Consequently I dusted down my new year’s resolution to ‘laugh a lot more’ and began thinking about Labour’s attitude to economics. I propose to look at the Labour leadership’s deeper economic instincts to provide a guide as to how they might actually run the economy.

Ed Balls famously endorses post neo-classical endogenous growth theory: a theory which might be regarded as a left-wing version of the famous ‘trickle down economics’ which Thatcher practised.

Post neo-classical endogenous growth theory argues that if a government concentrates on creating high-skill, high-salary jobs, the wealth created by these jobs will create further, lower skilled jobs down the line, for less skilled workers to do, culminating in full employment without the government having to intervene.

This is a fundamentally liberal theory, and is much closer to the economic liberalism of Keynes than to the social democratic tradition of labour.

The problem with this theory and how it was applied in Britain is that successive governments of both the other parties ensured that most ‘high end’ value added jobs in the economy came to London and the surrounds, and even if one accepts the trickle effect, Britain is quite simply too large for all the regions to benefit from such a policy .

Under the coalition, the focus has changed, the talk is of rebalancing the economy, with thousands of apprenticeships created and a determination to revive manufacturing.

But perhaps the biggest clue to the current Labour leadership’s economic DNA can be found in relation to their rejection of the “lump of labour” theory .

Lump of labour theory states that there are a finite number of jobs in the economy at any one time, so the only cure for this is for the government to directly create jobs in equal number to the amount unemployed.

This theory fell from favour among most economists quite some time ago, they declare it a fallacy. Indeed “lump of labour fallacy” is now far better known than the original theory, which is now only used by ardent protectionists and crude neo-fascists trying to give their prejudices an economic veneer.

But it wasn’t always thus. ‘Old’ Labour politicians believed that government’s should pursue a ‘full employment’ policy, because they subscribed to lump of labour theory, which is also a central tenet of a Marxist analysis of capitalism.

For post neo-classical endogenous growth theory to be effective, ‘lump of labour theory’ must be a fallacy, because post neo-classical endogenous growth theory, as we have seen, is predicated on there being an elastic number of jobs in the economy even without direct government intervention.

Thus it could be argued that labour have abandoned ‘full employment’ as a policy, and embraced the more economically liberal stance of people like Vince Cable, who have been arguing for a generation that ‘lump of labour theory is a fallacy’. By embracing such a view, the two Eds are embracing classical, economic liberalism.

The reason they appear to be such ineffective leaders of the opposition is that they must constantly neglect their liberal instincts for the rhetoric of the left in order to keep their grassroots happy. In reality Ed Milliband has shown himself on numerous occasions to be a classical liberal.

On economics and a range of other matters, his instincts are much closer to the Orange Book than the Red Flag, which must be awkward for those in the Liberal Democrats who have, since the formation of the coalition embraced Milliband as an alternative to the economic liberals within the Lib Dem leadership. Still its an improvement on previous attempts by Lib Dems to embrace Tony Blair, who has described himself as a ‘conservative on economics and foreign policy’

Liberals of all hues should rejoice that as historically with the Welfare State, Climate Change, the EU, the leadership of the Labour party are starting to embrace liberal solutions. .

Since the Autumn Statement, when figures for the estimated size of the budget deficit in future years were revised upwards, one of Labour’s main arguments has been that by cutting “too far, too fast” the government has in fact made the deficit worse in the medium term.

Here’s what the IFS had to say on that argument:

The official estimates of the direct impact of policy measures announced since the coalition government came to power are that these will reduce borrowing by 2.7% of national income a year by 2016–17. Over the same period, the Treasury’s and OBR’sforecasts suggest that underlying borrowing has been revised up by 2.6% of national income in 2016–17. In other words, the fact that borrowing for 2016–17 is now forecast by the OBR to be roughly the same as forecast by the Treasury in March 2010 reflects two offsetting factors: (i) the underlying economic outlook has weakened significantly and thus borrowing would be expected to rise; and (ii) the current government has taken action to cut public spending and increase tax revenues by more than had been committed to by the previous government, which the OBR expects will reduce borrowing.

Of course, there are uncertainties around any estimates of the impact of policy changes on overall borrowing and it is possible that some of the weaker outlook for the economy has actually been caused by a detrimental impact of the additional fiscal consolidation announced by the coalition government that is not captured in the official estimates of the measures’ impact on revenues and spending. However, the error in estimating the size of the policy impact would have to be implausibly large to lead one to conclude that borrowing would actually have been lower in the absence of the additional tax rises and spending cuts that have been announced since May 2010 [emphasis added].

What the IFS are essentially saying, then, is that (1) the coalition’s deficit reduction programme has had a relatively small impact on overall economic growth, particularly compared to other factors and that (2) the budget deficit in 2015-16 would be significantly higher were it not for the tax rises and cuts being implemented by the government (see the final, emboldened sentence).

Anyone who has stopped and thought about Labour’s argument – that tax rises and spending cuts will lead to a higher budget deficit in the medium and long term – will realise instantly that it is utter drivel, but it’s good to see an institution as respected as the IFS putting it in black and white for all to see.

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

With the peculiar separation in the UK which has evolved between the ‘real economy’ and the civil service, media & political elites, this has left the political system scratching its head over how to achieve ‘fiscally sustainable quality growth’. The result has been a series of ad-hoc programmes – some designed to substitute for an ailing banking sector (growth funds, loan guarantees), some tax breaks, and facilitation of a few large infrastructure projects – but without a deeper look at the role of government in the real market economy in an international context. So here’s what to do…

1. The government needs to recognise the size of the task, the obstacles to change, and the extent of the long-term policy neglect. This leads to a conclusion that we don’t have the institutional structures necessary for the thousands of ‘growth-orientated’ reforms required across the UK administrative structures. For Conservatives, think of the effort needed to get the big privatisations done in the 1980s. Since the fiscal & macroeconomic changes needed are well underway, now is the time to switch the emphasis to growth.
2. The bulk of reforms needed include demonopolisations, removals of ineffective restrictions, more responsiveness to business needs in how the state delivers services and solves problems, and major improvements in the way that international trade & technology are promoted.. These systemic reforms cost little but are resisted by those benefiting from the status quo – often businesspeople that make political contributions. The reforms are hindered by lack of familiarity with the subject matter among civil servants, and bewilderment at how other countries run their ‘real economies’ more effectively. As a start, fiscally sustainable real-sector growth needs a Cabinet Committee of its own, where it is not crowded out by macroeconomics and fiscal policy.
3. Unfortunately, most such reforms take time. Decades. These include global trade & technology promotion reforms, how, regionally, education provision is better orientated to needs and shortages, and a wide range of equity finance, governance and competition policy reforms. Some however, have more immediate effects, such as re-casting how state R&D spending is managed, addressing excessive monopoly power and cartelisation in commercial banking, and further ‘planning’ reforms. Unlike macroeconomic & fiscal reforms, real market economy reforms are not ‘one decision’ changes. This means that policy requires pro-growth UK institutions internationally and up and down the country, which recognise the long term campaign nature of the changes needed.

Luckily the debate on this is now less clouded by the old market-versus-intervention ideological battles of the past. Also luckily, the Lib Dems are currently in a stronger position than the Tories in advancing these reforms. But not for long; some Tories are catching on…

Here are two graphs, both from the Financial Times. This one shows the UK’s Nominal Gross Domestic Product. It shows the development of the double dip recession we are facing.

The figures are up to October 2011. The next will be published in February, but expect the trend lines to continue ‘south’.

Then, here’s a chart of a measure of the supply of money in the economy. It is a broad measure called M4

This is a very revealing chart. First, what you can see is that since mid-2011 it too has gone south in a hurry.

What is also striking about this second diagram is that it shows that the money supply was falling *before* the Northern Rock crisis and obviously before the collapse of Lehman Brothers and the onset of the banking crisis, proper.

With the link between the money supply and prices, you would expect inflation to start falling in late 2008. And so it did. Inflation breakevens fell from 2.85% on 1st September 2008 to -2.77% on 2nd December 2008.

So with money supply figures pointing to inflation falling fast, Lehmans going txxs-up, banks refusing to lend to one another and the prospect of a severe deflation staring us in the face, you would have expected the Monetary Policy Committee (MPC) to slash interest rates. Or at least you would have expected to hear Prime Minister Brown throwing telephones about the place if they hadn’t. They did, surely they did, didn’t they?

No. The Bank of England did not lower short term rates to 0.5% and start quantitative easing until March 2009, six months after Lehman.

The MPC were utterly negligent and a mild recession got a hold on the minds of consumers and producers alike to make it a Great Recession.

Back at the first diagram you will see that things started to improve, but, before it could really make a difference, the voices on the MPC started calling for interest rate rises. At one point three of them wanted increases. Imagine if there had been a majority for that policy!

As you can see from the M4 figures the money supply has been bumping along at 2 or 3%. If you have inflation at 4 or 5% (because of tax hikes and oil price increases) and increase in the money supply of only 2 or 3% is a real reduction of 2 or 3% – keeping the brakes on the economy. No wonder it can’t motor down the road, let alone get up the hill.

And here is the hill. For a long period before 2007 the Bank of England seemed able to keep NGDP rising at around 5%. Roughly 2.5% inflation and 2.5% growth. NGDP today is 10% below where it would have been if there had been the necessary monetary stimulus to get the economy back on trend.

That’s a lot of jobs, a lot of lost tax (the main reason for the deficit increases) and a lot of extra benefits to be paid.

Why 29 days to save the UK?

We need to reduce real interest rates by raising the expected rate of inflation. This means resetting the mandate given to the Bank of England and the MPC by HM Treasury. And that’s done every March.

The thinking behind setting a higher price target is described by Nicholas Craft in a paper commissioned by the Centre Forum entitled, helpfully, Delivering growth while reducing deficits.

The slack this cuts us should be used as part of a great campaign to revive house building. According to Professor Craft, that’s what did the trick in 1932/4.

29 days and counting.

(Available on the BBC website here.)

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.

I shall tell the Prime Minister what is happening in the NHS: waiting lists up, morale down. What does the majority-Conservative Select Committee on Health say about his reorganisation? It says that it will be a “disruption and distraction that hinders the ability of organisations to” release savings.

Let us be frank: this is a Bill that nobody wants. It is opposed by doctors, nurses and patients. Before the election the Prime Minister said, “No more top-down reorganisation.” Is it not time he kept at least one promise, put aside his pride and arrogance, and dropped this unnecessary and unwanted Bill?

In return, all Cameron could do was bleat on about Doncaster, almost to the point of obsession.

Pass the sick bag, Alice

It takes considerable aplomb to out-pontificate Sir Peter Tapsell, but Eleanor Laing (Con) managed it with a very loud quotation from Robert Burns, it being Burns Night (Day). OK, she’s Scottish. – Shame she has to represent Epping Forest.

But she set off David Cameron who also felt the need to quote Burns. Oh dear.

iPad watch

Caroline Spelman (Con), Secretary of State for Environment, Food and Rural Affairs, spent the first few minutes of PMQs catching up on her email on her iPad. Bless her. She types very well on a touch-screen.

Liberal Democrat questions

Suitably, for Burns Night (Day), they came from two Scots:

Sir Robert Smith stated that the UK has developed a world-leading safety regime for offshore oil and gas which is threatened by EU regulaton. He asked if the PM would press for directives which can be interpreted flexibly, rather than regulation.

Malcolm Bruce asked about the British Airways takeover of BMI and what assurances there would be to retain landing slots at Heathrow Airport from regional airports such as Aberdeen.

* Paul Walter is Monday Editor of Liberal Democrat Voice and blogs at Liberal Burblings

Whatever the reason, this morning’s interview with Nick Clegg saw a helter skelter tour around a huge number of topics, making for a  comprehensive tour of current political issues but also a degree of superficial Q+A that did not shed much light on any of them. The number of times Marr’s questions were no more than very superficial in their references suggests that this style, whatever its reason, rather over-stretched him.

I suspect Nick Clegg went into the interview wanting to talk in some detail about his vision of fairness in a time of economic austerity as each time he half got going on such a topic it sounded like there were well prepared answers starting to come out, but each time also Andrew Marr quickly cut him off.

What we did get was a brief pop at Labour for not having a clear, coherent policy for delivering fairness when there is a deficit to tackle and a repeated emphasis on the need to make the country fairer – especially via targeted public services, such as the pupil premium, and changes in the tax system, such as a mansion tax. Fairness was also used to defend the benefits cap, on which the House of Lords votes tomorrow, Nick Clegg backed the principle of a cap strongly but added. ”Of course we need to look at transitional arrangements … and the place of children”.

One sound bite of note: ”I would like to see David Laws back in government”.

* Mark Pack is Co-Editor of Liberal Democrat Voice and writes a monthly newsletter about the Liberal Democrats.

I, along with most liberals judging by the reaction on Lib Dem Voice, warmly welcomed the substance of Nick’s speech as giving a distinctive liberal voice to the debate about responsible capitalism and  a real push to the causes of employee ownership and employee share ownership. As Nick and others have stated there is a clear link between employee participation and employee ownership or share ownership and company performance. But I was led to ponder whether  a “John Lewis economy” is a liberal economy.

What about a “Co-op economy”, where consumers own the business? Or a “Tesco economy” where USDAW, the shop workers union, praise the partnership agreement with Tesco as  giving staff “the opportunity to have a real say on pay, policies and other major business decisions through their staff forums and some of the best pay and conditions in the retail industry”? Or an “ASDA economy” where last year, employees who had saved £250 per month over three years in the company’s SAYE share scheme were entitled to payouts of £16000 ? Or a “Sports Direct economy” where a two year share scheme meant employees last year received on average a £44,000 bonus due to the company’s soaring share price? For both ASDA and Sports Direct employees these can be life-changing sums of money. And should we implicitly decry a more traditional family owned “Sainsbury’s economy” where until 2005 the Sainsbury family owned 35% of the shares and still own 15%?

Isn’t a “liberal economy” one where there is a rich diversity of forms of ownership, family owned business, traditional PLCs, mutuals, consumer co-ops and employee owned businesses competing with each other? A more diverse ownership structure for the economy will be a more robust structure. In some sectors some forms will be more prevalent than others. In some cases there may be a role for hybrid forms, e.g. Circle Healthcare where employee ownership and private equity “co-operate”.

We are far from such diversity at the moment, which is why there is a need to look to remove  unnecessary barriers to these other forms of ownership flourishing. There is clearly scope for a much bigger role for employee ownership and share ownership in the economy. But we also need to keep in  mind that a “John Lewis” structure is just one of many.

* Chris Nicholson is Chief Executive of CentreForum the liberal think tank.

My starting point is, I am afraid, we are going to have keep all these cuts. There is a big squeeze happening on budgets across the piece. The squeeze on defence spending, for instance, is £15bn by 2015. We are going to have to start from that being the baseline. At this stage, we can make no commitments to reverse any of that, on spending or on tax. So I am being absolutely clear about that.

So, it was something of a surprise when Ed Miliband said at this week’s Prime Minister’s Questions:

Why is unemployment rising? It is rising because he is cutting too far and too fast.

I would like to know how the Labour party can say those two things wthin four days. It would appear that Ed Balls has cut the ground from under Ed Miliband’s feet. He simply cannot credibly accuse the government of “cutting too far and too fast” when his shadow chancellor is saying “we are going to have to keep all these cuts”.

Question of the week

Labour’s David Hamilton asked:

In America, six directors from the bailed-out Freddie Mac and Fannie Mae companies have been taken to court for gross mismanagement. In this country, the Financial Services Authority says that it cannot bring enforcement action against Royal Bank of Scotland because of the ongoing legal tender. Will the Prime Minister consider introducing a legal sanction of strict liability into his draft Financial Services Bill so that those responsible for the banking crisis will be taken to task?

Liberal Democrat questions

Andrew George called for the Health and Social Care bill to be shelved, and for the government to “go back to the coalition agreement and build from there”.

Tessa Munt said that mainstream terrestrial television carries adverts for online bingo at 5pm and that 31 hours and 55 minutes each week is dedicated to live casino betting and gaming…at a time when there is £1.45 trillion of personal debt in this country. She called for greater protection for consumers via Ofcom.

Uncalled for insult of the week

To Dennis Skinner (Labour), the Prime Minister rather mean-spiritedly said:

It is good to see the hon. Gentleman on such good form. I often say to my children, “There is no need to go to the National History museum to see a dinosaur; come to the House of Commons at about half past twelve.”

Paul Walter blogs at Liberal Burblings

* Paul Walter is Monday Editor of Liberal Democrat Voice and blogs at Liberal Burblings

He talked about vested interests in the British economy and the need to shine a light on boardroom practices. He also expressed a desire to see wider employee share ownership – trust in people, rather than the “interventionist state” – and the move towards a “John Lewis economy”. Clegg said:

[Liberals] recognise that narrowing wage inequality is not solely a task for the state. We also need to put much more power in the hands of other stakeholders in the economy – shareholders and employees – when it comes to setting top pay.

City bonus season is just round the corner, so it is easy to see why the party leaders are talking tough on boardroom remuneration. Ed Miliband is keen for this to be one of the battlegrounds on which British politics is fought. “Bring it on” he asserted last Tuesday.

But as Clegg said today, “whether you call it a new economy, an ethical economy, moral markets, responsible capitalism, there is a big difference between having strong views on bonus culture or excessive top pay and wanting real change in the practices and principles that guide corporate life”. The true test will be whether something is actually done about the ‘fat cats’. Labour isn’t in power, so the ball is in the coalition’s court.

It is important here that the government doesn’t get too bogged down in efforts to curb excessive boardroom pay. Creating a more ‘responsible capitalism’ will require more than that, as Clegg acknowledged in his speech.

A week ago my CentreForum colleagues (Chris Nicholson and Patrick Briône) set out a whole package of measures for the government to consider. Making companies’ remuneration policies more transparent was one of them. The rest can be looked at here.

Evidence shows that empowering employees – giving them a real stake in the company that employs them – boosts performance and discourages the kind of short-termism that led to the financial crisis. It is “a hugely underused tool in unlocking growth”, says Clegg, who announced today that he wants this to be the “decade of employee share ownership”.

And why shouldn’t it be? Inviting a representative from the shopfloor to express disapproval at remuneration committees is tokenism. If you want employees to have a real stake in their company, you should give them the option of becoming shareholders. It’s a classic liberal idea and one that Clegg rightly places at the top of the agenda for ‘responsible capitalism’.

Tom Frostick is head of press and communications at CentreForum, the liberal think tank

The first good news is that inflation should fall – and steeply. Last year, inflation rose because of higher energy and food prices, and the rise in VAT.

Most of those increases are behind us – last week, energy price cuts of five per cent were trumpeted. Inflation, which peaked last year at 5.6 per cent (retail prices), should be down to about 2.5 per cent by May.

That will help hard-pressed household budgets.

The second piece of good news is that the Government has now delivered most of its bad news.
It is unlikely there will need to be any significant further tax rises and the tax-free personal allowance is due to rise by £600 this April – helping every taxpayer.

The third cheering fact is that interest rates and the pound look likely to remain low, thus helping people to pay off debt, and businesses to export

Finally, while the eurozone is a complete mess, growth elsewhere has been better than expected of late, particularly in the US.

The other good news, he reports, is that the Chinese are buying our Rollers by the shedload!

The full article can be found here.

Deputy Prime Minister Nick Clegg has urged more companies to offer shares to their employees, saying it will improve productivity and unlock growth.

He told an audience in the City that the government planned to cut red tape, and reform the tax system to accommodate employee ownership.

It is hoped the measures will create what he called a “John Lewis economy”.

…The Lib Dem leader told the event hosted by the City of London Corporation and Centre Forum think tank: “We don’t believe our problem is too much capitalism – we think it’s that too few people have capital.

“We need more individuals to have a real stake in their firms. More of a John Lewis economy, if you like.

“And what many people don’t realise about employee ownership is that it is a hugely underused tool in unlocking growth.

“I don’t value employee ownership because I believe it is somehow ‘nicer’ – a more pleasant alternative to the rest of the corporate world. Those are lazy stereotypes.

“Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors”

“Firms that have engaged employees, who own a chunk of their company, are just as dynamic, just as savvy, as their competitors. In fact, they often perform better.

“Lower absenteeism. Less staff turnover. Lower production costs. In general, higher productivity and higher wages. They weathered the economic downturn better than other companies.”

* Newshound sets the agenda, as you would expect from a Red Setter

I can of course entirely understand the urge to shout ‘Ha! Told you so’ at the shadow chancellor. In an interview for The Guardian published on Saturday, Mr Balls stated categorically:

“My starting point is, I am afraid, we are going to have keep all these cuts. There is a big squeeze happening on budgets across the piece. The squeeze on defence spending, for instance, is £15bn by 2015. We are going to have to start from that being the baseline. At this stage, we can make no commitments to reverse any of that, on spending or on tax. So I am being absolutely clear about that.”

The economy? It’s what you believe, stupid

For those Lib Dems who are daily having to defend the party against Labour’s condemnation of the Coalition’s policies, it is hard not to raise a cheer at this apparent climbdown. Of course, as Mr Balls’ defenders would be quick to point out, he is simply stating reality: with the UK economy faltering there is quite simply no public money to throw around. He and they would also argue that this is the Coalition’s fault: the Government cut “too hard, too fast” and is now paying the penalty.

As with many economic arguments, your interpretation of Mr Balls’ speech will turn less on the facts and more on your beliefs. If you think the deficit is the greater long-term threat to the UK’s prospects of economic growth you’ll trust the Coalition’s policies. If you think growth will be harmed by cutting the deficit too quickly you’ll be more inclined to Labour’s approach.

Coalition supporters will point to the fact that the UK has avoided the fate of many of our European neighbours, including now France, and has maintained its triple-A credit rating, keeping the cost of government borrowing low.

But, in the absence of a parallel universe, we have no way of knowing how the economy might have fared had the Coalition stuck to Labour’s plan only to halve the deficit within one parliament rather than to eliminate it. Would the UK have bucked the European trend? Or would we now be facing far more bitter-tasting austerity medicine?

No-one knows, or can ever know, for sure.

Why Labour’s economic narrative is failing

Over at his ‘thinking liberal’ blog, Matthew Green has a fantastic, must-read post analysing as neutrally as possible (despite the trenchant headline, ‘Ballsed up – Labour’s economic narrative implodes’) the perception of Labour’s economic narrative:

The angry brigade hears what it wants to from the “too far, too fast” mantra and thinks that the Labour front bench is on its side. But the Labour leaders also know that the economy has shrunk so much that many, indeed, most, of the cuts will have to be made eventually. Labour’s plans to cut the deficit before they left office weren’t so very different to the current government’s, and very little at all compared the surprisingly slow pace at which the deficit has actually been cut. Their plan is actually to win back and exercise power again, rather than simply have fun as an opposition party. …

But Labour have encountered a wider political problem. The passion and anger of their activists burns as bright ever, but the public are simply not convinced. Why? It is tempting to blame economic naivety, which allows the government and its supporters to present the government’s finances as if they were a household budget. Actually I think the feeling runs deep that the economic prosperity of the late Labour years was unsustainable. There is no naivety about that standpoint. Government debt catches the blame – but in fact it was private sector debt that was more to blame. And for those that did not have a government job, the suspicion the state was too big and benefits too generous ran deep. …

And so the two Eds have started to reach out to the sceptics by emphasising … that the cuts will have to stay. The hope is that this will then give them an opportunity to get a hearing for whatever else they have to say, on corporate greed, the NHS reforms and so on. But the activists are apoplectic. The Guardian‘s weekend article has attracted a whole host of disbelieving and hostile comments from a group of people that is now feeling disenfranchised.

But the narrative is too complex to be accepted by the sceptics either. Only a confession that the economy before 2008 and unsustainable, even without a financial crisis, will do that. Alas the two Ed’s don’t think they can say that. And so politically the narrative falls apart.

That all seems fair to me. And to be fair to both Eds, Balls and Miliband, I’m not sure how they can create a winning narrative given the still-dominant perception that the Coalition is clearing up Labour’s mess. Voters will gib at this or that cut, and would like to see more aggressive government action on top pay to make them feel like we genuinely are all it in together — but overall the current austerity is seen as an unpleasant necessity to be got over and done with as soon as possible, rather than stretched out.

But what of the Lib Dems’ own economic narrative?

So there are a few Lib Dems feeling relieved that the flak for facing up to economic reality is now being flung in Labour’s direction. But it’s worth considering the following two points:

1) We agreed with Labour’s spending plans in 2005

The Lib Dems were as signed-up as Labour to the government spending that saw the UK economy running an unsustainable deficit at a time of growth.

True, it can be argued that years of under-investment in public services required a correction. But the fact remains that we — along with the Conservatives (remember Messrs Cameron and Osborne’s “sharing the proceeds of growth” triangulating mantra? — were just as culpabale as Messrs Blair, Brown, Miliband and Balls in advocating policies which left the British economy especially vulnerable when the world economy collapsed.

Yes, Vince was a voice in the wilderness warning of high and unsustainable levels of private debt. But his warnings were taken rather more seriously in retrospect than they were at the time, including by the Lib Dems ourselves.

2) We opposed the scale of Tory cuts in 2010

We fought the 2010 general election on an economic platform which was somewhere between Labour’s and the Tories’, but was generally closer to Labour’s in terms of fiscal tightening, both in the phasing of deficit reduction, and also its balance between tax rises and spending cuts.

Had the electoral arithmetic been different, and a Labour-Lib Dem coalition been formed, there’s little doubt the parties would have agreed a less austere economic package than the one we signed-up to with the Tories. There’s no doubt that would have pleased many Lib Dem activists. However, having now committed to the Coalition’s austerity measures, members have in the main got behind it, as the results from our recent surveys have shown.

But we shouldn’t kid ourselves that the position the party now stands for is driven more by Realpolitik than it has been by our 2010 manifesto.

Conclusion

Such has been the visceral unpleasantness of the attacks mounted on the Lib Dems by left-leaning critics for the party’s decision to back the Coalition and the austerity package which was agreed, it’s no surprise that Ed Balls’ semi-U-turn has left many in the Lib Dems feeling vindicated.

And let me be clear here: I personally back the Coalition’s austerity programme. I believe it is the only responsible economic option for the UK at this time.

But I think it’s also important that we remember that the policies we’ve ended up supporting are not the ones that were in our manifesto. There’s a simple reason for that — we didn’t win the election — and also a less simple reason: the economic conditions have altered pretty drastically in the past 18 months.

So before we take pleasure in castigating Mr Balls it seems only fair to ask ourselves two hard questions.

First, given the Lib Dems backed Labour’s spending plans in 2005, indeed in many areas urged they went further, how far can we plausibly attack the mess Messrs Blair and Brown got the UK into?

And secondly, if we think Labour’s economic narrative is not credible, what would we have said about our own if we had been elected to govern (either on our own or in partnership with Labour) in 2010 given the similarities in our economic programmes?

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.

Jobs, Growth & Reform

Europe is at a dangerous crossroads. Without decisive and concrete action, we risk recession, rising unemployment and falling living standards. There is a real risk of Europe turning inwards, with a return to the protectionist policies of the past. Our ability to prevent this now depends on our willingness to act together in the collective interest.

Resolving the economic crisis is the urgent priority. This clearly requires greater fiscal coordination, discipline and solidarity. But our problems cannot be solved through austerity alone. Unless we can tackle another underlying cause of the crisis – Europe’s lack of global competitiveness – this crisis will be the first of many.

We are firmly of the view that a vital part of a lasting solution is an urgent and far-reaching reform agenda to create the right skills mix and to help unlock jobs and economic growth across the EU. Europe has done this before: the Single Market Programme of the 80s and 90s was a truly remarkable liberal achievement, tearing down trade barriers within Europe and unlocking unprecedented levels of new jobs, growth and prosperity. We need to build on the progress made to date, in particular through Mario Monti’s 2010 report on the Single Market and the Commission’s Single Market Act, to recapture this level of ambition.

We therefore call on all European leaders and institutions to use the January 2012 European Council meeting to kick start and drive forward an Urgent and Ambitious Plan for Jobs and Growth in Europe, including:

A programme for the completion of the Single Market by 2015. This should include a growth test to identify the priority measures, a fast-track mechanism to drive them through the legislative process, and a commitment to prioritise their implementation and enforcement. Completing the single market in the services and digital sectors alone could add hundreds of billions of Euros to the European economy and generate thousands of Euros in extra annual income for the average European household;

A programme running until 2015 for the reform of existing EU legislation, including social and employment legislation, to aid domestic structural reforms across Europe and help deliver flexible labour markets, boost European competitiveness and increase employment;

An ambitious external trade package that taps into the dynamism of other economies around the world, with the aim of completing all existing FTAs by the end of the year – contributing an extra €60bn to the European economy – and including the launch of new trade negotiations with Japan and the US as soon as possible. Such an ambitious external trade agenda could generate millions of European jobs. Meanwhile, we must insist on the respect of existing market access in third countries and must not allow protectionism to gather strength.

A commitment from member states and EU institutions to focus their limited financial and human resources on prioritising competitiveness, innovation, research and infrastructure;

A commitment from member states and EU institutions for growth, competitiveness and external trade to be priority agenda items on all European Council summits until the end of this Commission;

A reinforced smart regulation programme that incorporates the Commission’s welcome new approach to minimising the regulatory burden on SMEs, and includes reviews of the acquis for further opportunities to exempt or lighten the regulatory burden on micro-businesses where justified, a new administrative burden-reduction target and regular progress reports to the Council and Parliament.

Unity, the EU-27 & Eurozone Fiscal Integration

Finding credible solutions to the Eurozone crisis remains our number one priority and is in the interests of all member states. We call upon the European institutions to come to conclusions on the Commission’s enhanced six pack proposals and to adopt positions on the green paper on stability bonds. We recognise that the draft Reinforced Economic Union (REU) Treaty is a step towards greater fiscal coordination, discipline and solidarity among Eurozone countries. However, we strongly believe that this must not come at the cost of division or disunity in the EU.

We therefore call for the new Treaty to focus on fiscal matters among Eurozone members, believing that enhanced competitiveness is most effectively pursued by all EU-27 member states; for the Treaty to safeguard the community method and fully respect the policies and competencies of the EU as set out in the EU Treaties; and for the REU Treaty to be rolled into the EU Treaties in due course.

Political pundits rarely get their predictions right. It isn’t that they are particularly bad at punditry, it is just that – as research has shown across several fields – experts generally have a pretty poor predictive record. One prediction, however, that is rather safer than leaving your chocolate in my safe-keeping is that the economy will continue to be the dominant political issue.

In 2012 at least there is a good reason for such uncertainty with the great uncertainty over the European and US economies, both of which can have large impacts on our own. Some of the news from the US is starting to looking cautiously promising and the world’s economy outside the developed world has also been showing promising signs, including – thankfully – in many of the world’s poorest countries. On the other hand, a Euro-meltdown could make those factors look positively trivial.

Even in the best of scenarios, the Budget will not be one where the government has money to spare. That makes the choices of priorities all the more important. Even without a net reduction in taxation, it is possible to make the tax system fairer or greener. The wealthy can be taxed more and the struggling the least. If there is some sort of fiscal boost for the economy it can be done in ways that initially favour different sections – such as the low paid or the married. And so on.

On many of these issues it is not as simple as a Conservative versus Liberal Democrat split. They often see Conservative modernisers agreeing with Liberal Democrats and in opposition to traditional Conservative backbenchers. That means it is possible to see a distinctively Liberal Democrat influence on the Budget. It will be a key test of what the party achieves from being in coalition during 2012.

You can read the full set of challenges as they are published on Lib Dem Voice here.

* Mark Pack is Co-Editor of Liberal Democrat Voice and writes a monthly newsletter about the Liberal Democrats.

In the 1930s, depression caused countries to sink into rounds of beggar my neighbour protectionism, putting up barriers to trade in vain attempts to protect domestic economies but which only ended up dragging everyone further down.

This time round, not only is protectionism not on the march in the same way, but there has even been a good move towards lowering trade barriers with the agreement that Russia will be joining the World Trade Organisation (WTO):

Kirill Dmitriev, head of the Russian Direct Investment Fund, said that WTO membership could raise Russian growth by 10 per cent over the next five years and could help provide a solution to the European financial crisis.

“The way out of the European crisis is free trade and more cross-border investment,” he said, calling the signing on Friday “a very important milestone”.

There are many changes to the WTO Liberal Democrats want to make, but a WTO with Russia in it is better than one without.

Lib Dem members give thumbs-up (mostly) to Osborne’s autumn statement

Two weeks ago, the Chancellor George Osborne updated MPs on the state of the economy and the government’s future plans in his Autumn Statement as the Office for Budget Responsibility published its latest growth and borrowing forecasts.

LDV asked: Do you support or oppose the following policies announced by the Chancellor?
[NB: results below are arranged in order of net popularity]

Raising the levy on bank profits

Strongly support 64%
Support 28%
No view 4%
Oppose 3%
Strongly oppose 1%
Net support: +88%

Reducing the increases in rail fares to 1% above inflation, rather than 3%

Strongly support 43%
Support 45%
No view 7%
Oppose 4%
Strongly oppose 1%
Net support: +83%

Spending £1bn on subsidising work placements for young unemployed people

Strongly support 46%
Support 40%
No view 7%
Oppose 5%
Strongly oppose 2%
Net support: +79%

Increasing the state pension age to 67 by 2026

Strongly support 41%
Support 44%
No view 5%
Oppose 7%
Strongly oppose 3%
Net support: +75%

Spending money on 35 new road and rail improvement schemes

Strongly support 33%
Support 50%
No view 9%
Oppose 6%
Strongly oppose 2%
Net support: +75%

Increasing out-of-work benefits in line with inflation

Strongly support 30%
Support 46%
No view 11%
Oppose 11%
Strongly oppose 3%
Net support: +62%

Following a two year pay freeze, limiting pay rises for public sector workers to 1% for two more years

Strongly support 18%
Support 44%
No view 8%
Oppose 23%
Strongly oppose 8%
Net support: +31%

Cancelling the planned 3p rise in fuel duty in January

Strongly support 22%
Support 26%
No view 14%
Oppose 25%
Strongly oppose 12%
Net support: +11%

Giving a £50 rebate on water bills to people living in the South-West

Strongly support 8%
Support 15%
No view 47%
Oppose 20%
Strongly oppose 9%
Net support: -6%

Increasing the discount for people buying their council house to 50%

Strongly support 4%
Support 11%
No view 19%
Oppose 34%
Strongly oppose 33%
Net support: -52%

Overall there was strong support among our sample of Lib Dem members for most of the key measures in the Chancellor’s autumn statement. Two policies which did not find favour were (1) the £50 water bill rebate for those living in the south-west, probably because the relief is targeted to a region but not according to income/wealth (and besides almost half expressed no view on it); and (2) increasing the discount for people buying their council house, an overwhelmingly unpopular idea among Lib Dems at a time of high and increasing shortages of social housing.

• Over 1,200 Lib Dem paid-up party members are registered with LibDemVoice.org. Some 560 responded to the latest survey, which was conducted between 9th and 13th December.
• Please note: we make no claims that the survey is fully representative of the Lib Dem membership as a whole. However, LibDemVoice.org’s surveys are the largest independent samples of the views of Lib Dem members across the country, and have in the past accurately predicted the winners of the contest for Party President, and the result of the conference decision to approve the Coalition agreement.
• The full archive of our members’ surveys can be viewed at www.libdemvoice.org/category/ldv-members-poll

Like so many other people she worked as a professional in the public sector. Her department was being reorganised and jobs redefined. Professional posts were being regraded downwards, and people were being invited to apply for posts below their qualification and experience.

Understandably, she felt angry; the jobs still needed doing, her skills would become out of date unless she got a new job fairly soon and their household income would suffer a severe cut. She was also angry that so many of the current round of job losses are hitting women harder than men. Her husband is in work, but she doesn’t want to be beholden to him. Our fragile steps towards gender equality are being set back.

And I agree.

Is it really cheaper to have people unemployed and claiming benefits than employed doing something for others in society? And if so, why? I don’t have the whole answer (who does?) but it has got me thinking about it a bit differently.

Look at the big picture; the whole country picture. Money going round from one person to another (salary, tax, buying, selling, etc.) is all staying within the country, so is no net cost overall. When someone needs different clothes or uses materials at work that they don’t at home, or if they use energy to travel to, or when they are at, work which they wouldn’t at home, then this is a real extra cost. And it will need to be affordable. But how, and by whom?

If the energy/materials come from within the UK, then it is still no net cost to the UK. The problem comes because our current challenge is not to worsen our borrowing from outside this economic island. And so much of what we use does come from ‘outside’.

The biggest element of this cost, that I see, coming from outside is energy. Most of our coal, oil and gas – and even some of our electricity is imported. How much energy is ‘embedded’ in all we do, buy and make?

Building materials and clothing, a bus journey and a cinema show, sending an email and posting a letter – they all take energy.

It’s also our use of materials. Paper and fabric, copper and steel, plastics and wood – much of this also comes from abroad. We use it, and too much is binned. We need to deal with it better.

So my suggestion to get us out of our lack of jobs and improve our balance of payments is twofold:

First – protect those jobs that have very little or no external costs – such as many in teaching and caring.

Second – invest in jobs that result in greater UK independence for materials and energy, such as renewable energy and recycling.

Would it work? What do you think?

And if it isn’t what the government is doing, is there an even bigger picture that they are working within? If so, what is it?

*Lucy Care is a former councillor and PPC in Derby and is a current member of the Federal Policy and Conference Committees

Stephen Tall: So we now all know the painful financial reality. With growth forecasts revised down by the Chancellor in his autumn statement, austerity is here to stay.

Both Lib Dems and Tories had hoped and expected that three years of painful cutbacks would be followed by a year or two of pre-election giveaways — the Lib Dems would press for a balanced mix of increased public spending on areas that had suffered most, together with more tax-cuts for the low-paid, while the Tories would focus on their tax-cutting priorities like inheritance tax and fuel duty. Both Coalition parties would have popular measures they could sell to the electorate, and which reinforced our respectively distinct identities. And both would be able to say to voters, ‘If Labour had been in power you’d still be looking at a couple more years cuts. We took the tough decisions early, now we’re all feeling the benefit’.

But all these calculations have now been turned on their head. When Danny Alexander was asked on Newsnight on Tuesday if the Liberal Democrats would go into the next election promising nearly £30bn more austerity, he replied: “I’m afraid so.” So where does this leave the party? Have we now signed-up by default to fighting the next election on a platform of more cuts until 2017? If so, does this in effect commit the Coalition parties to fighting on a united programme — albeit with different candidates and different manifestos — in 2015 against Labour?

Mark Pack: Predicting where the economy will be in six months time let alone three, four or five years is a highly uncertain business. It is not just the government’s economic forecasts that keep on changing, so too do independent (eg, OBR) and international (eg, OECD) ones. Labour too has been changing – it was forecasting 3.25% growth this year and when quizzed about this not even Ed Balls was willing to say Labour would have achieved that.

So it is not wise to put too much weight on current intentions for what will be done in 2015, save for what it tells us about political and economic instincts. One is that Danny Alexander wants to see the Liberal Democrats firmly committed to tough financial responsibility. That is not the same as signing up to Conservative policies – unless of course you take the absurd view that all tax cuts or increases are the same as if changing the top tax rate is no different from changing the bottom one. The same fiscal targets can be achieved in politically very different ways.

The second is that the assumption in senior Liberal Democrat circles is that Labour will eventually take up a similar position about financial responsibility, so that Alexander’s views do not end up being compatible with only a deal with the Tories in another hung Parliament. If that does not happen, then there will be very lively debate in the party.

Stephen Tall: In fact, the party is in no different a position than we would’ve been if we were a majority governing party right now (rather than the junior coalition partner), as our 2010 manifesto did not commit us to eliminating the deficit within the lifetime of one parliament. Sticking to that would’ve made post-2015 cuts inevitable if we were to balance the budget; the problem is simply more acute now because of the sluggish state of the western economy and the Eurozone’s problems.

And you’re right of course that Labour is in exactly the same position – indeed, Alistair Darling’s pre-election plans were for the cuts to last until 2017 – and today sees the launch of ‘In the black Labour’, a group of party activists determined to regain for their party the economic trust which they’ve so catastrophically forfeited. They make a crucial point, one which applies just as much to the Lib Dems as the other progressive force within British politics: “Labour must put fiscal sustainability at the absolute core of its policy agenda, to ensure low interest rates and steady economic growth. Not just for electoral reasons, but because fiscal stability is vital in securing social justice”.

That is precisely the argument the Lib Dems must continue to make (while Labour continues to dither) between now and the 2015 election. It’s crucial to Lib Dem success that we can demonstrate our ability to be financially responsible while making the political choices that show we’re very different from the Tories – our emphasis on taking the poorest out of tax is a case in point.

Mark Pack: Even within the Liberal Democrats, little credit is usually given to the very different approach to tax that the Liberal Democrats have achieved in coalition from what the Conservatives wanted – because so many of the changes happened quickly last summer (capital gains tax increases, pension tax breaks for the richest cut and so on) and because some of the most important things are those which have been stopped (marriage tax breaks, for example). It would therefore be unwise to assume that there will automatically be political credit to be won over taxes but there most certainly is a great opportunity there, as long as the party sorts out its views on wealth taxes.

The bond markets are currently a ravenous pack of hyenas who have tasted blood in Greece, Italy and Portugal. Although they’re currently distracted by Belgium, Spain and now France even the slightest hint of weakness on Britain’s part will draw their perilous attention our way.

That said, protecting Britain from a bond market savaging must not be done at the expense of the people who actually make up Britain. Unemployment is toxic for the entire country. Each year a new cohort of working age Britons is going to enter a depressed jobs market. Those that find a job will find themselves worked harder and for less pay, and they’ll be the lucky ones. The rest will endure scarring periods of unemployment with no promise of light at the end of the tunnel perhaps into the late 2010s.

There are no easy solutions to any of this. The pain is going to have to be borne; the only thing within the power of Government is to mitigate the pain on those least able to bear it, and it is on this basis that the Chancellor should be judged.

Infrastructure spending is one of the few tools left in the stimulus box, and it has the added advantage of being attractive to overseas investors. But even if Lou Jiwei – Chairman of the $410bn China Investment Corporation – and Britain’s pension funds ride to the rescue atop shiny new trains the impact is going to be neither immediate nor effective for the 1,000,000+ unemployed young people. Credit easing might be effective at shaking out a few billion more for business, but it’s not going to be transformative. Targeting millions for investment in SMEs has some promise but with so little money behind it we’re not going to see a significant dent in the unemployment statistics.

Ultimately, the Chancellor is doing what he can. And, despite the noises off before, during, and most likely after the Autumn Statement, Labour would not be doing things much differently. Taxes cannot be much higher than they are now without a serious impact on competitiveness, and the national credit card is far past maxed out.

That leaves the Chancellor trying to kick-start a £1.7tn economy with a package that will shake out to being worth less than £100bn. The Americans as a ratio of GDP spent almost treble that and they remain trapped in anaemic growth. I say this as a devoted Keynesian; this is a problem Britain cannot spend herself out of.

We’ve had a decade of Potemkin growth fuelled almost entirely by credit, and now the time has come to pay the piper. The deleveraging must be done but it must be done whilst protecting the most vulnerable in society.

This is not just altruism talking – although altruism frankly ought to be enough. No-one in Britain has become wealthy in isolation. The richest Britons make use of the workforce that the rest of the country pays to educate, they transport goods on the roads the rest of us pay to pave and they are safe in doing those things thanks to the police force the rest of us pay to patrol.

Ultimately, the Chancellor has done what little he could be faced with typhoon-strength economic headwinds. There is no silver bullet, and whilst I disagree with some of the decisions around the edges of today’s Statement – the climate change language was frankly a sop to the Tory back benches – I agree with the intent behind it; I have no choice, it’s the only game in town.

* Ben Norman works on financial policy at Cicero Consulting.

‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email if you are interested in contributing.