Alan Johnson – “an instinctive cutter”

Given how I’ve previously pointed out that Yes, ministers can disagree and the world doesn’t end, it would be wrong to shout “splits! splits!” at what is going on in the Labour Party over economic policy. The latest disagreements between leader Ed Miliband and Shadow Chancellor Alan Johnson do however highlight just how much work Labour has to do to work out its economic policy.

As John Rentoul has pointed out:

Johnson made clear to Rachel Sylvester and Alice Thomson [of The Times] that he did not share his leader’s enthusiasm for making the 50p-in-the-pound top income-tax rate permanent: “I am only backing 50p for the times we are in. It is not ideal; five years ago [we] wouldn’t have done it. Our policy has to be based on principles of fairness and what encourages people to do well.”

In contrast to Johnson’s temporary lukewarm backing, Ed Miliband has called for the 50p rate to become permanent.

Similarly, whilst many in Labour have been saying how much they dislike cutting public spending, their Shadow Chancellor said he was (in The Times’s paraphrase), “an instinctive cutter”. Perhaps no surprise that over in the New Statesman, Mehdi Hassn’s reaction was “Ugh!”

Johnson seems to be very much in the Alistair Darling mould (it was Darling who talked of needing to cut deeper than Thatcher) and Darling is popular in many Labour circles. But reducing taxes for the most well off and being an instinctive cutter? Those polices are not exactly flavour of the month in Labour circles.

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9 Comments

  • I doubt there is much agreement between Osborne and Cable over economic policy. If you’d read Vince Cable’s book, “The Storm” (I’m sure you have; you seem quite bookish) you’ll recall he was extremely critical of Osborne’s calls in the autumn of 2008. This wasn’t political rhetoric and hype; Cable stripped the crisis down and considered the possible responses. In economist lingo, Osborne’s strategy was ridiculed. It was only a few months ago that Vince Cable was advocating a longer programme to deal with the deficit. He cautioned many times that sudden cuts will lead to a double-dip. I doubt he’s changed his mind.

    It’s interesting to note the Osborne strategy was the one the Irish government adopted. They imposed a sudden and painful austerity plan immediately. And now they really are in trouble. I’m not surprised. You cannot cut your way out of a deficit; certainly not a deficit caused by a drop in tax revenues. It’s madness – and Vince Cable said as much, and more in his book. But, here we are – following the Osborne plan. Shock treatment. Instead of utilising the human assets available to best effect until the upward curve of recovery commences, we’re laying them-off and getting no value and no tax revenue. The Osborne plan focuses only on government budgets. It doesn’t look at the UK as a whole. He’s supposed to be managing an economy, not a departmental budget.

    Criticism of the Osborne plan is coming from, of all places, America. This reasoned piece by a former US Treasury man, concluded with:

    What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector. [ ]… at a time when no sources of expanding private-sector demand exist to pick up the slack. Britain’s finest hour this is not.

    http://www.project-syndicate.org/commentary/delong107/English

  • Philip Rolle 16th Nov '10 - 12:30am

    It is possible to cut your way out of deficit. It depends on the strength and size of your private sector, amongst other things, including whether you have control over your currency and monetary policy. This is what Ireland lacks, and it will probably need a bail out.

  • Andrew Suffield 16th Nov '10 - 12:55am

    He cautioned many times that sudden cuts will lead to a double-dip.

    4% a year isn’t really very sudden. Particularly when you start two years after those events.

  • Paul McKeown 16th Nov '10 - 1:24am

    It seems to me that serious political discussion in this country happens somewhere on the axis between George Osborne and Alistair Darling. Both have a plan to reduce the deficit, both were worried about the risks of failing to act appropriately. However much of the noise and the fury in British politics takes place outside of those parameters. There are some in the Conservative Party (or UKIP, BNP) who would blame the EU or the Council of Europe for everything wrong in those country; they would deny any attempt to reduce the risks or mitigate the consequences of climate change; they would spend untold billions on “defence”, but against what no one can tell. They believe in a morality of the deserving poor, often with a “Darwinian” view of human society, unrelated in any way at all to any scientific understanding of natural selection but strongly coupled with a belief in a personal moral superiority. Frankly, reading their effluent on occasion makes my hair stand on end. Then there are some (very very many) in Labour (and the Greens, SNP, PC) who would deny any rational thought about reducing the nation’s dependence on borrowing, demanding instead for money to burnt as a fitting sacrifice on the altar to their Keynsian gilded cow, conveniently ignoring Keynes’s warning that the markets could remain irrational much longer than a nation could remain solvent. With messianic preaching reproduced only within the ranks of the Jehovah’s Witnesses, their effect on me is to resolutely bar the door to them.

    On balance it appears obvious that Labour in government, whether with the Liberal Democrats or not, would be utterly incapable of delivering Darling’s planned cuts, as a large mouthy part of Labour’s parliamentary party is determined to close its ears to commonsense and, as for Labour’s activist base, one might believe from it that Ed Balls is the most insightful economist since Keynes himself. Alan Johnson is a politician who has long had my trust, even when delivering messages and/or policies that I don’t immediately trust or indeed actively oppose; he comes across with sincerity. I don’t believe, however, that he can drag Labour onto the political middle ground, as too many in Labour would prefer shouting in impotent rage rather than taking responsibility.

    As for the current coalition, it is going to deliver an economic program that is tough, very tough indeed. It is credible, though, and the bond markets are looking elsewhere. Some of the measure being taken do make me uneasy, but the chorus of TINA does strike me as being honest, if as unwelcome as an inevitable hangover. The left wing rhetoric of Year Zero and neo-liberal fundamentalism does not, however, ring true at all. Government spending will increase, year on year, through this parliament. Some government activity will cease or will be severely curtailed. I doubt the broad sway of voters believed otherwise, although, of course, for many the assumption will have been that others than themselves would have born the cost or taken the pain.

    As for the nutjobs of the Conservative right wing, they are simply crying into their beer, to the last man jack and Philip Davies of them. Not one of their bizarre philosophies has made it into government and, indeed, many of the unpleasant and inhumane policies of the previous government appear to being ditched too. Theresa May appears to be our most rational Home Secretary in decades. As for IDS, I heard for many years about his compassion, but I never trusted him. However, paired with Steve Webb, he appears to be delivering what I never could give him my trust to do. My chief hope is that Chris Huhne will deliver, too, on his programme for a Green Economy. It is necessary, but I have my doubts still that he can deliver. He must though.

    Anyone who denies that the Liberal Democrats have had a great influence on this government does so from an economic perspective and a hatred of the Conservatives. I will always have doubts about the swivel-eyed Conservative backwoodsmen, but they have been castrated. That is the true measure of Liberal Democrats.

  • Alex Sabine 16th Nov '10 - 2:26am

    @ RichardSM:

    No doubt there are differences between Osborne and Cable over some aspects of economic policy, but I suspect there are much more nuanced and not black-and-white as you suggest.

    For example, my interpretation of their various statements is that Cable may be more wary of the risk of a general contraction in world demand if countries with relatively strong budgetary positions (eg Germany) tighten fiscal policy too aggressively, whereas Osborne probably welcomes his strategy being emulated by as many countries as possible and is more convinced of the growth benefits of strong action on deficits.

    But I’m sure they both agree with the IMF view that countries with weak budgetary positions (and the UK is among the weakest) must act to correct their acute deficits and that the sovereign debt crisis has made that action urgent.

    I have read ‘The Storm’ and if I recall correctly it does not offer a detailed prescription for cutting the deficit – it is much more big-picture about the causes and routes out of the banking and financial crisis.

    Whereas in his September 2009 pamphlet for Reform Vince did set out his judgement of what was required, and argued for a deficit reduction programme that almost exactly matches what this government is planning – an adjustment of 8% of GDP over 5 years,

    While acknowledging the risks of going too far too fast, he was clear that the Darling plan was inadequate in scale as well as lacking credibility because of the lack of specifics.

    Even on the question of when to start cutting, he suggested the cuts couldn’t be deferred much longer, saying that “the structural nature of the deficit means that there will have to be a major correction once it becomes clear that the economy is no longer in a downward spiral. The data emerging in recent weeks suggests that we may be approaching that point.” This was 14 months ago now.

    So if anything Vince, writing in a “personal capacity”, indicated that he wanted a tougher line on the deficit than the official party policy that we took into the election. But even this has been misrepresented as simply signing up to Labour’s approach. This was only true in respect of the issue of when to start cutting. We didn’t endorse their overall timetable except by omission: one of the criticisms that the IFS made was that neither we nor the Conservatives specified the period over which we thought the structural deficit should be cleared.

    Quote: You cannot cut your way out of a deficit; certainly not a deficit caused by a drop in tax revenues.

    Firstly, the vast majority (around 75%) of the UK deficit is structural not cyclical. Second, there was a persistent structural deficit in the 6 years leading up to the crisis (2002-03 to 2007-08), and this was certainly not caused by a drop in tax revenues; indeed, revenues were growing strongly during this period through the combined effects of economic growth and Brown’s discretionary tax rises.

    Thirdly, let’s look at what happened to revenues and spending during the crisis and test your proposition.

    Tax revenues dropped from a peak of £548bn in 2007-08 to a trough of £515bn in 2009-10 – a fall of £33bn or 6%. Revenues have since recovered to a projected £548bn in 2010-11, ie back where we started in cash terms (though of course still lower in real terms and as a share of GDP).

    Spending grew from £597bn in 2007-08 to £669bn in 2009-10 – a rise of £72bn or 12%. It has continued to grow to a projected £697bn in 2010-11, fully £100bn (17%) higher in cash terms than 3 years ago.

    Expressed as a percentage of GDP, revenues fell from a peak of 38.6% in 2007-08 to a trough of 36.6% in 2009-10 (a drop of 2% of GDP) while spending increased from 41.1% in 2007-08 to a peak of 47.5% in 2009-10 (a rise of 6.4% of GDP).

    Quote: Criticism of the Osborne plan is coming from, of all places, America.

    And there are also plenty of people on both sides of the political divide in America who are impressed by the coalition’s resolve and contrast it with the drift and special pleading that is currently prevailing in Washington, where there is rhetorical agreement on the need to cut spending but studied vagueness on the specifics. (Instead they prefer to talk about extending the Bush tax cuts but no doubt they will conjure some spending cuts some time soon.)

  • @Alex Sabine

    Let’s have a look, shall we?

    At the height of the crisis when Lehman Bros going down, Osborne said cut. Cable said don’t cut. Black and white or nuanced? You choose, I didn’t use the terms. Here are a few more examples:

    A critical factor at the time was confidence. Cable’s observation was, “The apocalyptic cries of “national bankruptcy” are unhelpful scaremongering.” Can you guess the quarter was talking about?

    Darling didn’t go for the shock treatment advocated by Osborne, an d Cable agreed with him. Darling went for stimulus.

    Since Osborne has taken up the reigns, his whole focus has been cuts and efficiencies. And yet Cable said,” The debate should not become distracted by a focus on “efficiency” savings. No doubt public administrators can be made more conscious of costs and efficient management, but it is not credible to believe that greater “efficiency” is a panacea…”

    One can only surmise that Cable has either changed in mind about the Osborne panacea in the last few months or he is biting his tongue.

    You mention the structural deficit in the earlier part of the decade. Hindsight is a wonderful thing. We can all look back critically on the years 2002-03 to 2007-08 and try to look clever. But here’s what Cable has since said: “However, although some of us warned of the unstable “bubble” character of economic growth, the scale of the structural imbalance was underestimated by everyone, including the independent commentators.”
    You seem to be suggesting there is no alternative to Osborne’s panacea, but lets look at what Cable said in the summer of 2009 :” …a fiscal tightening to the tune of around 8 per cent of GDP over 5 years may well be needed. The current Government’s plans for a correction of 6.4 per cent of GDP over 8 years are optimistic.” How surprised everyone was then when revenues improved, as your figures indicate, and £6 billion dropped onto Osborne’s lap just after the coalition had formed: a reversal of deficit reserves set aside by Darling but no longer required due to better than expected outturn. However, Osborne was claiming we were on the”brink of bankruptcy,” a claim for which he was recently hauled over the coals by the Treasury select committee.

    You say that Cable said of Darling’s plan that it lacked specifics as if it was a crticism, but you omitted (probably deliberately) to mention that Cable was talking about Darling’s plan for 2014-15 to 2018-19. Actually, that was your spin. Cable wasn’t criticising. However, what did Cable say of his own immediate plan? “The proposals outlined in this paper do not constitute an exclusive or exhaustive list. Major, specific areas of potential savings are identified though the examples are illustrative and represent only a first, rough, attempt.” A rough attempt! It rather puts your spin into context, doesn’t it?.

    As for the IMF, the noises coming from them in 2008 were all over the place. When Darling’s measure of a VAT decrease was announced, the IMF said the 2.5% stimulus will not lure people back into the shops. But as we now see from your figures, it did. However, let’s look at what the IMF is saying now on their forecast for the UK economy.

    • On the upside, expansionary impulses from very low real interest rates, past sterling depreciation, and the ongoing recovery of global demand could be greater than expected, boosting the UK economy onto a faster-than-expected growth path. This scenario would likely entail higher global commodity prices and stronger inflationary pressure.
    • However, downside risks are also sizeable, given the continued fragility of confidence, still-strained balance sheets among households and banks, signs of renewed housing market weakness, and the possibility that headwinds from fiscal consolidation could turn out to be more powerful than expected. Although it is unlikely and not unique to the UK, an adverse scenario where major new shocks – arising from either external forces or domestic ones – trigger another extended contraction in output cannot be ruled out.

    Did you note their “upside” explanations? Osborne opposed sterling depreciation. And note their “downside” risks from the Osborne shock treatment plan.

    Cable has at least adapted as circumstances have changed. Osborne’s plan in 2008 was shock treatment. In 2009 it was shock treatment. And in 2010 it’s shock treatment..

  • @RichardSM: Comparisons between the UK and the Republic are sadly not particularly valid. Beneath the millstone of cyclical debt from AIB, the Irish economy has excellent fundamentals. It’s difficulties are caused almost entirely by the bad debts it has nationalised. Our debts are structural, systemic in nature; would that we were in Ireland’s position.

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