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”.

Having a deficit in a recession is not only not a problem, it is (almost always) desirable. Moreover, measures to tackle the deficit shouldn’t look at what the deficit is in the middle of recession, but what it will be once the economy has returned to normality. Otherwise you panic and over-compensate – and the same happens the other way in the booms if you assume those bountiful tax revenues will come in forever and can be spent or given up in tax cuts. Just looking at the headline deficit figure would produce wild swings back and forth in economic policy. It is the structural deficit that guards against such exaggerations.

That is the theory. In practice, it is made rather tricky by the large adjustments often made even years later to estimates of the size of the structural deficit in any given year.

But there is another problem, rarely talked about. It certainly matters whether or not money is being well spent, but why aim for a zero structural deficit? Why should the deficit, in the long run as booms and busts even out, be zero?

Governments need to be able to afford to service their debts, but how does a zero structural deficit achieve that? In fact, it doesn’t.

What matters is how much it costs to service the government’s accumulated debts. That depends on five factors:

• how much debt has been accumulated over previous years,
• the deficit/surplus being added to/removed from that,
• the interest rates being charged on government debt,
• the rate of inflation (as inflation eats away at the real value of debt, unless it all inflation-indexed), and
• the level of economic growth (as how easy or hard it is to service debts depends on their size relative to GDP; the higher GDP is the less burdensome any particular level of debt repayment is).

Eliminating the structural deficit and having a zero deficit in the long-run only affects one of those five factors. There’s no magic virtue to having a zero for one of the factors when there are four others to account for too.

Indeed, a zero deficit in the long-run may well be too austere a figure. If the economy is growing a bit and inflation is nibbling away at the real value of the accumulated debts, then even a small deficit year after year could be accompanied by the debts becoming less of a burden.

Consider a simple example. Year one, economy is £100bn in size, accumulated debt is £50bn and there is a deficit of £1bn. Year two, economy has grown to £200bn in size (I said it was a simple example!), accumulated debt is now therefore £51bn. Interest rates have stayed the same, inflation is zero and the economic is neither in boom nor bust.

Was that £1bn deficit a problem? No. In fact it could have been much higher. Covering £51bn in a £200bn economy is much easier than £50bn in a £100bn economy.

So what should the government target? Rather than the structural deficit, it should target what percentage of GDP it takes to service the public debt.

It would make for better economic decision making, as it means aiming for a figure that captures the effect of tax levels, spending levels, interest rates and growth. In other words, it protects against myopic focus on one measure and instead puts the attention on general economic health.

* Mark Pack has written 101 Ways To Win An Election and produces a monthly newsletter about the Liberal Democrats.

(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.)

* Mark Pack has written 101 Ways To Win An Election and produces a monthly newsletter about the Liberal Democrats.

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.

But a recent research note put out by Roger Bootle’s Capital Economics is rocking these old certainties, and challenging the orthodox view. An article Why the UK output gap could be a chasm | FT Alphaville (register to view) sets out Bootle’s position.

The structural deficit is that part of the deficit that would exist even if the economy were operating at full potential. If we were at full potential now then the whole of any deficit would be a structural deficit.

Clearly we are not operating at full potential so to calculate the size of the structural deficit we need to know by how much below full potential we are operating, i.e. the difference between actual GDP and potential GDP – known as the Output Gap. The closer we are to full potential the greater is the proportion of the deficit which is structural. And the further we are from full potential the smaller is the proportion of the deficit that is structural.

The Office for Budget Responsibility (OBR) calculates that the economy is presently operating at around 2.6% below full capacity and from this deduces a figure for the structural deficit. It is the deterioration in the OBR’s figure that is putting pressure on the Coalition to find further cuts or tax increases.

So, what is Bootle saying?

We don’t think that it is out of the question that the economy was close to its potential in 2007 and that very little output has been permanently lost in the recession. On that basis, the output gap would be about 13% of GDP.

Even a highly cautious view of the situation still has Bootle’s estimate for the output gap coming in at 6%. If we were to take his 6% figure, Bootle concludes that, “this implies unnecessary fiscal consolidation under current plans of about 2.5% of GDP, or £35bn in current prices”.

As Izabella Kaminska concludes in the FT, “And that means… a) fiscal and monetary policies may be far too tight and b) there could be plenty of scope for the economy to grow strongly without inflation rearing its ugly head”.

So, why are our leaders allowing the debate over the Autumn Statement to be framed around the Welfare v Mansion Tax issue, when they could be calling into question the need for £35 billion pounds of cuts and when we could be arguing the case for a significant non-inflationary monetary and fiscal stimulus?

* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams

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 structural deficit is to be eliminated. That is assuming we do wish to do so.

The options, as ever, are further tax rises or greater public spending cuts. But within these options there are, of course, further choices. If we think that at least a proportion of the deficit in these years should be eliminated through spending cuts this raises the further question of whether the cuts should fall on departmental budgets or on the part of government spending not classed as departmental spending – ie the welfare bill.

There are downsides to each. Cutting departmental spending, particularly after five years of spending reductions, inevitably means cutting jobs in those departments. Making nurses, teachers, prison wardens and police officers redundant is not an attractive proposition, in both social and economic terms

The problems with cutting the welfare bill are equally clear. The majority of those in receipt of welfare are the poorest in society, and again there are clear economic and moral reasons to want to avoid this.

Within welfare spending, though, there are two options that might be more acceptable to Liberal Democrats, but the politics are difficult: cutting universal benefits received by the relatively wealthy and looking at the biggest part of the welfare bill, namely the state pension.

The latter of these looks immediately politically unfeasible, given our long campaigning for (and delivery of) a more generous state pension. The first – cutting universal benefits – is also politically difficult, but it makes economic and moral sense. But cutting these benefits alone wouldn’t plug the gap.

Which leaves tax rises. By 2015 we will have had a VAT rise, a significant rise in capital gains tax, an annual bank levy and various increases to taxes paid by the most wealthy.

Closing the deficit in 2015-16 through tax rises alone would mean another tax rise raising a similar amount to the increase in VAT by 2.5 percentage points. And if, as looks likely, the party wishes to continue to raise the income tax personal allowance to the level of the salary earned by someone being paid the national minimum wage, this means more tax rises elsewhere. Every £100 increase costs half a billion pounds.

And net tax rises, too, hurt the economy.

The bottom line? If we wish to continue to move towards a situation where the government is not spending more money than it raises, there are no easy choices. The welfare bill is the biggest single item of spending by the state; we can leave it untouched, but we shouldn’t pretend it makes those choices any easier.

* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.

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.

Now, wait a minute before you pile in with the derision. We have already bought in roughly a quarter of the National Debt with the QE so far and our head is just above the water. That lot is sitting in a computer in the Bank of England as a figure owed by the Government to the (nationally owned) Bank of England. It is just a press on a delete button to wipe it clean, so why not go the whole hog, hoover up the rest and press delete. Could that be Nick’s intention?

Madness you say. Think of the criticism he would receive from the Telegraph.

Until, that is, you read a piece on Monday by the Telegraph’s senior economics commentator Ambrose Evans-Pritchard entitled, World Edges Closer to Deflationary Slump as Money Contracts in China. The gist of Evans-Pritchard’s argument is that we are on the verge of another shock similar to that of 2008/9. Whereas then, the BRICs were able to keep the world economy afloat (just), this time the BRICs are in the mire too.

The situation in China, India and Brazil makes scary reading. Writes Evans-Pritchard, “My fear has always been that the credit cycle in the Rising World would blow itself out before the Old World has safely recovered, or reached “escape velocity” to use the term in vogue”. And the second straw? The stock market fell by 2% today. Pundits pointed to Europe, but just suppose the market is responding to similar fears expressed by Evans-Pritchard. Greece and its politics have surely been factored in. The election and the aftermath can’t have come as a shock to anyone. In fact, says I, grasping at the second straw, Syriza and the Greek people probably have it right. Greece is too important for Germany to allow it to fail. Faced with a Greek exit or renegotiation, the Troika will blink before the Greek people do.

In pursuit of extreme monetary stimulus, Evans-Pritchard is all for loading the helicopters tonight, “sovereign central banks have the means to defeat any depression thrown at them by launching mass purchases of assets outside the banking system, working through the classic Hawtrey-Cassel quantity of money mechanism until nominal GDP is restored to its trend line.”

“The problem is not scientific,” he continues. “A world slump is preventable if leaders act with enough panache. The hindrance is that the Euro Tower still haunted by Hayekians, and most G10 citizens – and Telegraph readers from my painful experience – (and Lib Dem Voice readers from mine, B le B) view such notions as Weimar debauchery, or plain Devil worship. Economists cannot command a democratic consent for monetary stimulus any more easily today than in 1932.”

In 1932 they couldn’t print gold. In 2012, the ECB, the Bank of England, the Bank of Japan and the Federal Reserve can print Euros, pounds, yen, and dollars.

Nick, don’t let me down. You can eliminate the whole of the National Debt and you may have to. But more importantly you will be saving future generations from the legacy of a preventable depression. Winter is coming early if you don’t.

* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams

The report analyses large scale datasets from the Civil and Social Justice survey which samples the public’s legal problems, their effect and how they are addressed. It’s not rocket science as the survey data shows up the “adverse consequences” of being unable to access legal services or obtain civil law redress; an avoidable eviction costing the state over £1000 in homelessness/re-housing costs, a stress related visit (typical for those reporting money/debt problems) to a GP costing over £100 or hospital costing over £500, a job lost unnecessarily where employers flout employment law resulting in benefit claims and lost output and tax, the costs to the courts of dealing with “litigants in person” in family cases, and the cost to the NHS of recovered insurance premiums in funding clinical negligence cases through no-win no fee deals rather than legal aid.

If anything the report uses an overly cautious approach and methodology in identifying obvious, direct “knock on” costs to other budgets, including the costs of alternative sources of advice. A year ago, I analysed known/recorded outcomes of legal aid advice on social welfare law issues (housing, debt, benefits and employment law problems) and mapped the positive outcomes against the known adverse consequence costs of unresolved problems – this analysis suggested that for every £1 in early “legal help” advice under the civil legal aid scheme, the saving to the state, economy and society ranged from £2-8 depending on the type of problem.

Legal aid cuts have been a tricky issue politically for lib dems in Government; in the past our frontbench and numerous conference motions have always supported civil legal aid services, but now a Government Bill is abolishing most of the “civil” side of legal aid. However, this is not a policy “owned” by lib dem Ministers and the pressure to support Ken Clark, ordered by the Treasury to make substantial cuts to the legal aid budget, has been intense. Despite much lobbying from our MPs (very conscious of the risks of losing advice providers in their constituencies), there has been no ‘give and take’ or account taken of consultation, and lib dem amendments were guillotined from debate, so in the final Commons stages of the Bill, a sizeable number rebelled by supporting Labour amendment.

The Bill is now in the Lords and many of our Peers are unhappy with the Bill; Lords and Baronesses Phillips, Thomas, Shipley, Carlile, Lester, Clement-Jones, Doocey and Dormer amongst others. Lib Dem peers are especially excised about clinical negligence cases, which leave victims with life-long costs and disabilities, being ditched from legal aid, and there is a clear line of rebellion on this. However, it’s unclear how far our peers are prepared to go in seeking amendments on family breakdown and social welfare legal help.

The Government’s defence is that people need “practical, general advice” to resolve problems rather than legal aid and publicly funded litigation. It’s an attractive argument, except that this is precisely the level of service provided by not for profit agencies, such as Citizens Advice Bureaux and Law Centres that is being stripped out of the legal aid scheme. The Kings College report is just one more piece of evidence underscoring the false economy of abolishing community legal advice provision.

James Sandbach is Policy Officer for Citizens Advice, a former Parliamentary Candidate, a non-practicing barrister, and one of the founders of Justice4All www.justice4all.org.uk

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 were saying it, the Labour manifesto if 2010, written by a certain Ed Miliband, detailed how Labour would cut.

Alastair Darling said in the Chancellor’s debate on Channel 4 Television pre-the 2010 election that there would be cuts ‘faster and deeper than Thatcher’ under Labour after the election if Labour won, Vince Cable and George Osborne agreed with him that day.

Ed Balls recently published an article in The Times in which he said that Labour would be cutting now if they were in power. (I would post a link but it is behind a pay wall.)

So the consensus appears to be that cuts are necessary and would be happening now, no matter who won in 2010.  

That’s not to say that ideological cuts are not happening.  Right now across Britain ideological cuts are depriving people of vital services when there is ample cash to pay for them, those cuts are being implemented by Labour councils.

One such example is Haringey Borough Council in London , an area of high deprivation and scene of some of the worst rioting in London recently, is to cut almost £60 million from its budget over the next four years, while having ample cash reserves as can be seen here and here.

But as can be seen from the second of those links, Labour in Haringey are not some ideological mutation of Labour nationally, rather they are doing what Labour council’s across Britain are doing, cutting for the sake of it.

Lambeth council in London is closing services, but has cash and reserves of £120million. It also continues to pay the wages of shop stewards.

I’m a huge believer in Trade Unions, but they are ideological groups, and if Labour is cutting a front line service to pay for people to promote an ideology labour agree with, that surely is an ideological cut?  

Even Doncaster Council, where Ed Miliband is the MP, has gotten in on the act, closing services while having millions in the bank.

Now the great economic Liberal JM Keynes was a great believer in fiscal prudence, saving money in the good times to be a safety net in bad times. But I think we can all agree these are the bad times, so what are the councils waiting for?

Further evidence that council’s are making cuts that are not necessary comes from the fact that no council where the Lib Dems are in overall control has cut a single sure start centre or Library.

Now I will leave it up to readers to decide why Labour Council’s across London and the UK are making these cuts, some might argue its simply incompetence, and after 13 years of seeing how Labour  ran Britain ,  incompetence is something we can certainly believe of them.

But then you get back to the ideological point, and you think: All of those Labour councillors making those cuts will be up for re-election between now and 2014. I wonder will they perhaps start announcing huge spending initiatives in the run up to that election, and perhaps tell a tale of how they have all of this money despite the Coalition cuts and doesn’t that show what and efficient bunch of administrators they are?

It would help them get re-elected to promote their ideology, and never mind the damage down.

There might even be a council leader somewhere in Britain who will say, he has abolished boom and bust.

Lib Dems nationally are putting the long-term betterment of the current ahead of short-term election considerations, with 2012 soon to be upon us, we must dedicate the new year to campaigning against Labour’s ideological cuts in our communities.

* David Thorpe is a Lib Dem member in Hammersmith and Fulham.

* David Thorpe is a member of the Liberal Democrats in Newham, and works for an economics publication.

What nonsense; a weirdly Liberal Democrat version of Tall Poppy Syndrome. Success is confused with selling out, with some copying their Tory counterparts in cutting off the party’s nose to spite its face. The very reasoning behind entering coalition was, lest we need reminding, that the economic reality left behind by Labour was even worse than had been envisaged, and a steady course of fiscal retrenchment was needed to keep market confidence. And as we exit 2011 with an even grimmer reality, our increasingly distant neighbours struggling with impending Eurogeddon, this reasoning is just as strong if not stronger. We agree that the structural deficit must be eliminated, so the choice becomes either ‘harder, deeper, faster’ cuts now – or more cuts post-2015.

Not for Danny Alexander’s critics, however, who are burying their heads in the sand by rejecting both options. They will only follow the coalition’s plan up to 2015, they say, despite this meaning that the plan is left unfinished. Nearly two years after those fateful 22 days in May, our party spokespeople are still explaining our reasons for signing up to coalition in terms of vital deficit reduction, of sticking to the plan. Our position is thus being undermined by these critics, who do not seem aware that they are threatening the very arguments that we have been making for our entry into national government.

Reality needs to strike home, and strike home soon – we have shares in both the tough decisions and the rewards, implementing cuts but also implementing over two-thirds of our manifesto. The many generations of liberals who fought so hard and so unsuccessfully for a whiff of power would be outraged at the treatment of our beloved ginger rodent!

Ultimately, no-one denies that we will discuss the detail of additional cuts as a party before they enter our 2015 manifesto. We cannot, however, forget our commitment to saving the nation’s finances by removing the structural deficit, even if it takes us beyond 2015 to achieve.

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 regress at all. Be that as it may, how can it be a just strategy to uprate out-of-work benefits by freezing child tax credits – thereby moving a further 100,000 children into poverty – while leaving the tax burden on higher income households largely untouched? It conflicts directly with Government commitments to reward those contributing actively to society because it weakens work incentives. I’m glad that the Coalition catchphrase – “we’re all in this together” – seems to have been retired. We so palpably aren’t.

The Chancellor’s early commitment to so-called “expansionary fiscal consolidation” also appears to have evaporated. It was always nonsense. Research indicates that the strategy is almost always a failure. The cuts happen in the short term. The transition to a private sector-oriented, export led economy can take years – and relies not only on strong export markets but heroic assumptions about rapid labour market adjustment and the nature of capital markets. In the meantime, demand collapses, which destroys business confidence and willingness to invest. You set off a downward spiral.

The Autumn Statement introduced all sorts of small-scale initiatives that wouldn’t have been countenanced under pure Plan A. But are these new initiatives are likely to be effective?

Spending on infrastructure has got to be welcome. But, again, as so much of it relies upon finding a vehicle with which to entice pension funds to invest that won’t happen overnight. Personally I would have preferred greater emphasis upon investing in housebuilding, for three reasons. First, it is easier to get housebuilding projects up and running in the short term. Second, more of the money can be channelled to small and medium sized firms of the sort that don’t tend to control road widening or rail building schemes. Third, with housebuilding there tends to be less leakage into imports than other types of infrastructure investment.

The most obvious question mark is over the idea of “credit easing”. Clearly the Chancellor feels he can no longer rely on the more general approach to quantitative easing. Giving banks the money and expecting them to lend has just resulted the banks leaving the money on their balance sheets. The banks say that the problem is not an unwillingness to lend but a lack of demand for funds. The fact that private sector firms are also sitting on piles of cash and not investing lends support to this view. So the Government is trying a more targeted approach. It is trying to strengthen a specific link in the economic chain. But is it the right one?

As perhaps befits a Cabinet drawing its senior members from banking dynasties, the solution is sought in banking. It is of a piece with the supply-side thinking such as proposals for further labour market deregulation and weakening of planning and environmental protections. Pre-Keynesian classical economic thinking continues to dominate at the Treasury.

We face predominantly a shortfall of demand and a crisis of confidence. If firms faced consumers with money to spend then they would have the confidence to take out loans to invest in production. Offering to guarantee loans for investment when there are no consumers looking to buy is coming at the issue from the wrong end. Walsus’s Law doesn’t hold outside of the world of the textbook.

This isn’t about not wanting to reduce the deficit or the desire to continue unsustainable spending. It is about whether the austerity-driven approach is the way to cut the deficit or whether it is self-defeating. Much has been made of the need to preserve the AAA rating from the credit ratings agencies. We are getting strong signals that the austerity strategy will not sate the CRAs and the rating will go anyway. In the meantime, the long run productive capacity of the economy has been undermined and many thousands of people’s lives have been damaged. Other strategies could well be judged more credible in this context.

Danny Alexander apparently committed the Liberal Democrats on live television to collaborating with the Tories in planning £15bn of cuts after 2015. It was news to me. It appears it was news to many other Liberal Democrats as well, including those in the Parliamentary party. It is pretty incendiary stuff.

There are many positive things that differentiate the Liberal Democrats from other parties. One is its approach to internal democracy, with the leadership there to represent the agreed, democratically decided collective views of the membership. Rather than, for example, the leadership sitting behind closed doors cooking up policies that they want to see implemented and expecting the membership to follow like sheep.

Concerns have already been expressed that being in government is undermining this fine tradition. There were dark muttering about the management of the agenda at the Birmingham conference. Was the leadership trying to stifle dissent around the NHS Bill so as not to cause problems with the party’s Coalition partners? Danny Alexander may well have been pressed into an unwise commitment by Paxman’s persistent questioning, but is this how it is going to be from now on? Are we to discover what party policy is by watching late night television? That would be a very sad demise for a fine tradition.

Alexander’s comments also seem to suggest that there is at least some thought being given to a post-2015 coalition with the Tories. That would be very dangerous territory. Keeping an open-mind about the formation of any future coalition has got to be the appropriate stance.

Equally fundamentally, signing up to the Tory agenda now would remove two reasons for voting for the party. One, the party conducts itself in a more democratic manner than other parties, with the scope for grassroots members having a genuine influence. Two, the substantive agenda is unjust and regressive. So what would be the point? Why not vote Tory and get the real thing?

* Alex Marsh is a member of Bristol North Liberal Democrats and blogs at alexsarchives.org.

And the public would be right not to believe it, because, on a key measure, the difference between the cuts planned by Labour and those being implemented by the coalition amounts to just 0.13 percentage points.

Let me explain. In a thorough post over on his Telegraph blog, author Toby Young has the figures for the cuts being made to departmental expenditure limits (DEL – the actual spending on public services, excluding welfare and debt interest payments) over the course of the parliament:

Overall, DEL is set to fall from £375.170 billion in 10/11 to £331.900 in 15/16, a cut of £43.27 billion or 11.53%.

It’s worth noting that that 11.53% will not be evenly spread due to the government’s decision to protect particular departmental budgets (health, international development and energy) and particular spending areas within departments (schools, for example).

So how much would Labour have cut DEL by? Labour’s ‘plans’ were so skeletal that we can’t ask them for this information. However, the Institute for Fiscal Studies have analysed what information we know and concluded that the cuts that Labour would have made to DEL to make their figures add up would have amounted to 11.4% over the parliament.

Of course DEL is only one measure, and doesn’t include welfare spending which has been cut by a greater amount than the IFS analysis assumed. But looking at the figures does show just how nonsensical the debate over public spending cuts has been. And while cuts of 11.53% are clearly very large, the argument that the coalition is cutting spending more than necessary – too far, too fast – is proved utterly false by an analysis of the figures. The coalition is cutting more overall from than Labour says it would have, but not by much (you can see a breakdown of how the extra cuts are distributed over on Mark Pack’s blog).

So next time you hear a Labour spokesperson bemoaning one cut or another, ask yourself this: what exactly would their 11.4% have been?

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 2010 to April 2012 is likely to be around £30 billion less than in the plans set out by Labour’s Chancellor, Alistair Darling.

And precisely because the markets trust the Coalition’s commitment to sound financial management, UK interest rates have plunged and the Bank of England is able to carry out more quantitative easing. This has two crucial benefits. The first is that the lower interest rates cut the costs of government borrowing.

The second is that low interest rates help businesses and mortgage payers – enabling public spending to be cut back and the economy to be rebalanced.

The other good news is that after the massive increase in world food and energy prices this year, inflation is now at its peak, and should fall back to around two per cent in 2012 – taking some of the squeeze off household budgets.

You can read David’s piece in full here.

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 simple. The FT’s
definition is: “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.”

Unfortunately, that definition doesn’t tell the whole story. To understand an OBR report, you have to understand other phrases, such as the “current deficit”, and the “cyclically-adjusted current deficit”.

The current deficit is the deficit, excluding capital spending. Capital spending is on items with a useful life of more than one year, so long term assets, like a new hospital or, er … the Millenium Dome. Current spending is on items which are consumed, like salaries or drugs in a hospital.

Some argue that the capital spending part of a deficit doesn’t matter, because it is investing in a long-term asset which will improve efficiency. But this isn’t always true. What about the aircraft carrier that’s being built, only to be mothballed? And are all replacement buildings so much better built and designed that they will pay for themselves in improved efficiency?

So there’s room for debate about whether we should worry about the capital spending part of the deficit.

In 2010, the BBC reported the OBR saying that the structural deficit would widen from 7.3% of GDP in 2010-11 to 8%.

But is that really what the OBR said? If you look at the OBR
report, you will search in vain for the words “structural deficit”, instead, they use terms like “cyclically-adjusted net borrowing”. In this case, the BBC used the phrase “structural deficit” to mean “cyclically-adjusted net borrowing” – in other words the structural deficit, including capital spending.

However, most commentators use the term in the same way the government does, in its target to balance the structural deficit excluding capital spending.

So, when you’re reading serious articles about the deficit, be careful how you read the figures. Different “experts” can mean different things by the same term. Their only consistency is that they don’t give you a glossary that explains exactly what they mean.

And I find that worrying.

The whole point of the OBR was that it should allow the voter to hold the government to account for its financial responsibility. If even financial journalists get confused, what chance has the poor voter?

The OBR publishes lots of useful data for academics and economists. But this isn’t enough. The OBR need to work harder at making their material more accessible to the general public.

A decent glossary would be a start.

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 act itself.

“They must consider the impact of the cuts they are making and look to make sure that they are fair and that’s the point of the equality duty in anything you do. I remind colleagues endlessly.”

Labour has mounted a campaign highlighting the impact of the coalition’s spending reductions on women, arguing they are bearing the brunt of the cuts because women rely more heavily on the state for benefits and are more likely to work in the public sector.

Featherstone, Liberal Democrat MP for Hornsey and Wood Green, insisted the coalition’s record for women was better than Labour’s.

Explaining the fall in women’s support for both coalition parties, she said: “Maybe the harshness of the situation we find ourselves in, as a result of having the biggest deficit in peacetime, for some reason resonates with women.”

She added: “The coalition government is actually delivering an awful lot for women. There are some hard decisions we’ve had to take because the deficit is enormous.

“I’m sure no parent wants to visit that deficit on their children’s future. So it’s important before everything that we clear up the deficit.”

Read the full piece at the Guardian.

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 this issue but on a wide range of others.

Many take the view that since the government ‘bailed out’ the banks, they should be forced, in the ‘national interest’, to lend more.

The weakness of this argument is that it risks merely re-inflating the economy on the back of cheap and easy credit, which would just store the same problems up for the future that we are living with now.

It is in the public interest for capital to be widely available in the economy, if it is not then all that will happen is that those who already have the resources already, whether big businesses or property owners, will be able to continue to dominate the economic activity of the country in their own interests, because any challengers won’t have access to capital.

If the government are not happy with the current level of capital being provided by the banks, and want to see it increased, then they need to ignore any calls to ‘force’ the banks to lend more. Forcing them to do something would be detrimental to the public good as long as the taxpayer has a stake in the banks.

If banks are forced to lend to uneconomically viable entities then the banks will become less economically successful themselves, and thus make less in profit, hitting their ability to pay tax to the treasury, to repair their balance sheets and to repay the taxpayer for the ‘bail outs’ they received.

At present the big banks have two options when it comes to lending. The first is to lend to the private sector, bearing the risk of an economy which, while moving stoutly in the right direction, is still fragile. The second is to lend to the government, potentially at a lower rate of interest than to the private sector but with almost 100% certainty of being repaid.

Whenever the UK Government borrows, in the form of Gilts, banks and pension funds snap them up. This reduces the pool of money available to lend to the private sector.

In economics this is known as ‘crowding out the private sector’, and is a problem which arises in different ways across a number of different economic theories and methods. The latest UK inflation, trade and to an extent unemployment figures showing some signs of moving in the right direction without any major surgery being needed, as I indicated would happen here.

There is however still a huge amount of spare capacity in the economy, with none of the means of production being deployed to their full potential, and a particular problem with labour and enterprise. To do this the government to continue on the path it is on, of reducing its own borrowing requirements, freeing up financial institutions to lend to the best of the private sector.

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 as fully costed manifestos in each election.

These Alternative Budgets show that in every year from 2001 onwards, our tax and spending plans led to a smaller deficit than Labour planned. In the most recent General Election [PDF] our plans were for a cut in the deficit of over £8bn a year above Labour plans. In the 2005 General Election we were planning to cut the deficit by £5bn a year. Even back as far as 2001 we were planning to cut the deficit by hundreds of millions of pounds a year. All of this was in a political climate dominated by Labour’s claims that Gordon Brown was fiscally responsible, when there was no political pressure for the Liberal Democrats to be as responsible as we were.

It’s easy to say that you are going to cut the deficit in principle. What’s difficult is to have the courage to make the difficult decisions to cut spending, avoid populist promises and, where necessary, increase taxes. If Labour are against all the cuts, then they should explain how they will pay for their spending spree. If they are in favour of some of the cuts, then it’s time they told us which ones.

Rob Blackie was the party’s Director of Research from 2003-2005 and was heavily involved in writing every Alternative Budget from 2000 – 2005, and in costing the 2001 and 2005 General Election manifestos. He has been active in London politics for 11 years, including running the only campaign to win a council seat from third place in London in 2010. Rob writes a blog on e-campaigning at www.rob-blackie.blogspot.com.

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, so they already take into account less income tax and VAT revenues, and higher spending on unemployment benefits.

It would have been useful if the IPPR had tried to put detailed numbers on the reasons for that dramatic increase in the deficit. How much was this because the recession did permanent damage to sustainable economic activity, and how much of it was because of the end of a debt-fuelled bubble?

If the IPPR won’t do it, perhaps another body will,because this is an extremely important question.

If the reason for the vast structural deficit is because the government was making long-term spending commitments on the basis of a windfall from temporary bubble-related revenues, then this isn’t just of historical interest.

The economic statistics prior to 2009 did not warn us of a hidden structural deficit. We need to be assured that the methodology that the OBR is using will warn us if this happens again.

And, if a large part of the growth prior to 2009 was based on rampant lending, then we need to be warned of that. So that governments will find it harder to pump up a bubble just before an election, and claim this as sustainable growth.

Aside from that important point, I found Tony Dolphin’s piece disappointing. He repeats, among others, the standard Labour claim that Labour had a lower deficit in 2007-8 than it inherited from the Conservatives in 1997.

While factually true, this is political spin. Tony Dolphin is not comparing like with like.

In 1997, the UK had a deficit on a firm downward trajectory, so that, when Labour followed the Conservative spending plans, within two years they were running budget surpluses. In 2007-8, unsustainable spending was rising rapidly. When the recession punctured the bubble, revenues from sources associated with rampant lending disappeared, and the deficit leapt to a peacetime record. If he compares the deficit in 1997 with that in 2010, when the coalition took over, the statistics tell a very different story.

This sort of spin is understandable from politicians. From a think-tank, it is worrying, because it implies that there is some kind of group-think in Labour-leaning circles. That they are refusing to acknowledge what really happened.

For Liberal Democrats, this matters. It is in our interests for Labour to put behind it the mistakes of the Brown years, and re-establish its economic credentials. Otherwise, I fear, after 2015, we are in for a decade of Conservative majority government.

For the country, this matters. Because, if Labour refuse to accept the mistakes of the past, their opposition will inevitably take the form of popularism, aimed at stoking up anger at deficit reduction, rather than in offering a coherent alternative.

Irrespective of who wins in 2015, the social cohesion of the country is important.

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 a member that made these dreadful decisions.

This is a classic example of what may be termed the Politics of Amnesia. We all expect time to be a great healer. It was not surprising, for instance, that the illegality of the Iraq war should have faded as a factor in the 2010 election despite having been potent five years earlier. People are remarkably forgiving of their politicians even while claiming to be cynical and disillusioned.

But the Hodge episode is a new phenomenon – denying responsibility for very recent acts and policies which are on the record as yours, in the confident hope that no-one will notice.

There are other examples: the debt crisis is portrayed as entirely a world phenomenon, despite the fact that the UK deficit was worse than most other countries and despite the fact that Darling’s growth forecasts were criticised at the time for being wildly overoptimistic (we now know that Brown – and presumably Balls – was behind this disastrous manipulation).

Likewise, it was Labour who instituted Lord Browne’s review of Higher Education and it was Labour who first introduced tuition fees – but without the mass demonstrations now organised by its student arm, the NUS. And Labour was planning to end the Education Maintenance Allowance.

But how do they get away with it? Partially it is unforced errors by the Coalition. If you are going to turn tuition fees into what is effect a graduate tax then say so and reap the plaudits for a much improved policy.

The rest lies with the media. We don’t expect most papers to love us (although the now ridiculous Guardian is perhaps the most disappointing in its partisan coverage). But we do expect the BBC to be a bit better.

In the morning’s programme, there was no challenge to Ms Hodge over her government’s failings. No questions about hypocrisy.

But perhaps that is not surprising from an organisation which has decided to back the No to AV campaign by ordering its journalists not to talk of electoral ‘reform’.

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 appear to have trumped economics on too many occasions over the past eight months”.

And I have to agree. Yes, the deficit needs to be addressed, but the economy also needs to be given time to recover and grow. Unemployment is still increasing, inflation is rising and wages are stagnant. The problem is that it’s very hard to sort both problems at once.

The Coalition seems to have become obsessed with the deficit—something that was true of Osborne and Cameron in the run up to the election—and has taken steps to reduce it. So far, these steps have primarily comprised slashing public spending by almost a fifth and increasing VAT to 20%.

These policies have started to take grip now and their effects will be seen in GDP figures during the coming years. What we are yet to see, however, are any policies for encouraging growth. Yes we have a Green Investment Bank on the (distant) horizon and a lot of talk about encouraging small businesses, but there is no equivalent to the relatively speedy action taken on the deficit.

By attacking the deficit so quickly, the Coalition risks stifling growth for years to come. Two of the determinant factors for GDP are government spending and consumer spending. But the measures so far introduced will decrease both of these.

By cutting government spending, you reduce government contracts. Government contracts are vital in encouraging growth as the money feedbacks into the economy. Firms make money, they contracts create jobs. People get paid, and then people spend their money and pay taxes. Welfare costs decrease.

By increasing VAT, at a time when the cost of living is increasing and wages are stagnant, the spending power of consumers is decreased. Less money is spent, demand is lower, and there are less jobs and lower growth.

The reductions in public spending will remove just under half a million jobs from the public sector. The Coalition is confident that the private sector will more than pick up this tab. What is the basis for this confidence? As Sir Lambert asked “where’s the growth going to come from?”

The old saying “you have to spend money to make money” is surely never truer than when applied to governments during recessions. The deficit needs to be brought under control, but it is a question of timing.

The Lib Dem manifesto reflected this sentiment:

“We must ensure the timing is right. If spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma.”

And in a statement issued at the beginning of 2010, Vince Cable responded to news that the economy had grown by 0.3% that:

“This news underlines again the folly of rushing into rapid cuts which could push the economy back into recession and inflict further structural damage on the UK, making it harder to sustain our credit rating and creating an even larger budget deficit.”

Unfortunately, it seems that when it comes to these matters, either the Lib Dems in the cabinet have changed their minds, or economic policy is being dictated to them by the blue side of the coalition.

The misguided notion that by tackling the deficit first you can encourage growth because market confidence will be that much stronger ignores the importance that consumer spending plays in economic growth. It also misses the more human consequences that high unemployment and rising prices accompany.

To make matters worse, both the stagnating economy and the deficit reduction tactics will hit the most disadvantaged hardest. As a member of a party founded on equality and fairness, this is a bitter pill to swallow.

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 cooperation on policy to become a halfway house to defection, but that doesn’t mean we should refuse to offer him public advice.

Labour may be intending to steal our votes and create schisms within the party, but it’s no different from David Cameron’s invitation to Lib Dems to “lend their vote to the Conservatives” a couple of years ago.

If they do borrow Lib Dem policies in the way Tony Blair did, a future Labour may still end up just as illiberal as they did before, but their borrowing our policies would still be a good thing. It would increase our influence on the political consensus, it would strengthen our negotiating position within the coalition, and it would make a Lib Dem/Labour coalition more feasible after the 2015 election.

So, despite being a supporter of Nick Clegg and of the coalition, I’m going to suggest a few ideas:

Economy and deficit

By leaving a huge deficit to their successors, Labour have seriously damaged their reputation for economic competence. Their first priority should be to try to restore it.

Labour should change from its strategy of saying nothing and scapegoating the coalition for the pain caused by Labour overspending. They should offer to form a cross-party committee to explore areas of consensus for deficit reduction. For this to work, there must be a strong ethos of confidentiality in the discussions, so he should choose representatives who have a track record of avoiding tribalism. It should be low-key, so that it isn’t wrecked by political opportunism. The objective would be to find policies that, without consensus, would be politically impossible.

Making the Bank of England independent has been a success, but it didn’t prevent a huge structural deficit. The reason for this overspending is nothing knew. To a lesser extent, something similar happened in the recession of the nineties, when the temporary windfall of tax revenue caused by a housing bubble disappeared.

Any government, faced with large temporary tax revenues, finds it extremely hard to resist the temptation to spend it, even though that will bequeath the country with a large structural deficit. They will do so because the overspending isn’t immediately obvious, and so, politically, they can get away with it.

So the next government should instruct the Office for Budget Responsibility (OBR) to produce regular estimates of the underlying structural deficit, by estimating what part of government revenue is caused by a bubble, and so is temporary. The OBR should also highlight other liabilities which do not normally fall under public debt, such as PFI and public sector pension liabilities.

Council Tax

One of the most regressive taxes in the UK is the council tax. This has risen dramatically over the last decade.

In one sense, reducing government grants and increasing local taxes is a good idea, because it frees local councils from central government control. But a progressive council will be very reluctant to increase such a regressive tax.

So the government should undertake a major reworking of council tax, introducing more bands at the higher level, and changing the burden of tax, so that the poor pay a smaller proportion.

I’ll be suggesting a few other ideas in a second article tomorrow morning. But, until then, over to you guys for your policy suggestions.

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 deficit is going to dominate the whole parliament, and fixing it is absolutely essential.

Over nearly thirty years of party membership, I’ve constantly been infuriated by the old cliché, that progressive politicians are irresponsible with the public finances.

There is absolutely nothing progressive about creating initiatives that have to be scrapped because you overspent. All you do is employ people you have to sack, and raise hopes you have to dash. That, and waste a lot of money. Labour avoided doing that in their first term, then, to their shame, they did exactly that in their next two.

But progressive politicians can be responsible. Labour in their first term ran a surplus. So did Roy Jenkins. Bill Clinton was extremely responsible in running the finances of the USA, especially when compared to his Republican predecessors or successor.

And the Lib Dems are being responsible too.

For me, sorting out the potential catastrophe of the deficit is central. But the party has done a lot more than that.

There are numerous examples of progressive policies: for example the higher tax allowance, the pupil premium, and the scrapping of populist authoritarian legislation. Perhaps the greatest victories of Lib Dem influence have been in the policies of Tory Ministers. Ken Clarke’s shift to a progressive penal policy is remarkable, and Ian Duncan Smith’s initiative to remove the poverty trap is potentially historic.

I applaud the fact that these policies aren’t just throwing money at a problem. Rather, they seem to me to be hard-nosed and evidence based.

I’ve mentioned in other threads that there is a lot I’m uneasy about and some things I really hate. This isn’t the thread to go into the negatives, but what reassures me is that I’m sure some Lib Dem ministers share my misgivings, and are working behind the scenes to try to mitigate the damage.

When I remember the last Tory government, who were in a much better financial situation but far more regressive, and compare it to the Coalition, the contrast makes me proud of the difference our people are making.

This post grew out of a thread in our members’ forum responding to Richard Huzzey’s resignation letter. If you are a member of the Lib Dems, you can join the discussion.