Austerity and Napoleon

There is an old joke: Income tax was introduced (by Pitt the Younger) to pay for the Napoleonic wars and now that those wars are over, surely it must be time to get rid of Income tax.

As a Liberal I believe in the individual and to build a society that will support and nurture that individual’s potential. If you look at examples in history, in almost every case it’s the individual who has made a difference so it makes sense to support creative/driven individuals to enable them to realise their vision.

However, society is made up of groups and communities with individuals of different capabilities. The predicament is to have a tax system that not only encourages investment and reward but one that ensures society is also equally served.

To a large extent these two positions have been polarised by political parties resulting (to some extent) in a lurch from heavy borrowing and spending followed by stringent cost cutting. These positions have almost become a dogmatic badge of honour for them. Following the economic mess the Labour party left behind in 2010 the austerity programme to reduce the deficit (remember you have to clear the deficit before you can start to clear the debt in any meaningful manner) which the Liberal Democrats also agreed to, for a parliamentary term that quickly went south. Initially, we were going to take the Canadian approach, which quickly stretched to a 5-year programme, to 7 years, to 2026 and now no date has been agreed by which to clear the deficit. We are in a long-term state of austerity and will continue to be, especially if we leave Europe and the economy is negatively affected.

I believe a growing and strong economy only has one purpose and that is to support the people of that economy.  For 8 very long years Local Government has seen severe cuts to their funding resulting in significant impact on the services provided. In 2015 there were 715,000 millionaires living in Britain compared to 508,000 in 2010 (International Business Times). At the same time, there was a 25% real-terms reduction in local authorities’ income from2010-11 to 2015-16, and 40% for the largest local authority in real terms (delete the dash in “real terms”) (National Audit Office). According to the Financial this is over £18 billion cuts to local authorities since 2010.

Because of this more than 350 Sure Start children’s centres have closed in England since 2010, access to vital services for 150,000 pensioners has been scrapped, there have been cuts to child protection spending by over 10% and the list goes on and on. Social care has been devastated and the number of Local Authorities that are projecting extreme financial difficulties in the coming year has increased significantly.

I see nothing wrong in borrowing to invest in businesses to stimulate economic growth. A growing economy with lower unemployment will bring in more revenue and release the pressure on benefits. But what of our communities? Setting aside the dogma of borrowing or cost cutting we need to be pragmatic and increase spending on our industry (as did Obama to pull America out of their slump, we need to increase taxes, sensibly, to ensure that the public services we have are not further eroded and start to grow again. Napoleonic wars may be over but taxes could not be more needed.

 

* Tahir Maher is a former Chair of South Central Liberal Democrats and lives in Wokingham.

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18 Comments

  • Here we go again – the unthinking suggestion that Lehmann brothers were members of the Labour Cabinet in 2008.

  • It is a shame more people are not taught Keynesian economics and then they would understand that the Labour government did the correct thing in 2008-10 and the Coalition government did the wrong thing 2010-13. We should never forget that the failed economic policy of the Coalition government almost brought the UK into recession again. A recession caused by the government. At the time it was reported that the UK was back into a recession (the double dip recession). The only reason this happened was because the Coalition government pursued the wrong economic policy.

    After 2008 banks would not lend, companies would not invest and people used some of their income to pay off some of their debts. Keynesian theory states that leakages (government revenue, imports and “savings” i.e. money not spent saved or invested or paid into a pension plus debt repayment) equal injections (government spending, exports and private borrowing). Therefore to keep the economy growing the government should spend as much as the banks, companies and people are no longer spending or the economy will go into recession as nearly happened at the end of 2012 and the beginning of 2013.

    Austerity didn’t work in 1931 and it didn’t work in 2011. Austerity can never grow the economy. It only hurts people. We as a party should commit ourselves never to support austerity again.

    If the government pursued Keynesian economics and was focused on achieving full employment then real wages would rise, economic inequalities would be reduced, poverty would be decreased and productivity would be increased.

  • John Marriott 12th Feb '18 - 3:33pm

    Cllr(?) Maher seems to be singing from the McDonnell songbook. The coalition government could have taken the FDR approach from the 1930s. It decided not to. Labour was prepared to sucker up to all those people, who, in Lord Mandelson’s words, were getting “flithy rich” and, despite the noble Lord’s pleas, were actually NOT paying all their taxes. The problem for Labour, and the rest of us, was that we nationalised their debts, certainly as far as the banks were concerned; but privatised their profits. Is it now payback time?

  • John Marriott I seem to remember it was a certain Mr Cable who was the first one to want to nationalise the banks, John. In 2008.

    Michael BG exactly right. In fact Skidelsky’s book on politicians and the 1931 slump should be compulsory reading for all who claim to be Liberals.

    The odd thing is that whilst Lib Dems are reduced to 6% – they still can’t agree on a coherent economic policy to replace austerity. Meanwhile it’s Armageddon for the nhs, social care and local government as the failed experiment of PFI, privatisation and outsourcing continues to go down the pan.

  • Paul Krugman summarises the Keynesian view quite neatly in four points :

    1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

    2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

    3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

    4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

    Printing money can solve one specific problem, an economy operating far below capacity. It cannot conjure up higher productivity.
    The case for fiscal stimulus is quite restrictive, requiring both a depressed economy and severe limits to monetary policy.

    In the wake of the financial crisis there was a requirement for both aggressive monetary expansion and fiscal stimulus. As the economy recovers the case for fiscal stimulus falls away.

    Krugman and fellow travellers are sometimes referred to as Neo-Keynesian economists. Neo-Keynesianism derives from observed differences between Keynes’s theoretical postulations and real economic phenomena. The Neo-Keynesian theory was articulated and developed mainly in the U.S.A. during the post-war period. Neo-Keynesians did not place as heavy an emphasis on the concept of full employment but instead focused on economic growth and stability.

    Another point of departure of the school from classical Keynesian theory was that it did not see the market as possessing the capacity to naturally restore itself to equilibrium. For this reason, state regulations were imposed on the capitalist economy. Classic Keynesian theory only proposes sporadic and indirect state intervention.

  • Peter Martin 12th Feb '18 - 5:45pm

    @ Joe B,

    “Printing money can solve one specific problem, an economy operating far below capacity. It cannot conjure up higher productivity.”

    It’s been a long time since we’ve had gold coins. Money has been either printed or created by computer keystroke, or maybe in a manual ledger, for the last 80 years or so. It has been 45+ years since the pound has even been guaranteed against another currency which has itself been linked to gold.

    But it’s only in the last decade than productivity hasn’t grown.

    There really doesn’t seem to be any correlation at all!

  • Peter Martin 12th Feb '18 - 7:59pm

    @ Joe B,

    There is no such thing as neo Keynesianism or even classic Keynesianism. It’s either in accordance with what Keynes said and wrote or it isn’t. That’s not to say that he’s infallible. If we think he might have been wrong we should say so and say why.

    I don’t know where you’ve got “Classic Keynesian theory only proposes sporadic and indirect state intervention” from.

    Keynesian economics amounts to the government doing all it can to foster job creation. It’s government spending in the context of creating jobs and utilising underutilised resources. If you’re making weapons, or if you’re hiring schoolteachers it amounts to the same thing in the context of a Keynesian framework.

  • Thank you for your comments. Unemployment is low, inflation is relatively low and interest rates are almost at an all-time low. However, the NHS is creaking, social care is faltering, Local Government is starting to fail to name but three. This is not a sign of a healthy society although it may be a sign of a growing economy. It isn’t about Keynesian economics or monetarist policies it’s about being pragmatic to make sure we continue to support the needy, make sure as a nation the divide between the rich and poor doesn’t get even wider or public services are not lost. Reflating the economy for a while may well further stimulate economy growth and a sensible thing to do. The economy is there to serve it’s people!!!!!

    David Raw …”The odd thing is that whilst Lib Dems are reduced to 6% –
    still can’t agree on a coherent economic policy to replace austerity” HOW TRUE.

  • Joe, Krugmen is not summarising Keynes’ view but as you later state he is a neo-Keynesian and seems to be a bit of a monetarist and only thinks fiscal methods should be used when monetarism fails. Of course he rejects the idea of full employment. I expect he supports keeping unemployment as high as the NAIRU (non-accelerating inflation rate of unemployment). Reducing interest rates should encourage the private sector to spend rather than save and to borrow more and so like a government deficit it would stimulate the economy and so can be seen as Keynesian.

    The Bank of England didn’t really help with Quantitative Easing and giving money to the banks which they didn’t lend, but which caused increases in inequalities by benefiting the already rich. If instead of giving the money to the banks if they had given it to the government to spend then aggregate demand in the UK would have been higher and fewer people would have been unemployed.

    Tahir

    You are correct the economy should serve the people. Unfortunately since 1979 UK governments have not used economic policy to serve all the people. It is vital that we have a government which wants to achieve full employment. Every member of the party needs to understand this. (History shows us the best method for reducing economic inequalities is full employment.) It is a myth that we have low unemployment. It is only low compared to the high levels we have had since 1976. It is not low compared to the 1950’s and 60’s. With full employment there comes increased productivity, improvements to living standards, increased wages, reduced economic inequalities, a reduction in the number of people living in poverty. It might even improve our health. With a continuous growing economy with full employment we would have more money for the NHS, social care and education and even local government.

  • Michael BG 12th Feb ’18 – 10:02pm…………………… It is vital that we have a government which wants to achieve full employment. Every member of the party needs to understand this. (History shows us the best method for reducing economic inequalities is full employment.) It is a myth that we have low unemployment. It is only low compared to the high levels we have had since 1976. It is not low compared to the 1950’s and 60’s. With full employment there comes increased productivity, improvements to living standards, increased wages, reduced economic inequalities, a reduction in the number of people living in poverty. It might even improve our health. With a continuous growing economy with full employment we would have more money for the NHS, social care and education and even local government…………………….

    It is not just ‘full employment’ it should be ‘gainful employment’….A wage that keeps the earner in poverty is no substitute….
    The Tory ideal is a low wage high profit economy…Johnson’s view of a post Brexit UK is one of deregulation; just another word for the removal of basic rights (paid holidays, safety standards, etc; ‘Red Tape’ in Tory parlance)

  • David Evershed 13th Feb '18 - 12:48pm

    The coalition and the following Conservative government have continued to increase government spending and to double the national debt. As a result the debt and the interest on it will fall as liabilities on the next generation. A “live now pay later” policy for the current generation who have postponed austerity until the next generation.

    Government spending can not be net just by taxing rich people. But it is hard for political parties to win elections telling voters that their taxes will have to increase. That’s why we are where we are – it’s human behaviour.

  • @Michael BG etc.

    It is something of a myth that the coalition pursued austerity. It was actually the biggest ever period of Keynesian economics in peacetime. Government spending was 16% per person higher every year of the coalition than in 2008 per head of population adjusted for inflation. Health spending was 25% higher, welfare 20% higher. There was the biggest peacetime deficit.

    https://www.ukpublicspending.co.uk/spending_chart_1990_2017UKd_17c1li011tcn_F0t

    We don’t have alternative realities to compare. But arguably there was a deep shock and then due to Keynesian policies the economy recovered quickly.

    Now what does happen is that there are cost pressures. Massive cost pressures in the NHS – older people, new treatments etc. There are pressures on the benefits bill because the number of claimants increase in a recession.

    In fact we stepped from a warm room into a warm room that was slightly colder but doing that does not seem warm it seems cold.

    It is difficult to have a “land of milk and honey” if the economy has just tanked under your predecessor (and I will leave it others to distribute blame for that).

  • @ Expats
    Yes, indeed, a person should be paid a decent wage and have workers’ rights.

    @ David Evershed

    The National Debt is never paid off. Economic growth reduces its share of GDP. Please look at the chart at https://www.ukpublicspending.co.uk/spending_chart_1692_2017UKp_17c1li111tcn_G0t_Three_Centuries_of_UK_National_Debt which shows this and the fact that our National Debt has been much higher in the past. The liabilities do not fall on future generations only paying the interest and with economic growth even this diminishes over time. I do not understand why you don’t understand this.

    Austerity was the wrong policy. An argument could be made that once we had achieved economic growth of above 3% government spending should not be increased by more than 3% so that the economy would be growing faster than the deficit. If the government can stimulate the economy and so get people who are currently unemployed into work this helps the deficit in two ways, by reducing the amount of benefit paid and increasing the government’s revenue. This is why when a recession comes a government’s deficit automatically increases without them taking any action.

  • @David Evershed

    “As a result the debt and the interest on it will fall as liabilities on the next generation. A “live now pay later” policy for the current generation who have postponed austerity until the next generation.”

    Leaving aside the points of @Peter Martin, the point is that the Government does not exist independently of the economy as a whole. If the Government spends money by borrowing – the economy increases. The economy is now bigger and so that borrowing is more affordable by the future generation. In addition there is a multiplier effect. Create a job and that will create another job (or part of a job) when they spend their money in the economy and so on. Again borrowing becomes more affordable for the next generation.

    In addition the Government may do things that increase the productivity of the economy in the future. Build a road and people don’t have to sit in a traffic jam and can make more etc. Invest in education we have a more highly skilled and educated workforce to compete in and earn more money for the economy as whole.

    Obviously there are arguments against borrowing. If an economy is at (or near) full capacity than by doing something Government may compete for that labour and drive up inflation. Borrowing may “crowd out” public sector investment and increase interest rates.

    The public sector may be more inefficient and wasteful than the private sector. It could decide to build a big motorway in a remote area where it won’t get much use. A private sector motorway financed by tolls would have to make a return. And of course the interest on the total debt mountain has to be repaid and probably the capital – although it can be postponed indefinitely.

  • @ Michael 1

    You are taking your starting point at the wrong date. The spending for 2010 was mostly set by the Labour government, which the Coalition cut. Also you are looking at the wrong thing. Austerity can be done either via reducing spending or increasing revenue. The size of the deficit not taking into account inflation was reduced from £99.74 billion in 2010 down to £57.95 billion for 2015 and £14.04 billion in 2017 (2013 was the exception. I assume because the government thought we had gone into recession at the end of 2012 and beginning of 2013) (ukpublicspending.co.uk/spending_chart_2005_2017UKb_17c1li111tcn_H0t_Current_Budget_Deficit).

    You also seem to have not taken on board that the National Debt is rarely reduced and has nearly continuously increased since 1692. In another thread Joe quoted the OBR “budget surpluses have been achieved in only 12 years since 1948 and only five years since 1971-72”. Therefore the national debt is rarely paid off it is just normally reduced as a share of GDP as the economy grows.

  • @Michael BG

    Thanks for the comments. I think from our previous comments both of us would like more borrowing but – for me certainly – less than the growth in nominal GDP. The economic arguments as well the political ones will rage!

    —-

    I was taking issue with the criticism here and elsewhere of “austere” public spending under the coalition when in fact it was MUCH higher than under Labour with the possible exception of 2009.

    I am not sure the coalition can be hold responsible for 2017. But 2010,11,12,13, 14 and 15 along with 2009 all saw the largest peacetime deficits – however you measure it.

    It may have been a continuation of the LAST year of Labour but it was actually a period of massive Government spending and borrowing – the biggest in history. There is an argument that it should have been bigger.

    “quoted the OBR “budget surpluses have been achieved in only 12 years since 1948 and only five years since 1971-72”

    ukpublicspending has current budget surpluses (negative deficits) for every year between 1949 and 1973.

    “You also seem to have not taken on board that the National Debt is rarely reduced and has nearly continuously increased since 1692.”

    Sort of true and sort of not true – see above. There have been 2 massive peaks before the current one – the two world wars.

    ukpublicspending has total public debt per person in 2005 pounds – sort of not a bad “absolute” way of looking at it peaking at just under £13,000 per person after the second world war and going down to just under £4,000 in 1991 (lower than after the first world war) – and after that showing a wobbly but slightly upward trajectory until we get to 2008 when it went up to £9000 and then recent events.

    https://www.ukpublicspending.co.uk/spending_chart_1692_2017UKd_17c1li011tcn_G0t

  • @ Michael 1

    The government reduced the deficit nearly in half between 2010 and 2015 and this can be called austerity because it was the largest reduction in the deficit in peacetime. It is in relation to the previous year which is important not before it was massively increased to counter the financial crash and get the economy out of recession. If the government reduces the deficit they are squeezing the economy.

    “ukpublicspending has current budget surpluses (negative deficits) for every year between 1949 and 1973.”

    I have seen that chart before and I thought about using it when replying to Joe’s quotes from the OBR but I think there is something odd about it. If you look instead at the National Debt chart in pounds (https://www.ukpublicspending.co.uk/spending_chart_1900_2020UKb_17c1li011tcn_G0t) after 1945 the National Debt increases every year from 1950 to 1988 accept for 1952, 1957, 1969, and 1970, from £25.80 billion (1950) to £40.46 billion in 1974.

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