Tag Archives: deficit

The Independent View: IFS Director Paul Johnson – Balancing the books: some unpalatable choices

Paul Johnson is Director of the Institute for Fiscal Studies. He will be speaking on ‘Balancing the books – tax and spending choices in the next Parliament’ alongside Ian Swales MP and Anne Fairpo of the Chartered Institute of Taxation, with BBC Scotland’s Business and Economy Editor Douglas Fraser in the chair, at 6.15pm on Tuesday at the SECC (Dochart 1). All conference attendees welcome.

We weren’t supposed to be here. When George Osborne delivered the Coalition’s first Budget in June 2010 the plans he set out suggested that the job of rebalancing the nation’s finances would be more or less …

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Eliminating the structural deficit is aiming for the wrong target

HM Treasury logoThere is an appealing simplicity behind the idea of having a zero structural deficit. It is the policy the government is committed to, with its plans to eliminate the structural deficit. And it’s also wrong.

For all the problems in measuring the structural deficit accurately, the concept is a useful one – to measure what the deficit is, once you have allowed for where we are in the economic cycle. Or, as the FT puts it, “A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors”.

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Ed Balls denies that he denied there was a structural deficit

 

(Actually, it’s worse than that, for in addition Ed Balls’s claim that it’s only with hindsight that it’s clear there was a structural deficit doesn’t really stand up to scrutiny either.)

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Opinion: Mind the gap – a sceptical view of the need for cuts

The UK’s economic position has deteriorated, government revenues are lower and welfare expenditure higher than anticipated, worsening the deficit so that austerity must continue further into this decade. Because of this deterioration a combination of increased taxes or cuts must be identified in the Autumn Spending Statement in December.

That is the orthodox view. It is based on the generally accepted proposition that the structural deficit should be eliminated. This has set off widespread debate as to whether the increased scale of the structural deficit should be eliminated by increased taxes (such as a Mansion Tax) or expenditure reductions and where these should be identified, with the Conservatives placing welfare cuts at the top of their agenda.

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There are no easy choices when it comes to reducing the deficit

George Osborne’s statement that senior Liberal Democrats have agreed in principle to a further £10bn of welfare cuts in 2015-16 has prompted a strong reaction from many party members and a TV rebuttal from Nick Clegg.

But the issue is one worth pausing on, for it raises some important questions for Liberal Democrats.

Starting at the beginning, the first question raised is how we wish to close the deficit that will now exist in the first years of the next Parliament following the Chancellor’s decision in last year’s autumn statement to push back the period in which the

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Opinion: Clutching at straws

I have spent the day clutching at a couple of straws.

Last week in the tractor factory Nick Clegg appeared to confuse the ‘deficit’ with the National Debt when he said, “We have a moral duty to the next generation to wipe the slate clean for them of debt. We have set out a plan – it lasts about six or seven years – to wipe the slate clean to rid people of the deadweight of debt that has been built up over time.”

It sounded like a fail in GCSE Economics. But suppose he wasn’t mistaking the policy to eliminate the structural deficit by 2017 for a moral crusade to wipe the slate clean by removing the deadweight of the National Debt, all £1,300 billion of it.

At the other end of my straw was the realisation that Nick Clegg might have become an extreme Market Monetarist and was revealing his plan to re-establish Nominal GDP back to its trend line, even if that meant buying in the whole of the National Debt in the mother of all quantitative easing exercises.

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The unintended costs and consequences of legal aid cuts

Inevitably when policy-makers design cuts packages they look at the short-term – savings achievable in particular department budgets within the spending review period. More holistic assessments, looking at where other public services ‘pick up the tab’ for another budget’s austerity measures, and the ‘displaced demand’ or ‘knock on costs’ that arise, are left for another day. This has been brought home with the Government’s legal aid reforms now before Parliament; an Independent report from a Kings College economist suggests the contribution of these cuts towards “deficit reduction” will be negligible, owing to the public costs of unresolved legal …

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Opinion: Lib Dems Must oppose Labour’s ideological cuts in 2012

If I were a cleverer person than I am, I would try to create a joke with a punch line to fit the following set-up: What’s the difference between a cut in government spending and an ideological cut in government spending?

That I’m not clever enough to create a pithy punch line is of no consequence, as it is no laughing matter.

Labour have sometimes tried to trail the line that the coalition’s cuts are avoidable, that there are the product of ideology rather than necessity.

This line lacked some credence because even as they

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Opinion: Danny Alexander is right

As far as momentous television appearances go it was hardly Frost/Nixon, but Danny Alexander nonetheless made quite a stir on 29th November’s Newsnight. Our Chief Secretary to the Treasury confirmed that, post-Autumn Statement, the budget deficit would not be eliminated by 2015, and that further cuts would be required beyond then if this goal was to be achieved. For most of us this was stating the obvious, as well as in keeping with our manifesto policy on the deficit which called for it to reduced at a slower rate than that taken up by the Coalition, …

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Opinion: Oh, what is the point?

Having followed the Chancellor’s Autumn Statement and then watched Danny Alexander interviewed on Newsnight on Tuesday I have to say my initial reaction was “oh, what is the point?”. That was a reaction to both substance and process.

The Chancellor’s Autumn Statement, as the IFS analysis demonstrates, hits the poorest hardest and those on middle and higher incomes less hard. Most would call that regressive. I’m sure some bright spark can come up with an argument that if you look at the data from a different direction – on the basis of expenditure not income, for example – then it isn’t …

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Opinion: How much smaller would Labour’s cuts have been?

“Too far, too fast” – until recently you could scarcely switch on a TV without hearing Ed Balls repeating his four-word analysis of the coalition’s fiscal policy. It seems to be a line that Balls and Miliband are no longer sticking to. If I were to give them more credit for economic analysis than they deserve I’d speculate that this might be because they realised it is utter nonsense. More likely, their polling showed them that the public just weren’t buying it.

And the public would be right not to believe it, because, on a key measure, the difference between the …

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LibLink: David Laws – George Osborne must stick to austerity Plan A

Over at the London Evening Standard, Lib Dem MP for Yeovil and former Treasury chief secretary, David Laws, has a piece urging the chancellor to maintain the coalition’s deficit reduction plan to avoid importing the debt-driven eurozone crisis to Britain.

Here’s a sample:

Before the general election, many people said that a coalition would be weak and unstable. They don’t say that any more. By comparison with the eurozone and the US, our Government looks strong, stable and united. It is set to stay that way.

The Chancellor will be able to report that borrowing has been falling as planned. Borrowing from April

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Opinion: A deficit is a deficit is a deficit… Or is it?

The Office for Budget Responsibility (OBR) is an independent body, created to help us hold the government to account. It’s their job to check the government clears the structural deficit within this parliament. So it’s pretty important that we understand what is meant by “structural deficit”.

But what exactly is the structural deficit?

The word “deficit” is bad enough. A lot of people confuse it with “debt”, and that’s not just in inadvertent typos. However, if you stop and think, it’s not so bad. ‘Debt’ is what we owe, and ‘deficit’ is how fast our debt is increasing.

The structural deficit isn’t so …

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Consider the impact of cuts on women, warns Lynne Featherstone

From the Guardian:

In an interview with the Guardian, Featherstone issued her reminder that any public sector job cuts or other deficit reduction plans that failed to consider equality rules would fall foul of the law.

Under the Equality Act 2010, a new equality duty was introduced in April dictating that any public body must have regard to the equality implications of its decisions.

She said: “The equality duty means that the public sector will have to look at who is losing jobs and how those jobs are being lost because there is a duty to do so with regard to the

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Opinion: The best way to get banks to lend more is to reduce the deficit

From among the blizzard of economic forecast, commentary and political point scoring which presently dominates the airwaves, there is very little consensus but the need to get the banks to lend more is something which brings all sides of the debate together.

The dividing line appears to be on how best to achieve this.

Those who subscribe broadly to the neo-classical or neo-liberal economic world view believe that banks will start wanting to lend as the economy recovers and businesses become more viable. This ‘leave it to the market’ approach is something which Lib Dems should (and do) reject, not just on …

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Opinion: We were prudent in opposition – time for Labour to follow our lead

Labour have refused to provide any detailed alternative to the Coalition’s tax and spending plans. They have also implied that during their recent period in government that nobody challenged their irresponsible tax and spending plans. This is simply a lie. Not only did the IFS explain their irresponsibility as far back as 2003 , but so did the Liberal Democrats.

There’s an easy way to test how responsible we were while we were in opposition. Every year since 1992 the Liberal Democrats have produced an Alternative Budget setting out our alternative to the government’s tax and spending plans, as well …

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What the think tanks are saying: The IPPR on “How much is Labour to blame?”

(On 14 January 2011, the IPPR published a paper by Tony Dolphin, Senior Economist and Associate Director for Economic Policy at the IPPR entitled Debts and Deficits: How much is Labour to blame?)

Tony Dolphin makes a key point in his paper, that Labour did not seem to realise how much it was relying on revenues from sources associated with rampant lending, such as the City and the housing market.

Unfortunately, he doesn’t develop this point.

Using the Treasury figures for the budget deficit, between 2007 and 2009, the deficit leapt from £37bn to £123bn. These figures are cyclically adjusted, …

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Chris White writes: Hodge’s troubling amnesia

Margaret Hodge was on the Today programme yesterday morning on behalf of the Public Accounts Committee. She lambasted the Government for its policies on the widening of the M25. Money had been wasted, we were told, because the option of using the hard shoulder had not been pursued. Moreover a shocking £80 million had been spent on consultants. She was also disobliging about PFI.

Many may agree with this. But what was not said was ‘Which Government?’ Ms Hodge carefully said ‘They’ at all times. What she meant of course was ‘We’. It was the Labour Government of which she was …

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Opinion: A hurting Lib Dem and the stagnant economy

For the first time since his election as leader of the Labour party, I found myself agreeing with Ed Miliband during Prime Minister’s Questions this week.

With his new Shadow Chancellor sat next to him and in response to the news earlier in the week that the economy had contracted by 0.5% during the final quarter of 2010, Miliband urged David Cameron to think again over the upcoming spending cuts and VAT rise.

To make matters worse for the Coalition, the outgoing director-general of the CBI accused the government of putting politics before growth. Sir Richard Lambert argued that “politics …

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Opinion: what Ed Miliband should put on his blank sheet of paper – part 1

Ed Miliband has invited Lib Dems to make suggestions for his 2015 manifesto. In doing so, he is treading a well-worn path: from Tony Blair, who borrowed Alan Beith’s proposal for an independent Bank of England and a chunk of our policy on constitutional reform, to David Cameron, who borrowed a lot of our policy on civil liberties.

Imitation is a form of flattery, but it isn’t always sincere. I believe Ed Miliband spoke from the heart in his campaign for the Labour leadership, when he said that he would like to make us extinct. I’ve no doubt he would like …

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Opinion: why I still support the Lib Dems

This has been a hard few months, and there’s been a lot of discussion about why some people no longer support the Lib Dems. But there’s a lot of us who still do. I thought readers of LibDemVoice might be interested in a thread where a few of us explain the reasons why we are still enthusiastic supporters of the party.

Here’s why I am:

Many leftwing commentators write as if there weren’t a £150bn deficit. If the coalition give this as an excuse for the severe cuts, some sigh in frustration, as if this were a tired excuse.

But the …

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Opinion: deficit reduction or political dogma?

The effect of the ‘savage’ cuts as Nick Clegg called them last September are gradually becoming apparent over the course of the week. What both parts of the coalition insist is that these cuts are about deficit reduction and not a deliberate effort to roll back the state. There is a major aspect to these cuts however which are making this very difficult to believe.

If cuts were purely to balance the books, and the economic forecasts of the coalition were correct, there would come a time possibly during a hypothetical second parliament when some of the cuts could …

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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 …

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How the media loves mixed messages (when they suit their own message)

‘Conservative spending cuts are worse than Thatcher’s, says Alan Johnson’ shouts today’s Observer, reporting the paper’s interview with Labour’s incoming shadow chancellor.

If the election had turned out differently — if Labour had won, rather than suffering one of the worst defeats in its history — the headline could have read a little different… Imagine this headline:

    Alistair Darling: we will cut deeper than Margaret Thatcher

But wait, we don’t have to imagine that headline: it already exists, and was used by the Observer’s stablemate The Guardian back in March when reporting the then Labour chancellor’s realistic appraisal of the …

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Opinion: liberals should cut the deficit and support a strong state

There is a myth that a desire to balance the books is a virtue only of right-leaning governments.

There is myth that those who want to shrink the state are more concerned than others about how the state raises money.

Deficit deniers in one corner – state shrinkers in the other.

But Liberal Democrats can act to reduce the deficit and be positive about the role of the democratic state.

What prompts any given government to run a deficit is usually circumstantial, prompted and encouraged by economists reading the runes. Reaganomics was based both on huge deficits and reducing the role of the …

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Clegg and Cameron’s joint letter to Cabinet

The Prime Minister and Deputy Prime Minister have issued a reminder of the Coalition government’s priorities in the form of a joint letter to their Cabinet colleagues.

The letter, aimed at the public just as much as ministers, includes a summary of the “central purpose that will guide all our decisions as a government.” The letter says that deficit reduction and economic recovery will be achieved by redistributing power from government to communities and people, and by governing for the long term.

It’s a message, amid criticism of the cuts that the government has announced over its first twelve weeks, that the Coalition is looking at the long haul.

Here’s the text of the letter in full:

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The easy, progressive way to cut £44 billion without harming worthwhile public services or the least well off

It may sound a challenge, cutting £44 billion from public spending.

But actually, it’s easy.

Not only that, it can be done without hitting the least well off. Without cutting worthwhile public services. And if you’re so minded, you can even drape a “progressive” label over it all.

How to do it?

Simple.

You see, the last Labour Budget contained overall spending totals for the government that mean a cut in spending of £44 billion (using the calculations form the Office of Budget Responsibility). Now, because Labour didn’t publish any departmental spending total plans beyond the current financial year, we don’t know where those £44

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Deficit cutting the Swedish way

Running Canada a close second as the current country of choice to look at for deficit cutting lessons is Sweden. As I previously looked at the Canadian experience, now it’s the turn of Sweden.

The think tank Bruegel has published a pamphlet from Jens Henriksson about the Swedish experience of turning a budget deficit of over 11% of GDP into a surplus. He was a policy adviser to the Swedish government during this period.

The pamphlet spreads over more than 40 pages, though politically the most important point is made by him right at the start:

is not a paper about how to get rid of the welfare state. On the contrary, it is about how to strengthen the economic foundations for whatever kind of social model that is preferred. The budget consolidation in Sweden was dramatic but it preserved, and in many ways modernised and improved, the welfare system.

As with Canada, Sweden was able to tackle its budget deficit at a time of a much healthier world economy than the one that provides the backdrop to our own current efforts. Even so, it’s worth bearing in mind just how bad the Swedish economy had got:

Sweden experienced negative growth three years in a row between 1991 and 1993, averaging minus two percent. Over three years the debt almost doubled, unemployment tripled and the budget surplus turned into a large deficit. The combined effect of an exploding budget deficit, high interest rates and record-high levels of unemployment was staggering.

The ten lessons Henriksson lays out are:

  1. Sound public finances are a prerequisite for growth. That does not have to mean an aversion to borrowing or major monetary expansion. Henriksson is happy with plenty of the former if the money is wisely invested and Sweden did plenty of the latter, but you cannot just forever put off dealing with public finances.
  2. If you are in debt, you are not free. His underlying point is a sound one: if you are in too much debt then you end up in thrall to the international financial markets. However, becoming debt free is not the only way to avoid this problem; many countries (including Britain) have run manageable debts for long periods of time without running into that problem. So although the exact criteria may not apply to the UK, the basic point does – the less dependant you are on international borrowing to keep the government’s finances afloat, the more freedom you have to do what you want.
  3. The one responsible must put her or his job on the line. The argument here is that this is what gets credibility with the public, financial markets, civil service and political colleagues. If they all know that person X is deadly serious, it then becomes easier to achieve the goals. For example, civil servants may be tempted to try to avoid having to make cuts in their budget and ride out the political impetus to curb the deficit. If they know that they can’t do that, they are more likely to offer up suggestions based on their detailed knowledge of the more obscure corners of the public sector.
  4. Set goals and stick to them. Once again the theme of strong public commitments making the overall job easier features in Henriksson’s list. Here he argues that just as public targets for inflation make controlling inflation easier, so too do they for a deficit.
  5. Consolidation should be designed as a package: “An ad hoc hodgepodge of measures will only have a limited chance of success. Presenting the consolidation measures in one package makes it clear to all interest groups that they are not the only ones being asked to make sacrifices … If a consolidation package consists of both tax increases and expenditure cuts the distributional effect can be fair. When studying the distributional consequences, do not only use the income distribution perspective. There are other dimensions that also are important, such as for instance gender, age and geography.”
  6. Act structurally but be consistent. Perhaps the most surprising recommendation in the pamphlet, this point in Sweden meant a uniform 11% cut from all budgets – a very different approach from the Canadian one of looking at each area of government activity and deciding if it is necessary. The downside of a flat rate cut across the board is that there is no particular reason to believe that the least desirable expenditure is equally distributed across the board. Against this Henriksson argues that only flat rate cuts really get an understanding of the absolute need to find efficiencies seeping in to all corners of the state. It also avoid problems with some sectors feeling they have been picked on unfairly compared to others. In this respect, our coalition government, with its ring fencing of certain expenditure including the NHS, is going for the Canadian model rather than the Swedish one.
  7. Do not leave the problems to the local authorities. Again, this contrasts with the Canadian approach of displacing many issues from the federal government to lower levels. Henriksson’s warning is based on the Swedish experience where local authorities faced a really tight squeeze: “In Sweden it meant that we saw big cuts in schools, healthcare and childcare because they are financed through local taxes. This created enormous political problems.”
  8. Be honest to citizens and financial markets: “Never say that it won’t hurt. Never say that it is peanuts. Having been honest about the effects will not make it much easier, but being dishonest can lead to disaster. This will help ordinary people to plan ahead and to limit shocks.” The comments of Cameron, Osborne and Clegg neatly fit this lesson.
  9. Stick to one message. Tackling a deficit is not simply about producing a list of items to cut or taxes to raise; it’s also a communications challenge to bring the public with you and to win confidence from the financial markets. That makes mixing in tax cuts with the rest of the package tricky: “At one time the government decided to cut down on expenditures to finance a tax cut in VAT on food. The result was that people became furious. ‘You are not cutting down because you need to. You are cutting down because you want to’. That was an impossible argument to handle, since the message was budget discipline, but the action was .” On this point (and the linked argument against making any spending increases, even small ones in popular areas), the coalition government is taking a very different course from Sweden – looking to use tax cuts and targeted spending increases to garner wider support for the tough measures and also because they are justified in their own right.
  10. Stick to it. Once you have sorted out the deficit, make sure you reform the systems that caused the problem in the first place.

Overall there are many similarities between Sweden’s approach and the current British one, but also some notable differences – no across the board percentage of cuts and a mix of the tough measures with tax cuts and spending increases. On both those fronts the British approach looks to better suit our circumstances, provided that the rest of the package delivers the necessary financial changes. Whether or not that is the case will be much clearer after the forthcoming budget.

You can read the full pamphlet from Jens Henriksson here:

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Nick Clegg on the scale of the economic challenge


Video of Nick Clegg’s speech to the Institute for Government also available here.

This morning Deputy Prime Minister Nick Clegg made a speech on the economy (above) at the Institute for Government, putting the case for cutting debt sooner rather than later. He said that the debt crisis in Europe and Labour’s “terrible legacy” necessitated urgent action:

The choices that were available to us just two months ago are no longer available. We have to take action now so that we can still be in control of our future.

This evening, Nick emailed Liberal Democrat members with this summary:

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What does a Labour ex-minister think of deficits?

As the Telegraph reported:

Lord Myners, the former City minister, last night criticised Gordon Brown’s administration for living beyond its means and said he had been frustrated by his colleagues’ “flawed thinking” on the economy. “There is nothing progressive about a government that consistently spends more than it can raise in taxation,” he said.

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