Opinion: we shouldn’t blame the banks

Conventional wisdom says that the deficit is all the fault of dodgy lending by the banks. But is it? If there had been no financial crisis, just a correction at the end of a credit bubble, would the deficit have disappeared?

The recession has certainly caused a temporary deficit. We’ve seen a reduction in GDP of about six per cent, and unemployment up to two and a half million. The temporary effects of the recession, a higher spending on benefits and reduced tax revenue, account for around £50bn of the deficit. But this will disappear as the economy recovers.

In response to the financial crisis, the government spent large sums bailing out the banks, and rightly so. But these bailouts were one-offs, and were mostly loans or the purchase of assets. They’ve affected the debt to some extent, but they haven’t affected the deficit.

What really gives central bankers sleepless nights is the rest of the deficit, the part which won’t disappear as the economy recovers.

This £100bn per year of “structural” deficit is not caused by the recession. But where did it come from?

Part of it is easy to explain. During the latter part of the recent boom, between 2003 and 2007, the government significantly increased spending commitments, but didn’t raise enough taxes to pay for them.  As a result, they ran deficits of between £30bn and £40bn per year.

But what of the remaining £60bn to £70bn of structural deficit that appeared as soon as the recession hit?

For a decade, the government let a bubble build up in the housing and financial sectors. This gave a huge temporary boost in tax revenue.  When the bubble burst, this temporary revenue disappeared. The OBR believe this revenue will not return, and so they dramatically increased their estimates for what the deficit will still be when the economy recovers.

The bubble was caused by deliberate government action. Back in 2001, in order to prevent a recession following the dot com crash, Gordon Brown loosened policy, deliberately stoking up a bubble. Gordon Brown’s success in keeping the economy out of recession was seen as a vindication of his claim that Labour’s policies would see “an end to Tory boom and bust”.

Eddie George, as Governor of the Bank of England, agreed with the policy, but has said how this left his successors with the challenge of sorting out the problems it would cause. Unfortunately, they weren’t sorted out.

The ideal time to rein back the bubble would have been from around 2003, but rather than act, for years, Labour continued to massively increase spending. In 2006, they marginally slowed the increase, which meant the budget deficit fell back a little, but it still remained at £30bn, and they did nothing to rein back the credit bubble.

Then, at the end of 2007, the global financial crisis hit and the bubble burst.

The main reasons the government didn’t act must surely have been political: partly the 2005 election, and then Brown’s plans to become Prime Minister, perhaps thinking of a further election when he did.

But those weren’t the only reasons. He was also encouraged in these policies by experts from around the world.

The rest of the political class must also share some of the blame.

Until 2008, the Conservatives under Cameron committed themselves to match Labour’s spending plans. Although Vince Cable warned about the debt bubble, he didn’t advocate a reduction in spending.

I think there are hard lessons for all of us.

Political parties will, naturally, be tempted to put off hard decisions, especially in the run-up to an election, but we should resist the temptation. If the government had not run deficits of £30bn to £40bn per year, if it had restrained the growth in private debt from 2003, our present deficit would have been substantially smaller, and we would not be facing £83bn cuts.

In the booming economy of 2003, when anyone following Keynesian theory should have exercised restraint, the government chose the opposite course. It continued doing this until the end of 2007, when the consequences finally caught up with us.

Those same temptations are with us today. There are voices calling for delay, saying it is too soon to tackle the deficit. But aren’t those voices making the mistakes of 2004, 2005 and 2006? If they argue we should wait a year, then another, before long we will be in the run-up to another election, when tough action becomes politically impossible.

Just as failure to act in 2003 has left us with a far worse problem today, might not delay today leave us with even more serious problems when we hit the next crisis, perhaps in a few years time?

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117 Comments

  • Sounds just like Tory propaganda. Increasingly I don’t wether to laugh or cry when I read Liberal Democrats coming out with stuff like this. Have I stumbled across a Conservative website by mistake? or are they one and same now?

  • God the banks are as Guilty as sin, God knows whats come over the Lib dems they have been infected by their partner!

  • Anthony Aloysius St 20th Oct '10 - 3:53pm

    “Although Vince Cable warned about the debt bubble, he didn’t advocate a reduction in spending.”

    Indeed, he advocated increasing public spending to stimulate the economy!

  • Sean O'Faolain 20th Oct '10 - 4:02pm

    This is actually one of the best things Ive read on the crisis (an no, I dont work for a bank, Im public sector). Its certainly the best bit of economic analysis Ive seen on this site.

  • No Andrew…I said it SOUNDS just like Tory propaganda. I expect nothing more from them. However..it’s deeply saddening to see alleged Lib Dems sell their souls with such apparent ease. This isn’t propaganda..it’s something more pathetic. An attempt to convince us that this is somehow Lib Dem policy. The “spending review” is pure Conservative ideology. They’ve been waiting a long time for the excuse to implement this. Now they are almost wringing their hands with glee as they wreak the inevitable devastation on the most vulnerable members of society. It’s a massive betrayal of voters who put their trust in the Liberal Democrats (I count myself amongst that number….never again though) to see the latter blithely supporting this. If this party is at ease with what is about to happen….then good luck to you all. Prepare for a long vacation in the political wilderness.

    I

  • Who’s yelling Stephen. Good for the Tories? if you add big business / bankers to that sentence then yes I think that about sums it all up.

  • Good article. And Stephen W’s comment is also correct. It’s true that with hind-sight, a lot of things are obvious now that werent obvious in 2003-2007 – in particular that we were running a giant deficit (giant for those pre-crash times anyway!) during a boom, which was the exact opposite of what Keynes would argue. Given that it was a bubble economy, the “real” (i.e. structural) deficit was much larger than £30-40bn even back then. It’s possible that it was actually nearer £80bn, which would mean that if it hadnt been there we might now have been able to close the crash deficit without much cutting.

    I say these things are “obvious” in hindsight, but of course Labour deficit deniers are still in, well… denial… and pretending all our economic problems are down the the US housing market.

  • Interesting article. If you look at the national debt as a percentage of GDP (right hand side of first figure: http://www.economicshelp.org/blog/uk-economy/uk-national-debt/) then although a structural deficit was being run during the good times, the national debt in 2007 was actually lower than in 1998, so it’s easy to see how things didn’t look too bad.

    Brown’s mistake was to assume that the banks knew what they were doing and ignoring the obvious symptom of what they were doing (house price hyperinflation) whilst taking the tax receipts from that bubble that disguised government overspend.

    Bubblemania – the madness of crowds.

    Who was to blame for that? It wasn’t just Gordon, it was the banks, the regulators (everything Northern Rock did was off the dodgy scale – rapidly increasing market share, high loan-to-value loans, high loan-to-income loans), plenty of other western leaders and above all else; vast swathes of the general public who borrowed huge sums of money to gamble on house prices only going up.

    Our housing bubble has only partially burst over the last three years, with prices supported by zombie policies. I think the worst is yet to come.

  • Sorry, I forgot to add the tories to that list of people to blame. They didn’t speak out once against the problems that lay ahead due to spiralling house prices. vince Cable may have spoken out once, but I can’t remember (correct me if I’m wrong) it being Lib Dem policy to decrease spending/reduce taxes/implement policies to prevent house prices rising/regulate the banks, during the good times.

  • Sorry, that should say increase taxes in that list!

  • One of the problems with our FPTP electoral system is that all the marginals are, almost by definition, suburban areas where home-ownership and everything to do with it is a religion. Stating the obvious: that quickly rising prices are a bad thing – is like a slap in the face to that crucial demographic. That is a significant part of why the UK economy has largely been run as a housing-debt financed economy in the last 3 decades. Not even Lib Dems are brave enough to walk out in front of the voters and proclaim that house prices must fall massively!

    What is needed is to make the point that housing bubbles are dangerous and bad for the economy. Measures to prevent them, e.g. Land Value Tax, should be implemented.

  • David Evans 20th Oct '10 - 5:32pm

    It’s very sad to hear those naive enough to call themselves “progressives” try to wish away the problems that the Labour party have bequeathed to us all. By ignoring real facts about the problems we face, and just relying on rhetoric – nasty Tories, nasty bankers, nasty Liberals, simply means they are unwilling to own up. Their nirvana is based on borrowing now and giving the debt to our kids to pay off. This is as bad as Gordon Brown’s economics, which got us further into this mess – Thatcher took us in, but Gordon Brown sadly went even further. But when it all hit the fan the Labour party ran away from a left of centre alliance to keep the Tories out, leaving the Lib Dems alone in trying to offset the worst of the Tories’ aims. And most sadly, I remember hardly any on those nice progressives shouting that Labour should really support a left of centre alliance at the time.

    Ultimately what they say is we want a left wing ideal, but we aren’t prepared to pay for it.

  • @MBoy
    Quite, although trying to sell a Land Value Tax policy to the homeownerist public would be close to electoral suicide, even with a different electoral system.

  • Liberal Eye 20th Oct '10 - 5:48pm

    ALL the fault of the banks? Certainly not; there’s plenty of blame to go round. But the banks must certainly take a large share. Aggressive marketing of credit cards (remember all that bumph through the door every day), lending over 100% of value in a bubbly market, lending on the basis of self-certified income, lending mainly on property in a bubble rather than on productive assets; these are just some of the criminally foolish things they were doing, all symptoms of a banking sector that had thoroughly lost the plot.

    We shouldn’t be too surprised. Banking has a long history of going to the dark side very fast if they can slip the regulatory leash in some way because there are strong commercial and competitive pressures on them to go with the herd however lemming-like its behaviour. After all for a bank all that is required is a few accounting entries and, hey-presto, more credit is created and the more that can be lent, the more money they will make. It turned into a sort of feeding frenzy.

    A typical delusion is to believe that “this time it’s different”, that a clever method of containing and controlling risk has been invented. A typical symptom is to create financial instruments that promise financial nirvana but which are actually too complicated for customers to understand (thus creating and exploiting an information asymmetry for profit) and which inevitably blow up destroying wealth on an epic scale.

    The net result was to create a complicated property-based Ponzi scheme, and it is a characteristic of Ponzi schemes that, until they finally implode, the particpants feel good about them. Madoff’s customers thought he was the bee’s knees until they discovered he wasn’t. Equally, collapsed Ponzis are particularly damaging, there is very little to salvage from the wreckage.

    So now we have banks hobbled by their past foolishness with big black holes of unknown size in their balance sheets (I would be very surprised if they are being truthful about their true health) and with all sorts of outstanding financial contracts linking them to others that may yet go down. It’s the exact equivalent of piles of dry brushwood in the firebreaks of a fire-prone forest. One match could set the whole lot ablaze with no functional firebreaks for protection.

    Nor are the banks much use to the real economy. While they are getting subsidised by cheap money from government they are not passing this on to ‘Main Street’ because they are trying to rebuild their lost equity with retained profits. Yet the likely scale of the losses compared with their profits means that this will have to be a long term strategy – at a guess at least a decade – so we will be hobbled with dysfunctinal banks and hence an underperforming economy for a very long time. Very large businesses can fund themselves wholesale – ie they can cut out the banking middleman, but they create almost no net new jobs. Small businessses, which do create new jobs, have no option but to use the banks who will typically charge around 10% and then only loan if it’s fully secured. In such circumstances small businesses will have their work cut out to survive, never mind expand.

    Also it’s hardly good news for savers either – and I mean ordinary retired and nearly retired people, not the super-rich – who are getting next to nothing on their savings although these are being lent out immensely profitably.

    Also with all that cheap money and an immense hunger for profit it’s a racing certainty that much of it will go into speculation in asset markets. Anyone for another oil price or food price bubble?

    So, yes, we should blame the banks but George is right for the reasons stated that the government is also to blame. But rather than making this an entirely party-poitical point I think we should lift the curtain to find out why the government acted as it did.

    Here I think we come very soon to the majority of academic and government economists who clearly failed to understand how the system works (or they would have seen the crash coming). In particular they do not understand the significance of debt, particularly debt that has gone into Ponzi speculation rather than productive assets (which is not a problem because the new production can support the debt).

    Which raises some uncomfortable questions for liberals. How come that we weren’t on the case with a better understanding of what was going on under the bonnet of the economy? Have we by and large just imbibed the right-wing ‘there is no alternative’ propaganda for an economic theory that has baked-into it good outcomes for their client groups – those whose aim is to set up and own economic rent?

    And for the future it raises another thought. I don’t believe that there is any way we can make the economy move up a gear or two by clever macroeconomic manipulation (although we could certainly damage it by the wrong actions). So what do we have to do to make it internationally competitive and really work for those of us who aren’t bankers? This matters because as a nation we simply aren’t earning our way in the world which means that we either solve this problem or get steadily poorer.

  • Liberal Eye 20th Oct '10 - 5:57pm

    I forgot to note that that according to Channel 4 news of last week the loss of savers of the low interest rates available is running at about £20 billion per annum. That is huge, even in relation to today’s cuts. So why don’t we here more about this covert subsidy?

  • Liberal Eye 20th Oct '10 - 5:59pm

    Err, ‘that should be “loss to savers…”

  • Mboy has hit the nail on the head – who is going to upset those marginal seat voters by attacking their houses prices?

    Political suicide!

    What we need is a proportional system of Government – why can the referendum not ask this question as well as AV – there is a stronger intellectual argument.

    The price for just AV (which will probably not pass anyway) has not been worth it

  • David Allen 20th Oct '10 - 6:12pm

    Yes, it’s true that the bubble caused a temporary boost in tax revenue, and almost nobody suggested that we should use it to pay down the national debt. Effectively, we marked up the capital values of our property and share assets, then we kidded ourselves we had gained real wealth, then we treated some of the bogus “capital” as income, and we spent it.

    However, the reverse is almost certainly happening now. We are marking down the values of our assets as share and house prices fall. So we are kidding ourselves that we are losing real wealth. So we are treating some of the bogus reduction in capital as expenditure, and we are therefore now insisting on excessive cuts in spending.

  • The writer makes a good point – the problem is that the Keynesians did not practice Keynesianism. Now it’s too late to put that genie back into the bottle hence everyone can see that cut’s are now necessary.

  • @Tom Papworth: Good comments…but did you actually go out on the doors in April and tell voters that their house should fall in value to help fix the economy? Really?? 😉

    In a sense it’s a testament to the huge stature of Gordon Brown in the early 2000’s that the now-obvious bubble did not give any leading politicians or economists the ammunition to attack his policy of running a deficit in boom years. As is pointed out, Michael Howard tried to but the mainstream simply wouldnt have it. That in large part was due to the toxicity of the Tory brand – the Tories were still considered ideological cutters and their warnings were interpreted as such. A lesson perhaps in the importance of having a decent opposition even if you dont like them.

    Vince Cable did indeed warn multiple times of the danger of the debt economy, as far back as 2004, but the Lib Dems were unable to position themselves economically to the right of the Tories once they had accepted Labour’s spending plans.

    Tom is correct again in his post that notes that it is indeed Labour’s fault more than they would like to admit, in that the banking system – indeed the international banking system of the 2000s – was to a large extent the child of Gordon Brown. He was a chief international architect of the loosening that occurred over that decade. Such was his international stature that he won numerous arguments loosening regulation, blocking the closing down of tax-havens, etc. At the time he was considered a wealth-generator’s friend for all these… only now is his hand in the downfall obvious.

    Finally, it is outrageous that the banks are using public money to rebuild their own balance sheets and return to comfortable profitability rather than lend out that cash to desperate small/medium business. As is noted above, that will take the best part of a decade, considering their liabilities. If business is starved for that long the private sector will wither, despite bank profits. The public wont put up with it. Vince Cable will have to act more harshly to force them to lend…

  • Andrew Suffield 20th Oct '10 - 9:23pm

    ALL the fault of the banks? Certainly not; there’s plenty of blame to go round. But the banks must certainly take a large share.

    You missed the point. The banks are certainly almost entirely to blame for the recession. But structural deficit means the deficit which is not related to the recession, and we have £100bn per year of structural deficit. That has got nothing to do with the banks. That’s just the government spending way too much money.

  • I think a lot of this analysis is nonsese. The Bank of England, which was independent, set monetary policy to curb inflation. Inflation was at its level for most of the period (and when it wasn’t it was only a tiny bit above). This was the monetary policy that almost everyone – economists/polticians/institutions -in the world believed was right.

    Labour’s spending was a bit on the high side, but not that much, and the Lib Dems typically wanted more spending. The Conservatives did have a period of a few years where they suggested less, but the difference that would have made to our currency deficit is rather small.

    Why? Well I think the electoral sytstem does have a role, but surely a more fundamental reason is inequality – the economy as it works throws up too many people who without govt subsidy or benefits or so on would be unhappy with their lot. This inludes thouse who enjoyed massive govt-induced (through planning and taxiation law) house price gains.l

  • On the deficit, Labour can’t be to blame for a similar sized one in the US, or other European countries. So it’s a bizarre co-incidence, or there might be other factors at work?

  • Thank you Sunny H for pointing out what a structural defecit is.
    The neo-neocons that seem to make up the Lib Dems all of a sudden have got a lot to learn about basic economics.

  • well a small amount was down to Labour but the huge majority was caused by the banks. Northern Rock and all that…? Has everyone forgotten the days of crisis in the banking system when it all kicked off? Surely not? Trying to make it out to be any other way is tragic and just makes you despair about politics. People you hoped would be different just changing their views when it suits them to do so.

    oh well, no surprises anyway.

  • @ George Kendall
    If we want to put blame where it lies, shouldn’t we just say it was the fault of human beings with their inbuilt belief that the good times will never end when in a bubble? That is, of course, until they do end and then they realise that they should have gone without the holidays/new cars etc as they are now in negative equity. Hasn’t the human race been here many times before and can people ever learn the lesson?

    I also agree with the sentiments that housing could be a big bomb, has anyone actually managed to work out how many of those self cert mortgages were based on an unrealistic income assessment? I’ve not seen any figures, but judging by the amount of companies advertising for misselling compensation, some people think that there are a lot. When interest rates go up eventually, there could be a lot of people in serious trouble.

    Gordon called the tune and the bankers and public had a merry dance, but now we have to pay the piper.

  • Betrayed Liberal 20th Oct '10 - 11:35pm

    Words defeat me. I could drive a horse, a cart and a fleet of 747s through this argument that the banks aren’t to blame for the recession and the subsequent cuts.

    However, I have moved to where the fight is: http://www.coalitionofresistance.org.uk/?

    I am already organising my area to fight the savagest, most ideological cuts (the ideology of transferring money from the rich to the poor) since World War II.

    If any of you have the slightest sense, ‘progressive’ pretensions, empathy or morality I suggest you fight these cuts with everything you have.

  • @Sunny H: Your posts are usually interesting and measured. Not today. I guess the CSR has got to you.

    @Matt: There are not equal sized deficits in Europe except for the PIGS, which have been running terrible bubble economic policies for years. As for the US, I have just one word: Bush. He was also running massive deficits during the boom. Seeing a pattern emerge.

    @

  • @”Betrayed liberal”: You’re not fooling anyone. If your first reaction is to run to the arms of Marxists you were never a liberal.

  • @MBoy ..
    @”Betrayed liberal”: You’re not fooling anyone. If your first reaction is to run to the arms of Marxists you were never a liberal.

    No,but he may have been a liberal democrat which you should know is a totally different beast to a liberal,i think all your spinning is making you dizzy.

  • @George Kendall
    Posted 20th October 2010
    “”The Bank of England, which was independent, set monetary policy to curb inflation”
    A good point. I think Mervyn King should be exposed to a lot more rigorous questioning ”

    A lot of this questioning has been done already hasn’t it? Was there a House of Lords economic affairs committee report (from 2009?) that said the tripartite system was set up with inadequate definitions of who controlled what – which probably caused an “I thought Fred was doing that” situation.

  • OK, right. We can all have a big fight about who got it wrong and why during the bubble years 2002-2007. Getting up on that roof and repairing it while the sun is shining is always more difficult than demanding someone give you an umbrella when it rains. Gordon arguably got it wrong. Egged on by the Lib Dems and almost everyone else. Insofar as he did get it wrong, he built up the long-term national debt a bit more than he might have done. But we always have a massive national debt. We do not suddenly need to eliminate it now.

    Things have moved on. We are not trying to decide what we should have done in 2002-2007, any more than we might reconsider whether we dealt with Indian independence well in 1948, or the union with Scotland in the 1700s.

    We now face a classic situation where we should be undertaking Keynesian deficit financing to keep our economy afloat. OK, so the Keynesians lost out in 2002-2007. Is that a good reason why they should also lose out now?

  • David Allen
    Posted 21st October 2010 at 12:09 am

    “But we always have a massive national debt”
    I suppose from the point of view of people like me, x00 billion is massive, but in Gov terms it may not be, depends on which figure is used to represent x.

    “Is that a good reason why they should also lose out now?”
    I believe both sides of the argument put forward spending cuts that would result in a debt of about 1.3 trillion at the next election – the question surely is are we willing to go further into debt to pay for the Keynsian solution and where do we stop (e.g. 2 trillion, 3 trillion?). Of course, the bigger the debt, the higher the interest, the less to spend on other things we want later on.

  • Paul McKeown 21st Oct '10 - 12:31am

    An excellent post as usual, George. Sadly, many will deny its truths, they simply don’t want to know. It’s easier to deny economic reality than to face up to the difficult choices that they require. Anyway, George, keep writing; I’ll keep reading. Thanks.

  • I’ve come to this thread because George Kendall noticed my post on another LDV thread and drew my attention to this one. My post was as follows –

    ” I want to examine this thing about the deficit. Undoubtedly the measures taken (necessarily and rightly) by Gordon Brown to save the situation caused by the bankers created a major increase in national debt. But no-one is talking about rectifying that in any sudden way. In fact most if not all of it may well be paid down ultimately by profit from the public ownership of some banks. It is the continuing annual deficit that the coalition is tackling i.e. the appalling gap between public income and public expenditure every day of every month of every year. As far as I am aware no money is currently being paid to banks or expended in other ways to help banks. I suppose the interest on the national debt is higher than it would be if the banking crisis had not happened but that would not explain much out of an annual deficit of over £106bn.
    I am no economist but am I right in saying that the ongoing deficit as distinct from overall national debt is not being contributed to in any major way by the banking crisis?”

    Looking now at this thread, I think there is too much talk about who is responsible for the mess we’re in. Unquestionably the part played by the bankers was huge and disastrous. The real point is – are the coalition right to take such urgent and determined steps to get the deficit down? My point and I think George’s point in his much more erudite contribution is that blaming the banks for the ongoing deficit (as distinct from the one-off massive hit they caused) is too often used as an excuse not to address this dreadful problem or to put off addressing it.
    I think the coalition is right to do broadly what they are doing – we can argue about the detail.

  • It’s also conveniently forgotten by the ‘all Gordon’s fault’ that there was a world recession, deeper in the industrialised countries than any since 1930s. The reason this is forgotten is because the running of huge fiscal deficit has helped to reduce the effects, yet you never see any examination of what would have happened to the economy if the ‘budget must balance’ folk had been in charge.

    Remember the public deficit is a counterpart of a private surplus and if the private sector wants to save as much as they did in the UK you either let them (defiict rises) or you don’t (GDP collapses). Of course the private sector shouldnt have got into so much debt in the first place, but that comes back to my point about the economy not providing the income people desired.

  • George

    1. I agree on the whole with your post – my comments were aimed at other commenters, not you. I should have made that clear.
    2. When talking about ‘budget must balance’ I meant over the last three years. There is a whiff of the ‘Treasury View’ about the Lib Dems at the moment, I think (as I said on another thread) this is partly due to Nick Clegg’s misrepresentation of the govt budget as being simlar to a household.

  • Actually, selfishness, greed and shortsightedness are to blame. On the part of everyone involved in various degrees.
    The reason the banks and the Labour party get the lions’ share of the blame is that they are the ones who had the power and influence and money – so they had a bigger effect on the mess than everyone else.
    Selfishness, greed and shortsightedness are likely always to be with us. South Sea bubble anyone? Russian or French revolution? etc etc

    All we can do is try to avoid their worst effects by making it more difficult for them to cause mayhem – probably by legislating during the brief periods of lucidity after a major crisis and before we start building up towards the next one. Which will then manifest itself in a different form.

    That’s my twopennyworth.

  • There are no “‘budget must balance’ folk” who think that the budget should have been balanced during the recession. That’s insane economics that was slayed by lessons of the depression. Practically everyone is sold on “counter-cyclic” spending – meaning, run a deficit during recessions (if needed), a surplus during booms, and a balanced budget at other times. The point it, we are out of recession now.

    Labour are saying that we must run a deficit basically until the next recession (which, given the business cycle, would likely be within the next 8 years). The problem with that is that it will mean running a deficit most probably for well over a decade, and that if we need to spend more during the next recession the markets will baulk, as they would have no evidence that we can ever get spending under control. It would also mean a massive increase to the national debt, debt repayments, and a huge dose of intergenerational unfairness, as we load everything onto our children to pay off.

    Dealing with the deficit as quickly as possible – within the proviso of not harming the economy – means we will likely be in surplus before the next recession, and the markets will keep the faith, and the debt will be kept as low as possible.

  • I’ve read this debate with great interest but I have to admit I’m finding it hard to understand. So I’m going to try and break it down to a more simplistic level, see if I get it right.
    The structural deficit will only go away when tax revenue increases to a higher level than government spending. To do this we could continue to run it and create growth taxing our future more affluent selves at a higher level, we could raise present tax levels, or we can reduce spending on redistribution. We have decided to reduce it by cutting spending and thereby replacing structural deficit with structural inequality but that’s ok because it was all Gordon Browns fault.
    Is that it?

  • No.

  • @ George Kendall

    A deeply partial analysis which simply recycles Blue Tory canards about the financial crisis being all Labour’s fault and completely underestimates the effects of the banking crisis. If your analysis was correct Britain would be the only country in the world which had this problem. The recurrent claim of the coalition is that Labour got us into a financial mess by spending too much and that if Brown had paid down debt and built a surplus before the crash we wouldn’t be in this position. If one looks at the pre-crash fiscal state of the seven OECD countries which exceeded the OECD average deficit of -7.9% by the end of 2009 one can see what their deficit as a percentage of GDP was in 2007 compared to their position in 2009. This reveals that three of the countries which were most adversely affected by the crash, Ireland, Spain and Iceland were actually in surplus before the crash. Actually, Iceland, with a surplus of 5.4% had one of the best fiscal positions of all OECD nations in 2007. In fact, with a deficit of only -2.7% of GDP Britain’s deficit was not the worst in 2007. Greece’s defict was -5.4%, the USA’s was -2.8% and Portugal’s was -2.7. I’ll repeat that: three of the countries worst affected had surpluses: four were in defict. Adam Lent makes the excellent point that that the one thing these countries all share is not a bad defict position prior to the 2008 crash but economies heavily reliant on banking and construction which were hardest hit by the crash abd the recession. It is singularly dishonest of the Blue and Orange Tories to keep on repeating the lie that it is all Labour’s fault!

    For Adam Lent’s excellent analysis go to http://www.touchstoneblog.org.uk/2010/08/the-deficit-is-labour-really-to-blame/

  • So if you blame the cuts on labour you are basically using the same argument a wife beater uses when he says’It ain,t my fault because my Dad used to beat my mum so its his fault’
    but,i don’t think the courts would exept that argument would they?

  • @Sunny H

    “I’d like you to point me to a single politician, media commentator or financial investor who was flagging this up as a major issue and predicting that it would all unravel. If you can then show how this person was ignored by the political class despite pointing this out”

    Apart from pehaps the most famous investor in the world, Warren Buffet, who warned of Financial Weapons of Mass Destruction and Dr Nouriel Roubini who aquired the (now ironic) Dr Doom sobriquet for warning about the catastrophe to come, you have Jon Moulton (of Alchemy Partners) who did an entire Dispatches programme warning about the looming crisis and who even took his concerns to the Bank of England. His warnings were ignored of course and Brown’s craven ‘light touch regulation’ attitude to the Bankers continued at full speed over the cliff.

    Brown was at the heart of this disaster.
    He framed and oversaw the UK regulatory framework for the Banks which failed.

  • Liberal Eye 21st Oct '10 - 3:56pm

    @ George,

    I didn’t mean that banks are of little use to the real economy. Properly functioning banks are essential, rogue banks are an accident waiting to happen like an explosive factory in a city centre. Unfortunately ours are way to the rogue end of the spectrum and far from the useful end.

    As to shareholders pressuring banks for profit – well a bit of this happened no doubt but I don’t think shareholders have much real influence. A more convincing narrative is that it was driven by the bank’s own bonus policies which were in turn driven by competitive pressure. A football analogy would be that if giving penalties for fouls in front of goal were abandoned we could be pretty sure that such fouls would quickly reach epidemic proportions and that any team that did not follow suit would be unable to compete.

    This brings us back to my point about bad economics. How indeed did so many intelligent people get it so wrong? Actually there were remarkably few coherent warnings from the profession though many non-economists sensed somewthing bad was cooking well in advance without being able to articulate it. (I remember just such a conversation with my brother a full two years before it blew). Nor is it a matter of roundings as you suggest and with which I have no problems. It’s a fundamental failure to understand what makes the economy tick – witness the current debate about whether the cuts will collapse the economy or merely lead to a period of slow growth.

    The answer is that much of the received wisdom of mainstream economists is intellectual drivel with its talk of ‘equilibrium’ when in fact we know that any system with a high level of feedback is chaotic (in the formal mathematical sense).

    Our immediate problem is that we are in a ‘Depression’ (meaning experiencing debt-deflation) rather than a ‘recesssion’ (meaning a roughly cyclical imbalance between supply and demand). That changes things in a way we need to understand but which Westminster clearly doesn’t..

    The marginally less immediate problem is the balance of payments deficit. Long term if we don’t fix this we will drift into increasing poverty. This has been so for a long time and the political establishment has clearly decided ito place it in the ‘too difficult box’ thus ensuring it doesn’t get fixed.

  • @LDVBob,mmm,i don,t recall nick clegg snr complaining about regulations in banking,maybe thats because he is a ceo in the banking world Eh?

  • Interesting article.
    I have a problem with the coalition’s use of the term structural deficit. Its definition is simplistic, as it is really a tool of theoretical economics. Unfortunately it has been press-ganged into the service of public sector cuts, and has actually become a political tool rather than an economic figure.
    This article puts the argument well:
    http://www.investorschronicle.co.uk/Columnists/ChrisDillow/article/20100215/1b8f8020-1a1e-11df-b0bd-0015171400aa/The-myth-of-the-structural-deficit.jsp
    But some of you may have to get over the fact it’s written by a financial economist. I know I had to.

  • David Allen 21st Oct '10 - 7:24pm

    @ George Kendall,

    “@David Allen “We are not trying to decide what we should have done in 2002-2007, any more”

    Admittedly, this is historic. But I think it carries lessons for the future.”

    Learning the lessons of history is not simple! All too often, people twist the lessons of history until they appear to support preconceived ideas.

    You have analysed the boom conditions of 2002-2007, and concluded that Government spending should have been reduced at that time. You then proceed to apply what you learned to the bust conditions of 2010, and conclude that Government spending should also be reduced now.

    Now I might be being a bit simplistic here, but it seems to me that you just think Government spending ought to be lower, irrespective of what the economy is doing. If that’s what you believe in, shouldn’t you just say so?

    Shouldn’t you just forget about all this clever analysis of what the economy does through boom and bust, and just give us your reasons for preferring a permanently lower level of Government spending on political (ideological?) grounds?

  • Thanks for the reply George,
    I wasn’t actually suggesting that growth could solve the problem in itself but that once the cyclic deficit is under control and the economy is therefore stronger and more able to withstand tax rises we could then tax ourselves at a higher rate, as you suggest, that is what Gordon Brown should originally have done to avoid or restrict the size of the structural deficit in the first place.
    I don’t understand why you make a distinction between spending and redistributive spending, all government spending that is dependent on tax reciepts is necessarily redistributive isn’t it? Unless of course you are referring to waste.
    Your explanation leads me to this conclusion. The structural deficit is a result of actual social structures that require spending, not some abstract concept of the market or the bubbles it creates. When you talk about the structural deficit as a creation of Gordon Brown then it is not some fiscal mismanagement that is the fundamental problem causing the deficit, it is those things that the money was spent on and continue to be spent on. Repairing the problem through cuts then will require a permanent rebalancing of the social structures we fund through taxation by deciding what it is that is being funded that we do not value. As it is these structures that are the cause of the deficit then these cuts must necessarily be permanent.
    The key question as you say is whether we go for cuts or tax rises. That solving it through permanent cuts or permanent tax rises as a proportion of GDP are the only possible realistic solutions then we are back to the essence of the debate. The cuts are ideological. Tax rises would be ideological. By opting for the ideology of cuts you are left with the question: what is it that the state does that you no longer want the state to do. When you look at the spending review are you confident that the cuts made have made society a fairer more equal society based on liberal principles? Hopefully you do because given your explanation of the structural deficit, if I understand it correctly, the cuts must remain in place or form the constraint around which any future settlement must be based.

  • @George kendall
    “Where we might disagree is that I think the structural deficit of £100bn has little to do with the financial crisis. If you disagree, then I’d be interested to hear how you think it did cause the structural deficit.”

    The cause of the structural deficit was the collapse in tax revenue which resulted from the recession brought about by the collapse of the financial free market in the Autumn of 2008 and the huge fiscal stimulus that was necessary to stop the recession from becoming a 1930′s depression. The financial crash — not government public spending in the years prior to 2008 — caused the deficit. In 1965-66 Public spending as a percentage of GDP was 39.6%. In 2006-7 it was 40.9% of GDP. Hardly a huge rise!

    @ George Kendall
    “As for the three badly affected countries that had surpluses, I’ve not read up on the details of their situation, but, if they were relying on massive unsustainable bubbles, then my argument would apply to them as well.”

    But if seven, (and actually more) , adversely affected OECD countries were all shortsighted in this respect and maintaining massive unsustainable bubbles it is grossly unfair to resort to the old mantra,. “Gordon Brown left us this mess.’ It was obviously a complete failure of the global financial free market, involving many countries and their regulatory bodies. It wasn’t Gordon’s fault at all.

  • @republica

    “mmm,i don,t recall nick clegg snr complaining about regulations in banking”

    Then your memory is faulty as Nick’s then Deputy Vince did in 2007 as the quote shows.
    (besides the obvious fact that trying to complain that the opposition didn’t have all the answers then when Labour’s entire response to the cuts and every policy announced is that they are in opposition and can’t be expected to have a policy or view on these things yet)

    The Liberal Democrats issued a stark warning to homeowners today that the property market bubble is about to burst because of Gordon Brown’s failure to control house prices over the past decade.

    The warning came from Vince Cable, the party’s treasury spokesman and deputy leader, who told the party conference in Brighton that Mr Brown’s mismanagement had led to a “collective madness” around house prices which threatened to derail the economy.

    “History tells us that bubbles burst – and every housing boom is followed by a crash whatever the papers say,” Mr Cable declared.

    “A product of greed and reckless gambling by overpaid executives; lax, indulgent bank regulation; and a complacent Government.”

  • @LDV Bob
    Posted 21st October 2010 at 10:38 pm

    “…then Deputy Vince did in 2007 …”
    TBH, that didn’t require any special genius though. I wouldn’t make the village quarter finals for brain of Britain, but even I had worked out that it was going to end in tears (again!). I’d be a lot more impressed if he’d made those sort of statements a couple of years before it worked its way through my brain.

  • Tom Papworth 22nd Oct '10 - 12:10am

    MBoy: “@Tom Papworth: Good comments…but did you actually go out on the doors in April and tell voters that their house should fall in value to help fix the economy? Really??”

    At a hustings for my parliamentary seat I was asked a straight question: should house prices rise or fall. I gave a straight answer.

    Maybe that’s why I didn’t win!!

  • @Chis_sh

    “but even I had worked out that it was going to end in tears (again!)”

    As had I. But the difference is that Vince still worked it out long before Brown ever did, while Osborne pushed for more deregulation of the Banks in the years before the crisis.

  • George, again, if I understand your previous points correctly, the structural deficit is nothing to do with the debt and is not in itself a debt it is more akin to running an overdraft, thereby only really a problem when the lender calls it in or the interest repayments become unaffordable. The cuts agenda being analagous to us calling the debt in on ourselves. Concluding that the structural deficit can only be resolved by cuts must assume that those cuts will be permanent as tax rises are equally available and any attempt to reinstate the social structures that are cut will immediately reinstate the structural deficit. We are back to the start, cuts are ideological not necessary.
    What we can say about the optimum level of tax is that the coalition believes that it is 9% higher than present if you are a graduate and that if you have children it is a couple of thousand pounds a year more if you earn 44,000 a year than it is if you don’t have children.

  • LDV Bob
    Posted 22nd October 2010 at 12:16 am

    It’s not totally off topic I suppose, but the point about regulation is interesting. Labour loved regulation, however regulation is only as good as the enforcer and the enforcer can only be as good as the politicians will allow them to be.

    Whilst I agree the banks had a lot to do with this, GB set the tone in 2003 when he stopped the MPC from being able to use interest rates to curb any mortgage excesses – at that point the question really changed from if to when regarding a housing crash (it still is when for the second crash).

    He also set up the tripartite system, which (with the benefit of hindsight) was found to be lacking as it wasn’t totally clear who was responsible for what in various areas. There is also the question of political interference, politicians should set the regulations and regulators should be free to enforce the regulations without undue interference. Again, there was failure here as the politicians did interfere with the constant insistence on a light touch.

    So I would say that the amount of regulation doesn’t really matter (within reason of course), it’s the quality of the enforcement that really matters. However, that doesn’t excuse the banks, although I would still split the blame 3 ways (politicians, banks, general public). The trouble being of course, politicians won’t accept blame and the public are in denial so only the bankers are left.

  • The severity of this crisis has been trumped up by the Blue and Orange tories to justify a smash and grab raid on the hated Welfare state. At the end of the parliament (If the coalition lasts) Osborne will magically find vast sums to give away. If you want to know how he will do this go to http://critical-reaction.co.uk/ and read “Now for the Good News” by George Trefgarne. Meanwhile, the poor and vulnerable will pay for greed of the bankers. Yes, we should blame the banks! And make them pay for the damage they have done to our society.

  • MacK
    Posted 22nd October 2010 at 11:28 am

    “Yes, we should blame the banks! And make them pay for the damage they have done to our society.”

    Which highlights the point I was making about the public being in denial. What about the people who knowingly lied on self cert forms etc to get extra on their mortgage? Do you think they should all be prosecuted for fraud? Apparently there are lots of companies that think they should be absolved and claim compensation for being “missold” an innapropriate mortgage. If you think about it logically, if the public hadn’t been after their pot of gold then the banks wouldn’t have felt the need to create the wonderful instruments that they did. That isn’t to excuse banks, but everyone should also look to themselves to assess how they helped to cause the mess. Unfortunately, that would be to uncomfortable so a major scapegoat is found and every one carries on until the next crash.

  • George, I am saying that having read your explanation of the structural deficit and its origins that I conclude that a fixation with its eradication is dogmatic not pragmatic. Therefore the solutions to it are also a matter of ideology. Even though it is possible to make tax and spending decisions for pragmatic purposes the decision whether to do so is political and that the choice being made by the coalition is to not make those pragmatic decisions but rather to make ideological ones. The case for solving it with tax rises is equally as strong. The case for a middle ground of tax rises and cuts in combination seems stronger still. The effects of cutting public services and welfare benefits, when so much of the private sector and so many of the workforce depend on public spending, has potentially greater implicit danger for growth. The example of tuition fee repayments and child benefit cuts are used to demonstrate that the effect of tax rises on household budgets for the general economy cannot be seen as a serious obstacle by the coalition as the effect on those households that are charged can be no different than the effect on those households who do not qualify for the same tax rises. All of these are ideological decisions based on the notion that the structural deficit must be eradicated as a priority. Therefore the decision not to raise taxes is ideological just as the cuts that are being made are also ideological.
    And yes, tax cuts under the circumstances I outlined above would also reintroduce a structural deficit, this is the point that demonstrates that the choice is ideological and not pragmatic. Making the solving of the structural deficit imperative in government decision making is a false prospectus being peddled for ideological purposes. This is not to deny that there is a problem with the size of the structural deficit (although nothing you or anyone else has said above gives me reason to actually believe that but given my lack of economic expertise I’ll take evereyones word for it) this is to deny that the absence of any structural deficit or surplus is the desirable place for the economy to be, (although from my understanding of your explanations above it seems sensible to conclude that the notion of the size of the structural deficit is entirely dependent on estimated future growth and so it must vary dependent on who is making the growth forecast). A strict adherence to such an absence does tie the hands of government as it logically implies that growth must be static and therefore using such an ideal to justify the cuts being made does imply that the settlement of social provision after the spending review is the settlement that is ideologically desired by the coalition. The fixation with the eradication of the structural deficit combined with a cuts only solution is therefore tactical in the pursuit of dogmatic reduction of the size of the state. The pragmatic choice would be to run the deficit down over a longer period whilst protecting the poor from its adverse effects and maintaining the highest possible level of employment.
    The choice as you say is pragmatism or dogma. Deficit reduction through cuts as the only guide to spending is the dogmatic choice. So regardless of the blame for the deficit we are still left with the ideological questions of what kind of state do you want and what kind of state promotes liberal equality? The implied undercurrent of your piece, the search for blame, suggests you are uncomfortable with the dogma of the coalition.

  • David Allen 22nd Oct '10 - 3:01pm

    JRC,

    Well, my take is a little different. George Kendall has explained to me that his own position is not simple and dogmatic, but rather more complex and nuanced. I accept that. But….

    George, just look at all the people (Andrew Ducker, Richard F, MBoy, more) who responded with delight to your catreful economic analysis, and have commented how beautifully it supports their anti-Labour diatribes and/or their ideological position favouring lower spending. Whether or not you agree with them, they think that you have given them some intellectual cover. And that’s the problem. When one writes something, one has to think about how others will use it!

  • David Allen, if I come across as if I think George is being dogmatic I have written badly. I think George is anything but dogmatic on this matter (other than a perceptible and I would say somewhat overblown personal hatred of Gordon Brown). I think he has made a case that the cuts are unavoidable, that there is no alternative and is convinced that this is the pragmatic approach. I simply argue that he is wrong based on my own following of the logic of his explanations. I think the explanations given above should lead him to the opposite point of view and that the pragmatism he expresses should allow him to consider that.
    However, the case that he makes is certainly being used as a justification by others for a dogmatic realignment of the welfare state.

  • @Chris-sh
    It is you who are in denial. The reality which had been socially constructed by the banks led people who knew nothing about finance or banking to have confidence in their absolute probity even when they were selling them dodgy instruments. The public had no idea of the risks they were taking by buying the bankers’ products. Now millions of people who do not have the funds even to apply for a mortgage are having their paltry benefits removed or diminished whilst those who were responsible suffer no penalties at all, indeed continue to use taxpayers money to fund their inflated salaries and bonuses. Those banks that got it wrong should be blamed and made to pay heavily. After all, we are always being told that the reason their CEOs and other employeers get millions in salaries and bonuses is because they are the best available and can be relied on not to get it wrong.
    No, this is the story of a neo liberal government without a mandate artificially creating a state of emergency to circumvent democracy to carry out immediate and devastating attacks on popular public sector programmes while society is too disoriented and disorganised to resist.
    Cameron, Osborne, Clegg and Alexander have no mandate for cutting so deeply, so extensively and so immediately. If they have confidence that these cuts are the only solution why don’t they have the guts to form an electoral pact and put their proposals before the people who will actually suffer from them? Let’s have another General Election. Then we can tell the Blue and Orange Tories how much in denial we really are!

  • @MacK
    Posted 22nd October 2010 at 3:56 pm

    Well, it’s easy to see what side of the fence you sit on.

    “public had no idea of the risks they were taking by buying the bankers’ products”
    People didn’t realise what they were agreeing to when they got a mortgage, or perhaps did an equity release on an existing property to buy a car etc? Well, perhaps the regulator should have ensured standards were met. Unfortunately it would seem the Government regulators were not much use, even the CAB criticised them way back in 2007. Despite that, they don’t seem to have batted an eyelid about the fact that 45% of all mortgages completed between 2007 and 2010 were mainly designed for the self employed – some regulator!

    People getting self cert mortgages didn’t realise that inflating the truth about their income was not a good idea – in fact is was basically fraud? Never mind, they’ll probably get compensation as lots of claims companies are making statements like:

    “Were you encouraged by the broker to overstate your income to achieve the loan amount required? ”

    “It is you who are in denial”
    Far from it – I know full well that as soon as the interest rates start going up, those who lied about their income could struggle badly. I also realise that no one actually seems to know if this a big or small issue, however as approx 900k of mortgages between Apr 07 and Mar 10 used self cert then there is a huge potential for even bigger problems ahead (I’ve not found the percentages yet for the period before Apr 07). So there is a risk that the cost of housing is going to drop through the floor whilst people are trapped with expensive mortgages – unless we are very very lucky.

    Like I said – the Government, banks and public are blame for this – but it looks like the banks are going to bear the main cost. In the meantime, we can all sit back, pretend we didn’t contribute to the mess and wait for the next time.

  • David Allen 22nd Oct '10 - 6:49pm

    George,

    OK, let’s work through your analysis in detail. You have divided the deficit into three bits. Quoting from your piece, and putting in numbers to label the three bits:

    1. “The recession has certainly caused a temporary deficit. …. a higher spending on benefits and reduced tax revenue ….around £50bn of the deficit. But this will disappear as the economy recovers.”

    2. “What really gives central bankers sleepless nights is the rest of the deficit, … which won’t disappear as the economy recovers. This £100bn per year of “structural” deficit is not caused by the recession.” It splits into two sub-bits:

    2A. “between 2003 and 2007, the government significantly increased spending .. , but didn’t raise enough taxes… As a result, they ran deficits of between £30bn and £40bn per year.”

    2B. “But what of the remaining £60bn to £70bn of structural deficit that appeared as soon as the recession hit?
    For a decade, the government let a bubble build up … This gave a huge temporary boost in tax revenue. When the bubble burst, this temporary revenue disappeared. The OBR believe this revenue will not return.. ”

    How confident can you be that you can really tell the difference between these three bits of deficit? Bit 1 relates to a fall in tax revenues when recession bites which someone thinks will bounce back. Bit 2B relates to a fall in tax revenues when recession bites which someone thinks will not bounce back. (And even the size of bit 2A, which relates to what someone thinks are deliberately low tax revenues, looks as if it rather depends on that someone’s judgment as to what was planned and what was unplanned.)

    You seem to be saying that up to 2007 we had “bubble” conditins, when everything went crazy and none of the figures made sense, while now in 2010 we have “non-bubble” conditions, when all the figures are perfect and we can rationally plan exactly waht to do over the next five years.

    My feeling is that conditions now are no less artificial than 2007. Then we had an artificial boom. Now we have an artificial bust. Then, the bogus figures were encouraging us to spend beyond our means. Now, the bogus figures are encouraging us (encourgaing Osborne and Clegg, anyway!) to cut back too hard.

  • @Chris-sh
    ‘Well, it’s easy to see what side of the fence you sit on.’

    And it’s easy to see which side of the fence you sit on, even though we’re so supposed to be all in this together!
    And that’s the tragedy. Because, with a less ideological and less partisan approach we could really have solved this problem

  • @MacK
    Posted 22nd October 2010 at 7:20 pm

    “And that’s the tragedy. Because, with a less ideological and less partisan approach we could really have solved this problem”

    Actually, I’m not the one adopting a partisan approach – all I’ve said is that everyone has to take some of the blame. I would also be interested to hear how ‘we’ could solve what I’ve been talking about when no one has the faintest idea of the depth of the problem, or come to that, if there even is a problem. I’m assuming that there is as the evidence points that way, plus lots of good organisations are talking about it (e.g. those well know neo liberals at the Citizens Advice Bureau), plus a large number of compensation specialists seem to think that it’s worth their while chasing cases (i.e. they can do nicely out of it).

    In truth, luck will be the only thing that gets us out of this.

  • Sorry George but that doesn’t stack up. As I have argued the justification for cuts that you have advanced only entails a change in the balance between revenue and spending. It does not imply cuts. The balance between cuts and tax rises is therefore a political choice based on ideology. The justification for cuts being entirely dependent on eradicating the structural deficit leads inevitably to the point that once the balance is achieved there will be no room to reverse those ideological cuts. If it is cuts you want then those cuts must comply with your ideology because you are stuck with them. I have offered a reasoned analysis of why this is the case and you have pointedly ignored it in favour of saying that because cuts are justified then the nature of the cuts is irrelevant and can be adjusted in the fantasy future. I still don’t think that an ideological attachment to cuts is behind your thesis but that you feel allowing the ideological state-cutters a free reign in the resettlement of the size and function of the welfare state, I think this brings into question your ideological attachment to liberalism. In fact, although it is difficult to really get the measure of an individual over such a forum, I think that your character is not such, but, the case you make in regards to the structural deficit, the need for cuts and your dislike for Gordon Brown actually reads as though it is from someone with nothing more than an ideological attachment to the power of government. I don’t wish to sound insulting because as I say I believe your character to be otherwise but there were many apologists for the ideological betrayals of Tony Blair’s new labour government who later regretted such defences.

  • @JRC
    Posted 23rd October 2010 at 4:19 pm

    I’m not an economist so I have no great understanding of the really indepth arguments in macro/micro economics (plus of course, even if I was one, economists always disagree with each other anyway). However, surely it is not as simple as raising taxes/cutting spending?

    For instance, the raising of the tax threshold has potential to be better for the economy than a simple tax rise. By releasing money to the individual, they will spend money in the economy, which in turn creates a greater requirement for whatever products are being bought. This should increase/maintain the level of employment (perhaps in manufacturing, but also in the whole chain). This in turn means that the gov gains the tax/NI from those jobs (instead of paying benefits), plus VAT (assuming that the qualify of course) and CT if the increase means that those companies involved in the chain start making a profit.
    However, even of those people decide that they will instead use the money to pay down their mortgage/loans etc, then this will release money back into the banking system. This money could then be recycled back out to the business sector as loans or perhaps hasten the repayment of bail out loans from banks to government.

    Also, I was once told that the IR have a good idea about the levels of tax that can invoke the law of diminishing returns – so at certain levels of taxation, tax becomes counter productive as it removes incentive etc (and I don’t mean just for the rich). I’ve never found anything like this published by Gov, but I haven’t looked for a while so I may go back to try and find it (if such a document exists that is).

    So I don’t think it is so much an ideological question in the terms of left/right, I believe even Keynes (who I don’t think has a rep as a righty) recognised that tax can have adverse effects on the economy.

  • @Chris_sh

    It’s not luck that’s going to get us out of the problem but higher taxation on the ruling class and the banks. Instead of grinding down the poor and the disabled this government of millionaires should make the ruling class and the banks pay for the excesses and negligence of the past decade. The bank levy is inadequate and will be discounted by the increase in corporation tax. It must be greatly increased. The fat cats must pay and must be seen to pay. Erudite explanations for the causes of the problem are interesting but politically irrelevant. It is political expediency that matters. Heavily tax the fat cats in the banks. Not only will it serve the public’s conception of natural justice, but it might just possibly prevent the lib dems’ meltdown at the next election!

  • @MacK
    Posted 24th October 2010 at 10:41 am

    “It’s not luck that’s going to get us out of the problem …”
    Sorry, but we are going to need a huge amount of luck, if any more shocks turn up we could be back to square one.

    ” higher taxation on the ruling class……”
    Who is included in the “ruling class”?

    “The fat cats must pay and must be seen to pay.”
    Who are these fat cats?

    “It is political expediency that matters”
    And what contingency plans will you put in place for when such expediency comes back to bite you on the backside (as political expedient measures often do)?

    “Heavily tax the fat cats in the banks.”
    So how much do you think you’ll get from these people and organisations?

  • @ George Kendall
    Posted 24th October 2010 at 3:08 am

    Thanks for the link George, very interesting reading. As we know that in 2007-08 24.4% of all income tax was paid by the top 1% of income earners, it’s obviously an area where politicians have to be careful.

    Still looking for the other stuff, it’s not helped by the fact that I keep getting side tracked into reading search results that seem interesting!! (try )

  • @ George Kendall
    Posted 24th October 2010 at 3:08 am

    messed up the link – to late in the evening!
    http://www.imf.org/external/pubs/ft/wp/2008/wp0807.pdf

  • George,

    My post was:

    “George, just look at all the people (Andrew Ducker, Richard F, MBoy, more) who responded with delight to your careful economic analysis, and have commented how beautifully it supports their anti-Labour diatribes and/or their ideological position favouring lower spending. Whether or not you agree with them, they think that you have given them some intellectual cover. And that’s the problem. When one writes something, one has to think about how others will use it!”

    Your response was:

    “Regarding your remarks about those people who’ve commented in this thread supporting my argument. When you dismiss them as tribal ideological state-cutters, I’m afraid you’re the one being tribal.”

    Er, you’re the one who is putting words into my mouth George, and that’s just not on. I didn’t use the word “tribal”. And if you think I’m “tribal”, well, I suppose I should be delighted, because my tribe are the true Liberal Democrats who have been betrayed by the current leadership, and are determined to rise again as a political force! Apart from that, I don’t even have a blooming “tribe” to belong to, these days!

    You cleverly parlay my words into an attack on everyone who made a comment supporting your argument, and implied that I had dismissed them all as worthless. In fact, I just named three specific posters, all of whom did indulge in what it would seem reasonable for me to call an anti-Labour rant (oh all right, polemic, if you prefer).

    (As it happens, I distrust Labour, the party of Iraq and ID cards. The main thing I don’t like about anti-Labour ranting is that it is used to distract attention from the fact that it is now our job to run the country, not Labour’s!)

  • George,
    I’ll try and break the argument down further.

    As I understand the case from your analysis:
    IF structural deficit THEN cuts and/or tax rises and/or growth.

    As you put the case:
    IF structural defict > X THEN cuts not tax rises not growth
    structural deficit > X THEREFORE cuts

    A cuts program you say is then justified by the size of the structural deficit and is therefore the responsibility of those who inflated the size of the deficit.

    I have argued that the case you have made applies to structural deficit regardless of X therefore the size of the deficit is irrelevant. As there is no point at which the size of the deficit renders growth or tax rises ineffective or unavailable then the decision to only use cuts is ideological. The argument that there should never at any point be a structural deficit is also an ideological one. Furthermore, the deficit is not an abstract number; it is the actual cost of those structures that form the state’s role in our society. It is rather than simply a conceptual number; the job of the public servant, the meal on the table of the children whose parents are out of work, it is the hospital bed that you might need, the policeman, Trident, ID cards, irrelevant AV referenda or personal communications tracking systems. Therefore the argument that there should in fact not be a structural deficit is identical to the argument that the state should not engage in certain areas of society. It is therefore ideological. To argue that the structural deficit exists in some kind of vacuum divorced from the rest of the economy is sophistry designed to justify a dogma based cuts program.

    You then argue that tax rises cease to be an option when the optimum tax level is reached and returns diminish and also that the structural deficit is eradicated when tax revenue matches spending. These are separate issues that you conflate in order to justify your cuts thesis.

    The case you make to justify cuts assumes that there is no growth likely and that there is no option to raise taxes. Therefore you must assume that the optimum tax level has been reached. The fact that there are quasi tax rises being applied to specific groups (tuition fees, child benefit) implies that this is not the case. Therefore the decision not to raise general tax levels is ideological.

    You cite Martin Wolf to offer an opponent who also advocates cuts. I have not argued against cuts as such, only that the use of the structural deficit as a justification for them is insufficient and that it is an attempt to deflect responsibility for what is ultimately an ideological choice. I have no idea whether Martin Wolf would consider his position ideological or pragmatic and fail to see how it impacts upon the logic of my argument. I have based my argument solely on the information that you have provided within this debate in order to demonstrate that you have reached a conclusion that is unjustified in your own terms. If Martin Wolf reaches the same conclusion as you do with the same reasoning then I would disagree with him equally. If you have something more than his name to add to the debate please let me know.

    You seem to forget that “allowing the ideological state-cutters a free reign” is actually quoted from you but your further explanation of having to temper right-wing nastiness is negated by your position on going along with it in the first place. Cuts, as I have explained, are not justified simply by the presence of the structural deficit. They would only be completely justified by a saturated tax take. Until that point they are ideological. That you feel cuts are necessary and that this requires you to go along with the state-cutters until more economically stable times implies that you feel that liberalism is unaffordable in some economic circumstances. Trying to temper the nastiness is irrelevant when the justification you offer for cuts is ideological rather than pragmatic. The cuts in your argument trump liberal equality and as I have demonstrated must be the final settlement of the state’s function within society if structural deficit is your key indicator for cuts over taxes. Therefore tempering the nastiness only limits the ideological rebalancing of the state whilst providing the necessary support for the nastiness you fail to temper. Therefore I conclude that this justification calls in to question your ideological commitment to liberalism.

    Finally, I said your case on the structural deficit and cuts combined with your dislike of Gordon Brown had the effect of giving you the appearance of being ideologically committed only to sitting in power. It is the conflation of the three arguments that is relevant; that you use the structural deficit as justification for your ideological position, that you argue that cuts are imperative and that you use a personal dislike to deflect responsibility. That you choose to select from Gordon Brown onwards in your quote is quite telling. It reads as if you are trying to dismiss my arguments ad hominem as a personal defense of Gordon Brown rather than a critique of your overall reasoning. So I repeat my point; you appear to be rationalizing that which you find unpalatable by seeking to apportion blame on those for whom you have a personal dislike. Such rationalization comes across as a willingness to subordinate your principles for a seat at the big table.

  • David Allen 25th Oct '10 - 6:59pm

    George,

    Thanks. You are clearly someone who takes pride in being even-handed, someone who sees both sides of an issue, unlike most of the more simple-minded folk who post their strong, one-sided opinions here. If I can break this to you ever so gently (but with a bit of a silly grin on my face) – Just because you are so notably fair-minded doesn’t automatically mean you are always right.

    There’s a cardinal rule that applies here. If you quote somebody, it has to be a true quote. You can be as rude as you like about what someone has said, but, you musn’t pretend that they said something which they actually didn’t.

    So, when even your second go at quoting me says “when you dismiss them as either tribal or..”, and I never used the word “tribal”, you haven’t really done too well!

    I did talk about people who went in for “anti-Labour diatribes”. You point out that posters who go in for Labour-bashing often say a lot of sensible and interesting things as well, and I’m happy to accept that. However, just to take one example, in my view MBoy spoilt an otherwise very rational post with the remark “Labour deficit deniers are still in, well… denial…”

    Perhaps that is true of the chief denier, a Mr G Brown. But he has left the stage. While I have no wish to offer Labour undue praise, I don’t believe they are seriously in denial any more. On the contrary, they are pretty much in line with the G20 consensus. It is the coalition who are out of line. Bashing Labour, I fear, is rather designed to conceal that fact!

  • George,

    I don’t think we do have different definitions of “pragmatic”, “ideological” or “liberal”. I think that you are following a line of reasoning that allows you to think that cuts are all that is available in order to deflect responsibility for the choices being made by your leadership. That line of reasoning is false. I do not then, agree to disagree with you, I think that you are wrong and therefore no longer entitled to hold to your opinion. The spectre of the structural deficit is being held up to shift responsibility for an ideological cuts program that was never democratically mandated.

    “My argument is that, if spending is unsustainable, it means spending on services today, at the cost of less spending on services for the next generation.”

    That is a spun argument intended to pull on the emotional desire to be fair to children. It is also a circular argument. If spending is unsustainable then spending is ruled out by the arguments own terms, it does not function as an argument about whether spending on specific structures is sustainable. The situation we are being sold with such a statement is that it is not progressive to burden future generations with the cost of our luxurious present lifestyles. This is not a true representation of the options. The tax burden for protecting the victims of today’s banking crisis should fall on our present and future selves and the future selves of those who receive protection. The likelihood of the structural deficit being run until the present generation reaches retirement or death and a new generation takes over is not within the thoughts or plans of any so-called “deficit denier”. It is, as we started out, somewhat similar to a business running an overdraft by maintaining interest payments until in a better position to tackle the principal. If we guide present policy only by its impact on a notional structural deficit then the structure of present society must always be to maximise the balance of savings we pass down to future generations, spending is always then a selfish act as it will always reduce the amount we pass down.

    “Am I being ideological in saying that our generation should not be selfish? Call that ideology if you like, but I would call it basic morality.”

    And there we have it, when reason fails, resort to moralising.

    Obviously I would not call that ideology. First, you are not saying that our generation should not be selfish your arguments imply exactly the opposite and second, that implied characterisation of the points I have made is entirely disingenuous. What you are doing is defending an inherently selfish cuts program by translating the abstract conceptual notion of the structural deficit into the concrete arbiter of present and future fairness. Those that argue that welfare structures and spending should be maintained at a higher level than that envisaged by the government cuts are arguing against the inherent selfishness of the cuts program. The cuts program will remove benefit structures for future generations that those from the generation who enjoyed the bubble benefitted fully from, just like the tax payers of the 1980’s protected themselves from the contemporary costs of industrial retrenchment by slashing state protections and starving the health and education systems of funds so that the “profligate” Gordon Brown had to rebuild the very fabric of those services, i.e. fixed the roof while the sun shone. The cost of cuts in the 1980’s was transferred into the 2000’s. Taxing the wealthiest on the huge benefits they have had from the bubble and continue to have through the recession in order to pay off today’s debt today would be unselfish. Asking everyone to accept a moderate tax rise would be unselfish. Asking those who are poor to contribute a portion of their benefits in order to avoid future and present taxes is selfish. Maintaining welfare, education, health, social care, disability allowances etc. and retaining a publically owned health service free at the point of delivery would be passing down the fairness we have enjoyed to future generations. Dismantling those structures in order to cut costs so as to save ourselves a higher present tax bill and our future selves a higher tax bill is nothing other than selfish. Falsely arguing that this is the unselfish act of someone wishing to protect our children from higher taxes is deceitful at best. You are not arguing that our generation should not be selfish; you are arguing that an ideological selfishness is a pragmatic imperative whilst claiming to do it on selfless grounds. The only way the cuts program can be spun to fit your thesis of selflessness is if you frame the debate as being only concerned with tax payers and ignoring the effects on the poor. You don’t appear to be on the moral high ground to me.

    “Regarding much heavier tax rises, if someone could convince me that they wouldn’t undermine the sustainability of providing good public services, I’d be all for them. But, from what I’ve read, the opposite is true.”

    Again you ignore the fact that the quasi tax rises of tuition fees and child benefit are demonstration of the fact that the coalition does not agree with you and in fact has determined that those who are earning more than £21,000 and happen to be graduates can sustain a 9% increase in taxation. That the Browne proposals are being reviewed is not due to a concern over such a quasi tax but on grounds of fairness. There is no logical reason why 45% of the population could bear such an increase and the others not. Cutting public spending to such a high degree in the current environment is by most reports, including the signals from the government, a very risky strategy that could cause a much bigger blow to tax receipts and make the sustainability of public services much worse. Your denial of the tax option is based on the same argument. You therefore have an equal justification for opposing cuts as you do for opposing tax rises. The government is prepared quite openly to admit that the reason it is choosing cuts is because it regards the state as too large. It is less open about the fact that they are prepared to risk economic recovery in order to get the cuts because in the long run they feel that the prize of a smaller state is worth it. This reasoning is based on ideology. The cuts are not to be temporary they are to be permanent. Your argument that we can let the coalition do what they wish to the state in order to get the finances sorted out and then start spending again is quite frankly absurd. It casts the Conservatives as the only economically competent government and progressive policies as necessarily unaffordable and utopian. This is not the position of a liberal egalitarian.

    “As to how we reduce that deficit, I’m entirely pragmatic. I’ve repeatedly said that, without the constraints of a coalition, I’d like to see a slightly slower reduction programme, and more emphasis on progressive taxes like income tax. But that’s not the situation we’re in.”

    However, you are prepared to write an article defending the coalition’s policy on cuts as being the pragmatic economic choice and that the responsibility for the cuts should be laid at Gordon Brown’s door. This is somewhat at odds with the implicit argument here that the pragmatic economic choice should be slower cuts and more emphasis on taxes but the constraints of coalition prevent it. Or are you saying that your preference would be to follow ideology rather than pragmatism?

  • George Kendall,

    “What I wrote wasn’t a quote, and I think it was a pretty reasonable paraphrase.”

    Stop it. I am not the only poster who has complained about your “paraphrasing” their words. It is plain wrong. If you persist, the mods should ban you for it. That would be a pity. You take pride in your own fair-mindedness, often reasonably, so please get rid of your blind spot.

  • George Kendall,

    “To my mind there are a number of things Ed Miliband has to do to be completely free of the label, “deficit denier”:
    – He has to propose a credible deficit reduction plan, including specific, and politically risky, cuts and tax rises
    – His party need to change from a rhetoric of opposing every cut
    – They need to recognise what went wrong. While they still claim that we only have a deficit because of the banks, I find it hard to believe they really have changed. It’s obvious to everyone that Labour massively overspent, but they still won’t admit it.”

    There, that’s a beautifully impossible series of criteria for them to swallow! Just to make sure, you’ve included item 3. So, unless they confess their dreadful sins, repent, parade through the city in sackcloth and ashes, and then hang themselves, they just won’t have any credibility as far as you’re concerned!

    “It’s obvious to everyone that Labour massively overspent”

    No they didn’t. They under-taxed. Why don’t you put it that way round? Because of all the Tory pressure over “stealth taxes”, which helped to drive Labour into under-taxing. You wouldn’t want to saddle the Tories with their share of the responsibility for the deficit, would you?

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