a primary cause of the deficit?

    In addition, the coalition has pledged to remove the structural deficit of £69.4bn/year and leave the £116.4bn/year cyclical deficit to fix itself. Whether you agree with this approach or not it can hardly be described as callous.

    A final unrelated point. Any article for LDV has to be short, it can’t pad out the detail on every point. Don’t assume that just because something is unsaid that it isn’t meant. I’m sure I speak for all of Liberal Reform when I say we’d be happy to see JSA also raised with (or above) inflation. It is a paltry amount and actually costs very little but is crucial to protecting the most vulnerable in society. We would happily see a reduction in middle-class child-related tax credits in order to cover this increase.

  • Matthew Huntbach 26th Jun '13 - 11:03am

    Andrew Tennant

    Anyone who has ever worked in the public sector knows that vast swathes of taxpayers money are wasted on sustaining inefficiency and paying for services with little public demand and/or little prospect of providing a return.

    Actually, no, not really. Perhaps you could suggest what they are, I’m sure there are many Liberal Democrat councillors faced with making tough budget decisions who’d be delighted if you could find things that could be cut and no-one much would miss them.Myself and most of my family work in various public sector jobs, and all of us feel things have long ago been cut to the bone.

    If you are looking for waste and inefficiency, look at the massive pay senior executives receive in big private sector companies, the lavish fancy headquarters they have and so on. The “finance industry” is just the bureaucracy of capitalism – a vast, bloated and overpaid bureaucracy. Why can’t we have some cuts there, so saving money which has to come from somewhere to pay for all of that?

  • Bill le Breton 26th Jun '13 - 11:34am

    William, first there is a very wide set of ‘guesstimates’ of the output gap – see the OBR report at the time of the budget. The OBR always takes the average of the estimates of 15 consultancies. If you take Capital Economics’ for instance, their calculation is that the structural deficit is not nearly as large as is advocated by those who think there has been a huge loss of productivity over the recession. Let’s get on with tackling the cyclical deficit and see what’s left .

    Second, endeavouring to remove a structural deficit at the nadir of one of the deepest down turns in history is not wise. “Hey, Labour didn’t fix the holes in the roof during the fine weather, so now the storm is raging we think it is the best time to dismantle the fabric entirely.”

    This is the liquidationist view – all those so-called zombie firms need to go to the wall so that investment can be freed up for new initiatives. When in fact returning aggregate demand to the pre-crisis trend rate (we are 15% below that figure!) is a more effective way of using our resources.

    N.B. The Central Bank sets the level of aggregate demand NOT the fiscal authorities – just in case you think I am advocating a fiscal stimulus.

  • Steve Griffiths 26th Jun '13 - 11:50am

    Andrew Tennant

    “Anyone who has ever worked in the public sector knows that vast swathes of taxpayers money are wasted on sustaining inefficiency”

    I’ve worked half my career to date in the private sector and half in the public sector. I have seen financially profligate and financially careful institutions in both sectors. Such generalisations contribution little to any debate.

  • Bill le Breton 26th Jun '13 - 12:39pm

    Thomas, the OBR in its June 2010 pre budget report calculated the output gap at -4%. Page 75 here:
    http://budgetresponsibility.independent.gov.uk/wordpress/docs/pre_budget_forecast_140610.pdf

    But as I pointed to in a piece here http://www.libdemvoice.org/opinion-mind-the-gap-a-sceptical-view-of-the-need-for-cuts-30919.html last October Capital Economics published an important note.

    It said, “‘If we assume (generously in our view) that the economy was operating 2% or 3% above potential in 2007, and that the financial crisis dealt a permanent blow to the economy of 5% of GDP, the output gap should still be about 6% of GDP. If our view is correct, this implies unnecessary fiscal consolidation under current plans of about 2.5% of GDP, or £35bn in current prices.

    “A large output gap offers the prospect of the UK being able to enjoy strong economic growth, if and when demand recovers, without inflation taking off. But as long as monetary and fiscal policies are conditioned on a pessimistic view of spare capacity, this prospect may be frustrated. Accordingly, supply pessimism may be self-reinforcing.”

    Our leaders continue to support a monetary target that is too tight and unable to respond to the present behaviour of prices and to administer an unnecessary and self-defeating fiscal retrenchment.

    If your ideas were going to work they would have worked by now – you have had your policy in place for three years and you have overseen a reduction in the deficit – not including interest resulting from QE and post office pension snaffles – of just 10%. And perhaps you would tell me by how much you have increased the national debt over the lifetime of your policies.

    You really want fiscal retrenchment not for pragmatic reasons but, as Andrew T admits above, because of an ideological commitment to a much smaller state.

  • Simon McGrath 26th Jun '13 - 1:16pm

    @Matthjew Huntbach “If you are looking for waste and inefficiency, look at the massive pay senior executives receive in big private sector companies, the lavish fancy headquarters they have and so on. ….. Why can’t we have some cuts there, so saving money which has to come from somewhere to pay for all of that?”

    OK so we cut the pay of senior managers. Profits, taxed at far lower rates than income go up. Taxes go down. less money to spend on welfare etc. Not sure you have thought this through

  • Arthur Bond 26th Jun '13 - 7:25pm

    I really don’t get it. Bankers continue to get large bonuses;Intelligence Services get increased funding;Trident is ,we are told going to cost one hundred billion pounds. Yes I said one hundred billion pounds.We are ruled by a cabinet, most of which are millionaires. What are they giving up, I wonder.
    Back in the 1930’s the rich ruled and controlled everything. The result was high unemployment and rising inequality.Working people were the hardest hit.We are seeing similar results today.Ever since de-regulation bought in by Margaret Thatcher the economy has gone into free fall.We are now being told that we will get more of the same whoever gets in at the next election.What sort of democracy is that???

  • Eddie Sammon 26th Jun '13 - 8:15pm

    Arthur, please explain what the difference is between a banker getting a large bonus and a large salary? So you would rather the bankers were paid less? So as Simon McGrath points out, the likes of you and Matthew Huntbach would rather the banks profits were higher?

    In reality, I imagine you would want the bankers to be paid less and the bank’s profits to be lower, so really you would want them to charge less for their services. But if they only made low profits, then who would invest in them? Would you invest in a bank that could go bust without hope for much return? No, you’d just put it in a savings account instead, oh wait, in a bank.

    So let’s get rid of the hate and be productive about things. You can’t legislate for morality, you just need to hope that people learn from their mistakes and use regulation to build consumer trust.

  • Matthew Huntbach 26th Jun '13 - 11:04pm

    Eddie Sammon

    Arthur, please explain what the difference is between a banker getting a large bonus and a large salary? So you would rather the bankers were paid less? So as Simon McGrath points out, the likes of you and Matthew Huntbach would rather the banks profits were higher?

    No, I’d rather the banks were not making so much profit, especially as one reason for the big deficit was the massive bailout they received from the rest of us.

    Of course I’m not giving a fully worked out policy here. I’m just noting what seems to be a serious imbalance in society. I appreciate it can’t be solved by simplistic measures. I do not, however, see the bankers getting millions as rare geniuses who deserve so much. They are getting it for bureaucratic jobs which are no more intellectually challenging than the public sector jobs whose much lower wages here are being decried as “waste and inefficiency”. In other countries, taking vast sums of money just because you are in a job handling it is called “corruption”.

  • Matthew Huntbach 26th Jun '13 - 11:09pm

    Matthew Huntbach

    Andrew Tennant

    “Anyone who has ever worked in the public sector knows that vast swathes of taxpayers money are wasted on sustaining inefficiency and paying for services with little public demand and/or little prospect of providing a return.”

    Actually, no, not really. Perhaps you could suggest what they are.

    My question was not intended to be rhetorical. I would appreciate an answer. If it is so obvious as Andrew Tennant put it, then answers to it should be flooding in. So where are they?

  • Matthew Huntbach 26th Jun '13 - 11:26pm

    John Edwarde

    Of those that retain the status of being ripe for more cuts, local government stands out,

    It does?

    Why?

    Perhaps you could suggest what big cuts your own council should and could be making. Do we have too many libraries? Do we spend too much making unnecessary repairs to roads? Are there too many youth clubs? Do we have public parks so well-kept and sparkling, with dozens of gardeners working on them, so we could sack a few of them and no-one would notice? Do those who give care to the elderly lead easy leisured lives, or are they so well paid that there are thousands flocking to do their jobs? Do those who visit families with problems to watch out for child abuse and so on lead similar well-paid and leisured lives? People I know working in this sort of job are suffering huge amounts of personal stress due to increase workloads and cuts in the number of people doing the job already.

  • I would like to touch on this point on ‘difficult decisions’

    For me, as a manager, a difficult decision involves me having to have a personal interaction with the person affected. Deciding not to promote someone, give them a harsh proposal or sack a person due to their performance is a difficult decision as I have an emotional involvement as well as practical. Being responsible for a decision to stop a project for budget reasons and so have to tell people a year’s effort is wasted, or again a reduction in numbers is difficult to do.

    To me, it is this emotional part that is ‘difficult’. The decision based on numbers alone is relatively easy as it is just shifting big numbers around a spreadsheet until the answer is right

    For someone like Osborne, I do not see how these decisions are particularly difficult. If you are a Tory from a monied background how many people who will be affected by the cuts will you have an emotional interaction with – not many at all imagine?

    This makes me angry because the people who will be making the ‘difficult decisions’ will those who have to tells someone their benefit is being taken away or that they will have to wait months for an operation – perhaps also with a threat of redundancy over their heads.

    Decisions may be necessary (although not convinced on this either) but at that sort of level they are not necessarily difficult, especially if the person taking them is lacking in empathy or is devoid of any emotional intelligence

    I do not see Osborne or Alexander showing any indication they have this emotional intelligence and their constant referral to ‘difficult decisions’ is an example of that – do they really think their decisions were that hard? I think others do realise this and this is why they keep their heads down and understand the implications of the decisions they take on the personal level – Vince is one of these, perhaps even Clegg.

  • Andrew Tennant 27th Jun '13 - 8:17am

    @Matthew Huntbach
    I work identifying these inefficiencies professionally. Each organisation is different and I’m prohibited from discussing mine publicly. If you need my help then you should hire me.

  • Andrew Tennant

    Great to see you are such a productive member of our society.

    I can tell you in my own, private, organisation we love having people coming in and telling us how to do things when they have no idea of what they are talking about. Usually expensive as well and leave nothing sustainable behind them.

    Be interesting to do a proper cost/benefit analysis of what this type of work actually delivers – ‘inefficiencies’ are not always what they seem and require a great expertise in order to be able to find them.

    I assume you will respond that you are a great expert in all these areas – easy to do on a forum. You can’t be just working in just one sector/company as you are making such sweeping generalisations

  • Bill le Breton 27th Jun '13 - 9:53am

    Is the economy coming out of intensive care? Fiscal and monetary policy in the UK is based on this hope.

    News from the US should give us pause for thought. We could be about to repeat the mistakes we made in 2011 – not seeing another run down in NGDP ( GDP measured in £) and stimulating aggregate demand through monetary policy to counter this.

    Here’s the story from the US: http://finance.yahoo.com/blogs/the-exchange/fed-gets-reason-keep-stimulating-153244090.html

    When the US sneezes, we catch a cold … as they say.

  • Matthew Huntbach 27th Jun '13 - 10:57am

    Andrew Tennant

    I work identifying these inefficiencies professionally. Each organisation is different and I’m prohibited from discussing mine publicly. If you need my help then you should hire me.

    Then you have made a statement and refused to give supporting evidence for it.

    As a member of the Liberal Democrats, I work (or worked) voluntarily for my party, and give advice based on my professional experience for free. Obviously, there are times when I cannot disclose full details. However, it is certainly possible to speak in generalities.

    Obviously I don’t have any money myself to hire you, and that was rather a ridiculous statement to make in a general political debate on a party site. However, if I were still a councillor and had some responsibility for hiring consultants to assist in finding efficiency problems, I would expect anyone who wished to be hired to provide enough details to demonstrate to me that they would do a worthwhile job.

  • Matthew Huntbach 27th Jun '13 - 11:08am

    bcrombie

    I can tell you in my own, private, organisation we love having people coming in and telling us how to do things when they have no idea of what they are talking about. Usually expensive as well and leave nothing sustainable behind them.

    Yup. Why is it that these days people who post with the LibDem birdie by their name come across as Tory b’stards in the sort of comment they make?

    In the 12 years I spent as a councillor, I saw enough of what these sort of consultants do to be pretty sure that a good efficiency measure is not to hire them. I was there long enough to see cases where one set of consultants made recommendations, after being paid sky high fees, to do one thing, then several years later another bunch recommended doing the exact opposite and so returning things to where they were before. Well, it stands to reason, doesn’t it? They aren’t going to say “Actually, you’re doing well, carry on doing it the same way, now here’s our bill”, are they? So they’ll always find something where they can make up a plausible argument e.g. if you have decentralised procurement, they’ll tell you all about efficiency savings given by centralised bulk purchasing, if you have centralised procurement, they’ll tell you all about efficiency savings if you decentralise and let staff close to the ground use their own initiative.

    Not only do these people charge extortionate fees for saying things which are at best common sense and at worst business school jargon (in my University department, we send the duffers who can’t manage the technical stuff to do business modules, where they get grade As and Bs easy-peasy, unlike the stuff I teach which they’ve failed), the council then wastes huge amounts of time and money on the pointless reorganisation they suggested.

  • John Broggio 28th Jun '13 - 12:36am

    Spot on Arther, Matthew H & bcrombie.

    @Simon McG; I know this is economic heresy to those in the Treasury but the taxes on profits could be raised to (more than) cover the loss in income tax were bankers finally to be compensated at a level that reflects their economic worth to society as a whole (instead of their own accounts).

  • Matthew Huntbach 28th Jun '13 - 8:10am

    Matthew Huntbach

    My question was not intended to be rhetorical. I would appreciate an answer. If it is so obvious as Andrew Tennant put it, then answers to it should be flooding in. So where are they?

    I am still waiting for an answer. Andrew Tennant wrote “Anyone who has ever worked in the public sector knows that vast swathes of taxpayers money are wasted on sustaining inefficiency and paying for services with little public demand and/or little prospect of providing a return”. John Edwarde wrote “Of those that retain the status of being ripe for more cuts, local government stands out”.

    So I challenged both these gentlemen to provide examples of what could easily be cut from local government spending, and neither have been able to do so. If it were all so obvious and easy, if there really were vasts amounts of money being paid for services with little public demand, if it really were the case that there were aspects of local government which “stand out” as obvious targets for expenditure cuts, then examples could be provided instantly. If Mr Tennant’s job means he can’t give them, then others could rush in to his defence.

    So, I say again. We have been told here by two people, one of whom advertises his Liberal Democrat membership, that there are easy and obvious cuts that can be made in local government expenditure. I am asking those who hold to that opinion to give me examples. If what they are saying has any truth to it, that should be easy to do. And please, let’s not make this a “bicycle shed” thing – the examples need to be things which form a significant proportion of local government expenditure.

  • Matthew

    Hear hear!

    What we could also do is freeze council tax in a populist measure so to reduce even further money available for councils. I think the IFS summarised my feelings on this quite well yesterday.

    We are freezing the only property tax we have when we should be looking to extend it and make it more equitable. This is not on the agenda of the current Government but I can sense Vince (keeping out of the way at the moment isn’t he) shaking his head……

  • Nick Thornsby Nick Thornsby 28th Jun '13 - 10:15am

    Prateek,

    I for one (and while I can’t speak for all of my LR colleagues I know some of them agree) am with you on the failings of monetary policy pre-crisis and the need to switch from inflation targeting to NGDP targeting.

    The financial interventions in the banks by the government, though, were relatively small, and of course are usually excluded for the purposes of calculating the deficit.

    I disagree on the concept of a structural deficit being a worthless concept, though it is of course not straightforward to estimate.

    The reasons I would say cuts are needed (whether now or in 2018 is rather beside the point) is that (1) we were running an unsustainable deficit pre-recession and (2) because the assumptions made about the capacity of the economy and the size of future tax revenues when Brown was putting into place his spending plans turned out to be totally wrong. We lived through a credit-fuelled boom which cannot (in the long term) and should not be repeated. Growth needs to come from being more productive and from technological progress, not through money being borrowed at unsustainable levels.

    One could of course close the deficit simply through raising taxes, but I don’t want to see another 10% of GDP being taken in taxation, and I suspect most people don’t.

    Deficit reduction is not an end in itself. It is part of a wider deleveraging which has to take place because of the nature of the boom. Inherent in the concept of boom and bust is pain in the bust, which is exactly why Keynes wanted to flatten the effect of both the boom and the bust. We failed to do so in the bubble and we are not in a position to do so in the crash.

  • Nick Thornsby Nick Thornsby 28th Jun '13 - 10:21am

    Incidentally I should say that I don’t think austerity should be used as an excuse for inaction or timidness. I think it is a perfect time to make big, lasting reforms to the tax system to shift the burden of the low paid and onto the wealthy, from income to land.

    It should also (as David Boyle says http://davidboyle.blogspot.co.uk/2013/06/an-apologia-for-austerity.html) have been an opportunity to reform public services away from Labour’s centralised, target-driven behemoths. Unfortunately for us the Tories have just as centralising instincts, so instead of thinking how we can do things differently we end up salami slicing, which is not the best way to do things.

    I also agree with you Prateek that cuts to capital spending were madness.

    The particular ways in which cuts were made is not an arguments against cuts, though.

  • Bill le Breton 28th Jun '13 - 12:19pm

    Well Nick! As the lone voice here for a number of years now advocating NGDP level targeting I welcome your Pauline conversion. If only you were speaking for your master too!

    Tell me, please, what % growth rate are you advocating?

  • Bill le Breton 28th Jun '13 - 12:30pm

    Of course, we still have this ‘we were running an unsustainable deficit pre-recession’ issue to pin down.

    Perhaps you and the Treasury boys could say whether you agree with the figures quoted by Prof Simon Wren-Lewis (below) and whether you think that to sustain the long term trend growth rate of NGDP of 5% a 2.5% deficit was totaly imprudent.

    ‘The current balance (which excludes investment spending) was -0.5% of GDP in 2006/7 and 2007/8, which is hardly a large number. Public sector net borrowing, which does include investment, was around 2.5% of GDP, which seems larger, but here zero is not the appropriate reference point. A sustainable deficit is one that leaves debt to GDP constant: to take some round numbers, if the debt to GDP ratio is to be sustained at 40%, and nominal GDP grows by 5%, we need net borrowing of 2% of GDP. So an actual deficit of 2.5% again does not seem that excessive.’

  • Nick Thornsby Nick Thornsby 28th Jun '13 - 12:53pm

    Bill,

    I do disagree with Prof Wren-Lewis. We should not have been running a deficit at all! I agree that zero is an inappropriate reference point: the appropriate reference point should have been a surplus equivalent to 2 or 3 per cent of GDP (or more). So using the PSNB figure, there was a gap of over 5% of GDP in what we should have been doing and what we were doing.

    Incidentally the idea that no-one was concerned about the pre-recession deficit is false. I remember a distinguished professor of economics at Manchester when I was in first year (around the time of Northern Rock collapsing) warning that if we were about to enter a recession we were doing so with the public finances in one of the worst states at that point in the cycle for a generation.

  • Bill le Breton 28th Jun '13 - 1:00pm

    Yes, NIck, but was this the Leader’s view during his leadership election and in the run up to the 2009 Party Conference?

    And genuinely, I welcome your support for NGDP level targeting and would like to know what % growth you’d like the Bank to target as of, say, the arrival of Carney?

  • Nick Thornsby Nick Thornsby 28th Jun '13 - 2:46pm

    Bill,

    I’m not making a political point, I’m making an economics point. And I am speaking for myself and not for the party leader. That there was a political consensus that we should be running a deficit in a boom does not make it any less of an error.

    On NGDP, I have no strong view but a target that grows by 5% a year seems reasonable.

  • “That there was a political consensus that we should be running a deficit in a boom does not make it any less of an error.”

    No it doesn’t, but it does make those who were not calling for spending restraint at the time hypocrites when they conveniently forget that fact…

  • To ad to my previous comment, none of the major political parties called it right if we look at period 1997 – 2010.

    Labour bear the greater responsibility as they were in power, but a look at the budget responses and spending plans offered by other parties over the entirety of those years does not demonstrate that the position would have been dramatically different. If they did it would have been shouted from the rooftops.

    Labour are hypocrites now for pretending they would not be making significant cuts, but the Tories and Lib Dems are equally hypocritical when they insinuate that things would have been so much different had they had the keys to No 11.

  • David Evans 28th Jun '13 - 5:00pm

    Steve,

    I can see your point to an extent, but we all know that the answer you get at the end depends very much on the questions you ask on the way. Labour got their answer from the questions they chose to ask, but the Lib Dems (Vince et al) didn’t get the chance to ask the necessary detailed questions of the Civil Servants to expose Gordon Brown’s feet of clay because they weren’t in government. Many people, including myself, knew that Labour were stoking up an unsustainable boom on the back of easy credit, you just have to look at Gordon’s repeated re-definition of the start of the economic cycle. Putting together a coherent alternative policy can only be done on available evidence. Things would have been different if we had been in No 11, because we would have asked the necessary questions.

    Now, if the Tories had been in power, it would have been worse. They were looking to reduce regulation of the banks even more.

  • Stuart Mitchell 28th Jun '13 - 7:00pm

    @Simon Shaw
    “Thanks for those statistics which represent a shaming indictment of the last Labour Government.”

    And an even more shaming indictment of the Lib Dems who at the time were proposing to increase spending yet further.

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