Fiscal Rules and Land Value Tax

Much of the debate around austerity has focused on three principal areas; the underfunding of key public services at both national and local government level, welfare reforms and the adverse effects of constrained public spending on economic growth.
As a general fiscal rule when the economy is operating at what is considered by the Treasury as normal capacity with relatively low levels of employment, tax receipts should be sufficient to cover outgoings including the amortised cost of prior capital expenditure i.e. there is no structural deficit. In normal times, capital expenditure and the associated borrowings will be budgeted to allow for a gradual reduction in public debt i.e. the planned budgeted deficit will be slightly less than expected economic growth. Where actual economic growth is less than expected, automatic stabilisers in the form of reduced tax receipts and higher levels of social protection payments act to maintain aggregate demand in the economy.
The problem arises when desired levels of spending on public services and redistribution via pensions and welfare provision are greater than fiscal rules provide for. Quite often there will be a clamour for higher rates of tax on the higher paid and/or company profits or increasing income tax, national insurance or VAT. A debate will then ensue around Laffer curve effects of high rates of marginal tax; the pass-through costs and impact on investment of higher corporate taxes; and/or the deadweight effects on consumption and economic growth of increased income taxes or VAT. Whatever the policy outcome of these debates, total tax receipts as a proportion of national income have remained remarkably stable over the years at approximately 36% to 37% which coupled with other income and average borrowing of circa 3% of GDP provide for total spending of around 40% of national income. That appears to be a consensus level that the British public is relatively comfortable with as evidenced by swings between high tax and spend labour governments and lower tax and spending Conservative governments.
This is where Land Value Taxation comes to the rescue. Land being in fixed supply, a tax on unimproved land does not change the allocation of resources in the way that other taxes do i.e. there are no deadweight costs on economic growth associated with Land Value Tax. In traditional public finance theory, a tax on unimproved land is an efficient tax. In 1978, Milton Friedman said that “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago”

Vince Cable in ‘Beyond Brexit’ writes:

“Within an overall framework of rules and financial discipline, the need for better funded public services and a programme of poverty alleviation is paramount. This has to be honestly finance by taxation.  The tax system is over-complex and needs radical reform to shift the burden of tax from work, savings and innovation on to unproductive wealth, land, expenditure (online or in shops equally) and environmentally damaging activities – and meaningful international cooperation to ensure that the global rich and tax-dodging companies pay their share.

…there is scope for considerably increased public investment for infrastructure and housing, alongside the private sector, paid for by public borrowing and subject to a rigorous test of impact.”

* Joe is a Vice-Chair of Hounslow Liberal Democrats, Chair of ALTER and PPC for Brentford and Isleworth

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60 Comments

  • Peter Martin 1st Apr '19 - 9:16am

    Nothing about the trade or the current account deficit?

    It never ceases to amaze how those who think along orthodox economic lines (and wanting to introduce a LVT doesn’t change that) can overlook the bleedin’ obvious. There are lots of countries who are desperate to sell us much more than they buy from us and will use every trick in the book to make sure that happens. The biggest culprit is a fellow member of the EU, and there little or nothing we can do under EU rules to prevent it.

    If we have large sums of money leaving the economy to pay our net import bill then the choice we face is either to let it happen and see our economy spiral down into deep recession or deficit spend the difference back in to the economy to keep it going.

    Any talk about arbitrary ‘fiscal rules’ is totally meaningless unless there is a preparedness to factor in net trade. There are other important factors too, such as the rate of domestic savings and the rate of expansion of domestic debt.

  • Mick Taylor 1st Apr '19 - 9:40am

    The UK has had a current account deficit for most of the past several hundred years. This used to be made up by so-called ‘invisible’ exports like insurance, banking services, the activities of the stock exchange.
    One of the aspects of Brexit, overlooked as usual by Mr Martin, is that our invisibles will cease to be, because many of the companies that provide them are relocating to be inside the EU.
    So to put it bluntly, what you say is nonsense. Leaving the EU will make our current balance of payments (BoP) seem like the sunlit uplands. We will really be up the creek without a paddle if we lose the very element of our BoP that enables us to keep afloat.

  • Peter Martin 1st Apr '19 - 9:56am

    @ Mick Taylor,

    No you’re wrong. The ‘invisibles’ can either increase or decrease the raw trade deficit. Usually, for the UK, they reduce it but they don’t necessarily eliminate the deficit completely.

    The concept of a ‘balance of payments’ applies only to fixed exchange rates. The flow of money can be separated into the current account and the capital account. These have to sum to zero when the exchange rate floats. It moves up and down to keep everything in balance. The capital account includes the overseas purchase of UK debt such as the sale of Government gilts.

  • Mick Taylor 1st Apr '19 - 12:09pm

    Sorry Mr Martin. I have been a professional economist all my life. It is a fact that throughout our history, as long as accurate records have been kept, we have almost never had a surplus on visible trade and that most of the time this has been balanced out by invisible trade, though not always.
    The point I was making is that Brexit will put this delicate balance in jeopardy as financial services companies move their centre of operations to within the EU. This will effectively end the dominance of London markets that has persisted for so long. As a result the UK economy will lose out and our balance of payments will be up shit creek.
    Please don’t patronise me, I do know what I’m talking about.

  • chris moore 1st Apr '19 - 12:28pm

    @ Peter Martin.

    Peter, you say,There are lots of countries who are desperate to sell us much more than they buy from us and will use every trick in the book to make sure that happens. The biggest culprit is a fellow member of the EU, and there little or nothing we can do under EU rules to prevent it. ”

    1. It’s not “countries” who sell. We aggregate the activities of many, many different companies to come to the figure for total exports from a country.

    2. There will be countries whose total exports are greater than total imports and vice versa. Overall it’s a zero sum game.

    3. You’re worried about the overall surplus of German exports compared to UK imports into germany . And blame EU rules for not allowing us to do “anything about it”. Like what? Are you arguing for import tariffs on German goods?

    4. Are you also worried about the countries with whom the UK has an overall trade surplus?

    5. It’s a very zero-sum world you live in, Peter. The principle of comparative advantage is such an Intellectual liberator……

    6. What are these “tricks” “culprit” Germany gets up to to sell us goods, indeed “every trick in the book”. I’ve always thought German companies – including the renowned Mittelstand – produce very fine goods at a competitive price which British firms and individual consumers want to purchase. And meanwhile many UK companies happily sell their goods in Germany.

  • Peter Martin 1st Apr '19 - 1:28pm

    @ chris moore,

    “What are these “tricks” “culprit” Germany gets up to to sell us goods?”

    If you look at every large net exporter in the world, the common factor you’ll notice is that they don’t allow their currency to float. They game the system to suit themselves and run those surpluses. Conequently the countries that do genuinely allow their currencies to float, ie Canada, Australia, NZ, USA, UK nearly always will run trade deficits.

    That’s fine providing we don’t impose silly fiscal rules on ourselves that totally ignore the importance of having to run a budget deficit to keep the economy topped up with money to keep it functioning properly. If inflation becomes an issue then that’s the time to cut back.

    http://bilbo.economicoutlook.net/blog/?p=41879

    PS Sorry about the double post at the start. Not sure why that happened. Totally unintentional.

  • Peter Martin 1st Apr '19 - 1:54pm

    @ chris moore,

    “Are you also worried about the countries with whom the UK has an overall trade surplus?”

    What do you think?

    If there are three countries trading with each other in a closed international economy then A could run a surplus with B. B could run a surplus with C. C could run a surplus with A. So, in the end all three countries have close to balanced trade. But if A runs a big surplus with both B and C there could be problems due to a trade imbalance.

    Because international trade, like it or not, has to be a zero sum game. It’s just arithmetic.

  • Innocent Bystander 1st Apr '19 - 2:50pm

    ” What are these “tricks” “culprit” Germany gets up to to sell us goods, ”

    It’s called the “Euro”. If Germany went back to the Deutsch Mark its value would soar beyond the Swiss Franc and they would never sell another BMW in Britain.

  • Malcolm Todd 1st Apr '19 - 3:16pm

    Innocent Bystander
    It’s not quite as simple as that. Germany has had a trade surplus for most of the last 60 years (the only serious blip, I think, came around the time of reunification in 1990). The euro has certainly made the problem worse – though the problem, essentially, is that German firms make better stuff more reliably than others do. A floating exchange rate would help to mitigate by making their good stuff even more expensive; but it seems odd to want that, rather than asking why we’re not so good at making stuff in the first place. (Even if you count financial derivatives as “stuff”, it only reduces the gap, it doesn’t eliminate it.)

  • Peter Martin 1st Apr '19 - 3:54pm

    @ Malcolm Todd,

    “Germany has had a trade surplus for most of the last 60 years (the only serious blip, I think, came around the time of reunification in 1990). ”

    This is true. The 1953 agreement on German debts didn’t cancel them all. The Americans were sufficiently smart enough to realise that the only way Germany could acquire dollars to pay dollar debts was to export more to the USA than it bought from the USA. But what was fine then isn’t what is needed now.

    The German Govt needs to apply the same logic. If Italy and Greece, and others, owe Germany euros then they have to sell more to Germany than they buy from Germany to get the euros to repay the debts.

    Is this at all likely? No it isn’t. The Germans make good engineers but crap economists. They’ve ruined the eurozone by insisting on running huge surpluses.

    See the link on my earlier comment. 1st Apr ’19 – 1:28pm

  • Joseph Bourke 1st Apr '19 - 4:10pm

    The reason for a current account deficit can be boiled down to the UK as a whole spending more on consumption goods and services than it makes, with the difference being made up by sale of financial and real assets, foreign direct investment and/or currency depreciation over the longer term. The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates. Countries with high savings rates export capital and run trade surpluses. Countries with low savings rate import capital and run trade deficits.
    Several forces influence the size of the trade deficit.
    – More government spending, if it leads to a larger budget deficit, reduces the national savings rate and raises the trade deficit. A portion of the budget deficit is effectively financed through a rise in the total amount Britons borrow from abroad.
    – The exchange rate of the pound is important, as a stronger pound makes foreign products cheaper for British consumers while making U.K. exports more expensive for foreign buyers.
    – A growing U.K. economy also often leads to a larger deficit, since consumers have more income to buy more goods from abroad.

    Domestic meaures to address a widening trade deficit include boosting the U.K. savings rate. As the International Monetary Fund and others have pointed out , one of the most direct ways to do that is to reduce the government budget deficit. https://www.imf.org/external/np/seminars/eng/2010/eui/pdf/BL.pdf

  • Nonconformistradical 1st Apr '19 - 4:14pm

    @Jenny Barnes
    “Why we aren’t good at making stuff:
    Because the Thatcherites became the party of financial capital, and hosed manufacturing capital as part of their “destroy the unions” plan.”

    That’s a bit simplistic. No idea how old you are but we made some really rubbish cars long before Thatcher. Interesting designs some of them – but poor quality and relatively expensive in mass production. The Japanese came along and started selling much more reliable and cheaper cars – long before Thatcher.

  • Peter Martin 1st Apr '19 - 4:34pm

    @ Mick Taylor,

    It’s not a question of being patronising. We can’t have a balance of payments deficit if the pound is allowed to float. The balance of payments has to include movement in the capital account too.

    https://www.economicshelp.org/blog/485/economics/floating-exchange-rate/

    But this doesn’t answer the question of whether the UK will be better off inside the EU than out of it. That has to be a matter of opinion. We can have full employment outside the EU, have no Govt deficit, have no trade deficit and still be worse off. It is theoretically possible – but in my opinion unlikely.

  • Innocent Bystander 1st Apr '19 - 4:45pm

    “Because the Thatcherites became the party of financial capital, and hosed manufacturing capital as part of their “destroy the unions” plan.”

    I will refute this myth even though the truth enrages the socialists around here who want their distorted version of history to become “the truth”.
    The engineering company I worked for, in the ’70s, in Newcastle_upon-Tyne, was destroyed by trade union obduracy when the Prime Minister was “Sunny Jim” Callaghan.
    I was there, it wasn’t Thatcher, and I refuse to be silenced while I live.
    Those years, the 70s, were a critical period when computerisation, automation and new working practices were overturning industry. All these changes were bitterly fought against by the TUs. Attitudes became more reasonable by the late 80s but by then it was too late.

  • Peter Martin 1st Apr '19 - 4:55pm

    @ JoeBurke,

    “The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates.”

    This is the orthodox view and again it’s simpy wrong. We can show this by means of a simple thought experiment. Consider two countries trading together and with no-one else. If neither government intervenes in the forex markets trade will approximately balance. If one country starts to run an export surplus its exchange rate will rise to restore the balance. Its exports will become dearer and imports will become cheaper.

    But say one government intervenes to hold down its currency. It will start to run an trade surplus and the other country will run a trade deficit. It has to. Penny for penny.

    But does this mean that the deficit country has an ” imbalance between a country’s savings and investment rates”? Why should it? The trade deficit hasn’t been caused by anything done by its own government or even its own population’s saving and investment decisions.

    It’s been caused by the other country suppressing it’s currency’s value.

  • David Evans 1st Apr '19 - 6:37pm

    @chris moore, Joseph Bourke, Peter Martin. Chris asks – What are these “tricks” “culprit” Germany gets up to to sell us goods, indeed “every trick in the book”?

    In addition to your suggestions there is also the “and they portray their products as green, and provide false evidence when they are not.” I refer of course to VW and its diesel emissions software cheat.

    As an aside, I note $2.8b US fine, €1b German fine, $14m Indian fine, and I expect there are others. Has the UK fined VW yet?

  • John Marriott 1st Apr '19 - 7:20pm

    Trying to wade through this particular thread is helping me lose the will to live. I’m sure that most of the protagonists are fascinated by the argument; but fiddling while Rome burns certainly doesn’t turn me on. Perhaps I’m in a minority; but, if this is a sign of things to come, heaven help Joe Public.

  • John Marriott,

    Vince Cable’s comment above is the crux of the issue “…the need for better funded public services and a programme of poverty alleviation is paramount. This has to be honestly financed by taxation. The tax system is over-complex and needs radical reform to shift the burden of tax from work, savings and innovation on to unproductive wealth, land, expenditure (online or in shops equally) and environmentally damaging activities – and meaningful international cooperation to ensure that the global rich and tax-dodging companies pay their share.”

  • John Marriott 1st Apr '19 - 7:45pm

    @Joe Bourke
    So that’s it, is it? Why didn’t you make that clear in the first place, especially for those of us, who are not economic wizards? Mind you, wasn’t the 2008 crisis, which some would argue triggered many of the events that have led us to where we are today, all about living beyond our means and putting our trust in so called experts? Could we be repeating that mistake today?

  • John Marriott,

    Vince Cable’s pamphlet is available here https://www.libdems.org.uk/beyond-brexit-booklet.

    In the introduction he writes:
    “…the previously accepted norms of rational economic debate do not seem to apply – in effect, people vote against their own apparent self-interest. As I argue later, this opens the door to charlatans and rogues to exploit fears and stir up hatreds, all the while making sure that their own interests are protected.
    Our response cannot be to banish experts and usher in an age of unreason. Rather we must be better at demonstrating what we believe, to calmly continue setting out the facts and evidence – which these essays seek to do – and to propose radical change which leads to a more prosperous, socially just and environmentally sustainable society. Winning those arguments in the current divisive atmosphere is much harder if living standards are squeezed and inequalities widen. That is why I make no apology for starting my argument here with an explanation why our economy is malfunctioning and what we should do about it. I go on to explore important issues such as young people and housing, migration, the green economy and reform to our broken political system. I conclude with my ten-point roadmap to a better Britain.
    The message of these essays is simple and optimistic: Liberal politics can thrive in an age of identity.”

  • Peter Martin 1st Apr '19 - 8:34pm

    @ JoeB,

    “Germany, Netherlands and Italy all use the Euro that floats freely on international currency markets.”

    If the eurozone were a fiscal transfer union this would be a valid argument. The big surpluses built up Germany and the Netherlands would then be passed on to less affluent countries to increase their buying power.

    The Swiss Franc has only recently been allowed to “float.” The Swiss central bank still works behind the scenes to stop it rising too much. They have the world’s largest negative interest rate to discourage capital inflows.

    The Japanese Yen is openly referred to as a dirty float

    “Since 1973, the Japanese government has maintained a policy of currency intervention, and the yen is therefore under a “dirty float” regime. This intervention continues to this day. The Japanese government focuses on a competitive export market, and tries to ensure a low yen value through a trade surplus”

    https://en.m.wikipedia.org/wiki/Japanese_yen

  • Agree with John Marriott.

    As David Blunkett once famously said, “My dog’s fallen asleep”.

  • Peter Martin 1st Apr '19 - 11:26pm

    @ David Marriott @ David Raw,

    Just occasionally, between the endless anti- Brexit articles, Lib Dems will bemoan the state of the health service, which is underfunded, or education, which is underfunded, or social care, which is underfunded, or our local councils which are underfunded, or the police service, or the legal system etc etc which are underfunded.

    The reason they are underfunded is that Governments have cut back to try to ‘balance the budget’. But do we need to ‘balance the budget’? Is it even possible for the UK to do that when money is draining away to pay our net import bill? I’m saying it isn’t. We are causing so many unnecessary problems by trying and failing to do that. That’s austerity economics.

    So this isn’t just a sterile academic argument. It’s important stuff. If you aren’t interested, or can’t understand it, then you aren’t interested in, or can’t understand, politics either. Fair enough. Maybe just stick to watching Coronation Street?

  • Ed Shepherd 2nd Apr '19 - 6:27am

    These economic debates on LDV can go on to long but they have certainly been useful in provoking deeper thought about certain sacred cows such as the idea that government debt is always a terrible thing and akin to an individual’s debts.

  • Peter Martin 2nd Apr '19 - 10:20am

    @ Innocent Bystander @ Nonconformist Radical @ Ian Sanderson

    You’ve all made the argument that we aren’t very good at making things in one way or another. It’s all the fault of the unions – or whatever. It’s Mrs Thatcher. I don’t necessarily go along with that but if we want an economy that isn’t so dependent on manufacturing we have to make a decision about the sort of economy we do want.

    Because we can, and we do, import cars, cameras, computers, smart phones etc. Which is fine providing we can excahnge something in return that we are good at doing or making. Even if its just Government gilts! We can’t say we are hopeless at everything.

    International trade isn’t that much different from barter. The purpose of exporting real goods and services , which are a real cost to make, is to exchange them for for imports, of other goods and services which are a real cost for others to make. Money just makes that happen. Incidentally, that’s where the Germans go wrong. They tend to export just for the sake of exporting.

  • Nonconformistradical 2nd Apr '19 - 10:30am

    @David Raw
    ” Well, I loved my Triumph Vitesse convertible and Stag……”
    But how much did it cost in maintenance – or how much time did you spend fixing them??

  • Laurence Cox 2nd Apr '19 - 12:37pm

    @Jenny Barnes
    It was the post-war Japanese espousal of W. Edwards Deming’s work that they called Kaizen that made the difference. It was the philosophy of incremental improvement that required inputs from all the workforce to identify them, and hence for management and workforce to work in partnership instead of the combative approach seen at that time in the UK.

  • Innocent Bystander 2nd Apr '19 - 3:03pm

    Laurence,
    As a newly qualified engineer in the 70s I got the job of introducing Quality Circles into a factory on Tyneside. This was exactly the partnership working you suggest. The shop floor lads loved working with the “office” on improvements. One day the convenors walked into our group and ‘blacked’ it. So that was the end of that and the factory is long gone. In the 90s I worked in a factory in Lancashire with TU stewards with a completely different approach (the penny having dropped by then). The cooperation was fantastic they were great people and the memories of what we achieved together warms me still
    But my testimony remains that the critical decades of computerisation, automation and new working practices were lost over bitter demarcation disputes and broad swathes of industry did not come out the over side.
    What to do now? Of course we can “make things” and I even think we can be better at those Japanese techniques like Ohno, Shingo and Ishikawa than the Japanese! But we concentrate on the wrong problem. This party, like most, wails about a skills shortage. There is no skills shortage. The problem is subtly different. There is a know-how shortage. Companies are an accumulation of know-how not just a group of skills. The solutions to fix this have no quick easy answers although the politicos pretend there are but if we want to make progress we need to think in terms of 10 or 20 year plans.

  • Joseph Bourke 2nd Apr '19 - 5:47pm

    Innocent Bystander makes some very good points about know-how. The techniques he refers to like Ishikawa fishbone diagrams were first used in the 1920s and popularised by Kaoru Ishikawa, the engineer who pioneered quality management processes in the Kawasaki shipyards. It is a basic root-cause analysis that traces the cause of bottlenecks, delays, interruptions to production and wastage to its root cause. Not rocket science, but attention to detail, good planning and a conscientious and responsible approach to work tasks in the knowledge of where their timely and proper compleion fit in the delivery of organisational goals and objectives. It was this cultural cooperative approach to work that saw Japan rise from the ashes of WW2 and for several decades build a society based around jobs for life.
    Japan for all its renown in manufacturing excellence actually has a low level of overall productivity. This may be as a consequence of contuing over-manning in service industries. An obsession with hospitality and customer service sees department stores manned with greeters as you enter and lift attendants that have dissapeared from even the most luxurious of western hotels.
    Despite repeated government fiscal stimulus that has seen gross public debt rise to more than double GDP, inequality in Japan has grown as a result of economic difficulties that Japan has faced since the end of the economic boom of the 1980s.There has been a big rise in the percentage of the workforce employed on a temporary or part-time basis, from 19% in 1996 to 34.5% in 2009, together with an increase in the number of Japanese living in poverty.
    Japan in the 21st century has ben described as a “disparity society”, a socially divided society with stark class differences and inequalities. Ishikawa would have traced the cause back to its root – the rise of land values in the 1980s that saw people taking out 100 year mortgages, paying rents for apartments the size of a boxroom that absorb 50% or more of disposable income and a massive overhang of private debts than can not be repaid and can only be serviced at ultra-low interest rates.

  • Britain’s manufacturing malaise has roots that go back to the industrial revolution and is multi-factorial. So, simple answers like ‘it’s the unions fault’ or ‘macroeconomic policy is to blame’, while they are part of the truth, don’t capture the essence of the problem and often just exacerbate a polarising blame game.

    Countries that industrialised later did so with a strategic plan whereas Britain, being first, had no plan but stumbled into industrialisation by accident and drew the erroneous conclusion that simply ‘leaving things to the market’ is what works, and this view became embedded in the culture. More recently, this evolved to become the cover story for favouring capital (read: capital-owners and controllers) over ordinary people. The result is the constellation of policies we known as neoliberalism.

    Britain was undoubtedly the leading industrial power throughout the 19th century if you look just at volume; but look at quality (which wins in the long term) and the UK’s reign was much shorter, arguably ending in the 1850s. A half-remembered statistic I’ve not been able to trace and confirm is that by 1900 the UK still dominated global exports of iron and steel in tonnage but by value it had been passed by Germany. We were exporting simple construction steel to the colonies; the Germans were making high-tech steels. I may not have that quite right, but it all sounds dreadfully familiar.

    In the 20th century we were on the winning side in two world wars (which cemented a misguided sense of superiority) but lost the Empire, the exploitation of which had become the UK’s national business plan. In desperation we turned to the EU and eventually hit upon two distinct business plans. The first was to deregulate the City, the second to sell the UK as a bridgehead into Europe for international investors.

    These have worked to a point. For the City it meant making UK businesses into chips in its game of casino-capitalism and turning a blind eye to even the most blatant illegalities as long as the money flowed. For industry it has turned out that international investors that brought their home-country culture with them thrived whereas UK firms couldn’t and, as casino chips, have been mostly sold off.

    Brexit ends both these business plans.

  • Gordon – actually Britain did have strategy during the late 18th century and early-to-mid 19th century. It was similar to the US policy during the whole 19th century, which included high tariffs (like the various Calico Acts), Navigation Act in case of Britain, internal improvements, or bounties for manufacturers. And ironically these policies were pioneered by our predecessors the Whigs. Alexander Hamilton and Henry Clay actually imitated us. It was not until the Repeal of Corn Law that Britain moved towards a laissez-faire system. Inventions and innovations in the US were pretty much laissez-faire, championed by individual like Westinghouse or Edison, but they were protected by trade barriers.

    The fully science-based industrial policy, however, was a very new thing that was championed by Germany after 1850. I mean, Germany actually had systematic state-sponsored R&D. What actually made Britain lag behind was our inferior education, especially technical education, which was further constrained by the Tories’ obstruction of nearly every reform attempt, especially after Irish Home Rule. On the other hand, like Germany, the US in those days also possessed a world-class education system championed by the Republicans at the time it was still a force of progress (I mean, I would have been a stauch, automatic GOP voter during the19th century), so it was able to incorporate the new science-based approach quickly.

    Actually, Shieffield made high-speed steel that was capable of penetrating the high-tariff US market. But what you said was completely true about chemical industry.

  • Innocent Bystander 3rd Apr '19 - 4:16pm

    As one who graduated in mechanical engineering in 1972 I somewhat resent the notion that our technical education is inferior. The exams were really hard!, and the British had some really world leading companies.
    I worked in factories since then, until retirement, and what is hard for those who haven’t experienced it, (and I am not turning it into a blame game), is to appreciate the atmosphere that was widespread across shipbuilding, engineering, automotive etc in that decade. It was seriously unpleasant, and my contemporaries with whom I graduated said the same. It was known as the era of industrial unrest and rightly. You needed to have been very brave to put up your hand at the wrong time at a mass meeting. Thatcher wasn’t elected (in 1979) by toffs, bosses and aristocrats but by millions of the working class who could see their employers disappearing before their eyes. Again, it’s hard to convey the frustration of those of us who were trying to keep up with changes and the attitude of us in industry became “why bother to improve – it will never be allowed”. For those bright A grade students looking for a career the message was “avoid engineering, especially industry” and it wasn’t the quality of our education but the relentless reduction in the numbers and the ability of those wanting to study engineering that was a major part of our decline.
    I believe (having been there for most of it) that UK industry lost its ambition, its mojo, in the years between the mid 60’s and late 80’s. It was a lot better after but too late and that’s my point about know-how. Once it’s been dispersed it’s lost forever, it’s not temporary. We are almost back to starting from scratch, pre industrial revolution, if we want to create a strong, indigenous manufacturing capability. As I said this is a decades long job and there are fundamental societal upheavals needed before we even start.

  • Peter Martin 3rd Apr '19 - 5:34pm

    @ Joseph Bourke,

    “All other economies are tied to the health of these major economies regardless of what domestic policies are put in place.”

    This is obviously not true. If all the major economies are in good health than the UK too can be in good health with the correct domestic policies. On the other hand we can still completely cock it up with incorrect policies . An example of this would be the early 90s when the UK was in recession due to Nigel Lawson’s credit boom of the late 80s going bust, and the failed and misguided attempt of the UK to have the £ track the DM. This all ended in tears on Black Wednesday. At the time the rest of the world was doing reasonably well.

    We have been recovering reasonably well from the GFC in recent years. Admittedly it could be a lot better but unemployment has fallen. If we think it’s bad here it must be a lot worse in the EU otherwise the net migration pattern would be in the other direction. So if everywhere else isn’t doing so good it is still possible for the UK to do better with the application of the right policies.

    So we can’t just throw up our hands and claim there is nothing we can do if the world economy isn’t doing too well. Just as we can get it all wrong , we can get it all right too. What we do ourselves does matter. Domestic policies make a big difference.

  • Thomas – Britain certainly had a strategy in (roughly) the 18th century to build a global trading network supported by the Royal Navy which was astonishingly well funded and (eventually) well run since what matters (and is understood to matter) gets lots of high-level attention. That period ended when Britain emerged as the unchallenged superpower of the age and fell into complacency. As the trading network morphed into Empire, the complacency deepened and and rent-seeking became the key business model.

    However, I’m not convinced that policy with respect to manufacturing can fairly be described as ‘strategy’ since AFAIK no one could have known where it was headed. My impression (and I could be wrong!) is that it was more a case of the manufacturing lobby getting its own self-serving way with highly protectionist tariffs especially against Indian fabrics which were better and cheaper.

    At it happens this was exactly the right strategy to build an industrial base. It’s one that’s been successfully used many times and, in many countries, subsequently.

  • Innocent Bystander – No doubt Thomas can speak for himself, but I infer what he meant by ‘technical education’ was not the graduate level variety which has always been excellent (until recently), but the trade level – and that indeed has a long and sorry history of neglect in Britain.

    For example, in 1882-84 the Samuelson Royal Commission on Technical Instruction visited many continental countries and reported, inter alia, that “The one point in which Germany is overwhelmingly superior to England is in its schools, and in the education of all classes of its people … the dense ignorance so common among workmen in England is unknown …” (emphasis added).

    A system of apprenticeships belatedly emerged but was destroyed – accidentally, I think – by Thatcher. I’ve not managed to find a good account of this sorry episode but what seems to have happened is that the existing system was privatised but in such a way that the multiple component parts no longer meshed together to make a functional whole.

    Subsequently, university has become the main conceptual model of post-school education for most politicians. That’s plainly daft using anything like the traditional definition of ‘university’ and it’s clearly unaffordable – as expected of a ‘plan’ that involves throwing money at a fundamentally flawed concept. That, plus the marketisation of university, is causing rapid grade inflation which cannot end well. Moreover, it still leaves about 50% of school leavers with no obvious route after school.

    The aim should surely be that all, each according to ambition, ability and interest, should be able to do a world-class apprenticeship that makes its ‘graduates’ the aristocracy of the world’s workers – able to walk into a suitable job anywhere because of the reputation of UK training. Tragically, that’s only a dream.

    I agree with you about the toxic culture in the 1970s which is when I also started work. As it happened my first jobs were abroad, so I didn’t experience the unpleasant atmosphere you did but I knew it from friends.

    I especially agree with your point about the preciousness of know-how. Companies are not constructions of Velcro to be endlessly torn apart and reassembled for the fun and profit of the City.

  • Gordon – “As the trading network morphed into Empire, the complacency deepened and and rent-seeking became the key business model” – I disagree with Cobden in many things, but he really got a correct prediction regarding Empire and colonization.

    Regarding technical education, even university education was too much “Classics”, especially before 1945. In around 1914, Germany “produced” 9000 science and tech graduates, while the number for Britain was several hundreds and among them most were medical grads.

    Joseph Bourke – “That activity is undertaken principally by individual actors – individuals and firms – with the government providing a supporting role in the provision of basic infrastructure, legal systems, property rights, and education, health and social protection services” – that summarizes a horizontal strategy. But how about a more vertical industrial strategy?

  • Peter Martin 6th Apr '19 - 9:41am

    @ JoeB,

    “When the economy is powering along, when investment is increasing to meet demand, when we have full employment and wages are growing, when interest rates are moderate, and banks are supporting the real economy, not just gambling on property price rises – then the government’s current spending will automatically ‘balance’.”

    I really don’t know where you get these assertions from. And that’s all they are. You never explain why. You never give a reference except perhaps to someone else who has made similar unsubstantiated assertions.

    This one is just not true. I could start by explaining that the definition of ‘current’ and ‘capital’ is quite arbitrary. And; if we build a bridge or a hospital then that counts as capital spending even though neither will likely ever be be sold. And: if we employ doctors to actually do something useful in the hospitals that counts as current.

    But what’s the point?

  • Joseph Bourke 6th Apr '19 - 1:46pm

    Peter Martin,

    Ultiamately, all government spending/borrowing has to be financed by tax. The question is when is it appropriate to defer tax collections into the future. The answer is when the benefit of the spending is consumed in the future or as a means of smooting tax collections over the short-term via automatic stabilisers to maintain demand.
    Adam Smith illustrated that a nation’s prosperity is its capacity to provide “necessaries and conveniences of life” to its members. The goal of a nation and the purpose of its political economy is access to the product of labor, whether it is obtained domestically or from others in exchange for our exports. People want to acquire real, not monetary, values.
    Keynes demonstrated that the way in which a monetary economy works is so fundamentally different from that of a non-monetary system of exchange that any economic theory that does not assign money a central role in the formation of people’s decisions is inadequate. Agents making decisions in an economy of money contracts and uncertainty do care about financial stocks and expected monetary flows. For Keynes, monetary values shape real economic outcomes in a monetary economy, and effective monetary management thus becomes an essential condition for avoiding financial mishaps that ultimately affect real prosperity. These two views are highly complementary. Smith is warning us away from aiming at nominal, monetary financial goals, and Keynes is warning us away from pursuing Smith’s goals without considering how the system’s dynamics are driven by monetary and financial considerations and expectations. Smith is telling us that real output capacity is what matters, but he is also aware that money is “the great wheel of circulation”: it is not our wealth, but it makes the production of real wealth possible. Keynes is telling us that monetary and financial variables influence our choices, but he is also aware that real prosperity should be the ultimate public purpose of nations. Smith makes it clear what the policy goal should be. Keynes makes it clear what the instruments used to achieve that goal should be – first and foremost monetary policy and when necessary fiscal policy.

  • chris moore 7th Apr '19 - 11:06am

    @ Peter Martin,

    I hope you’re having a decent Sunday morning.

    Peter, you say, “Consider an economy which is starting from scratch. We have a government which creates the money and spends it into existence at the same time as imposing taxes to create a demand for its money.”

    There are numerous problems with this thought-experiment.

    No ” economy starting from scratch” could pay for the dubious luxury and advanced burden of a govenment.

    But let’s suppose, like the Almighty, the Government gives birth to itself out of nothingness, drops down on to the hapless “economy starting from scratch” and starts “spending money into existence”. Unfortunately, there is nothing to spend the money on as this economy “starting from scratch” has no assets and no activity.

    There is therefore nothing to tax. And no one will need or want the “money”. (In any case, given that there are no computers or printing presses in the “economy starting from scratch” there’d be no way to indicate the money anyway.)

    This thought experiment in no way illustrates or clarifies the real role of a government , let alone the many constraints that influence decisions on tax or spending.

    To my mind, what it does illustrate is the quasi-divine role Government attains in modern monetary theory. To my humble mind, one of the serious flaws in MMT.

  • Joseph Bourke 7th Apr '19 - 2:35pm

    Chris,

    MMT has some useful contributions to make in the field of post-Keynesian economics, but I would agree the quasi-divine role Government attains in modern monetary theory is one of the serious flaws in MMT. So too is the inabiity to recognise that government institutions like the treasury and central bank purposelly undertake separate functions and the independence of central banks is itself part of the economic infrastructure that maintains confidence in the stability of the currency.

    As this Econonist article writes: https://www.economist.com/finance-and-economics/2019/03/14/is-modern-monetary-theory-nutty-or-essential “speaking with MMT’s adherents is sometimes like watching a football match with friends who insist the ball remains stationery while every other element in the game, including the pitch and goalposts, moves around it.”

    All government spending/borrowing is eventually financed by tax. The current public debt (exclusive of gilts held by the BofE) is equivalent to cumulative government deficits incurred since the early noughties i.e. overthe last 17/18 years or so. All public spending/borrowing prior to that time has been effectively financed by tax. The deficit spending over the last couple of decades will also be financed by future tax receipts over the coming years.

  • Peter Martin 7th Apr '19 - 6:54pm

    @ Chris Moore,

    “There is nothing to tax”

    In any society, people have to have food, and shelter. So there is always something to tax. Imagine yourself as a European colonialist setting up for the first time in Africa. The local population will certainly have huts to live in and possibly other assets like cattle and boats.

    So you apply a tax to cattle, huts and boats. Payable in the currency you define. You have to have enough force of arms to prevent the local people putting an end to European colonialism but as you have guns and the native people only have spears that should give you some advantage.

    You have your tokens, ie your money, which don’t have to be made of gold. They can be made of any cheap metal providing you have enough anti-counterfeiting measures in place. Incidentally this has always been a problem (even gold coins can’t contain the full value of the coin) and is still a problem in the 21st century. You don’t actually want the tokens that you have a virtually unlimited supply of. You want the native people to work for you, to get the tokens and to pay their taxes. You’ll always have a deficit in tokens and they will be the ones that have remained out in the economy and are used as a means of exchange.

    @ JoeB,

    It’s nothing to do with quasi divinity as I’m sure you’ll know. It’s really just a statement of the obvious. Anyone who has a position of authority can turn that authority to their own advantage. If I’m running a protection racket I can demand that you pay me in my own business cards. So why would I want my own business cards which cost less than a penny each to print? I don’t. I want you to do what I tell you. I pay you in business cards and you pay the business cards to me as a tax. That tax prevents you coming to a sticky end!

    So you think you can print your own business cards exactly the same as my own? Don’t even think about it! 🙂

  • Peter Martin 7th Apr '19 - 8:01pm

    @ JoeB,

    “All government spending/borrowing is eventually financed by tax. The current public debt …… is equivalent to cumulative government deficits incurred since the early noughties i.e. over the last 17/18 years or so.”

    If the debt/gdp ratio is 100% then aren’t we just one year in arrears? Or if the government share of gdp is 40% we can say we are 2.5 years in arrears. If this helps you get over the fact that Governments, in the UK, USA, Australia etc nearly always run deficits then that fine.

    Japan on this basis is either 2.3 years in arrears or about 5 years in arrears depending on how you want to look at it. Does this sound slightly more acceptable that having a debt to gdp ration of 230%? I’m not sure.

    I don’t see how it matters providing inflation is kept under control.

  • Joe Bourke – Nevertheless, Peter Martin has a point. At least we should not be too hell-bent on “balancing the book”, especially within one term. The commitment to balance budget can be reduced to a footnote in the fiscal policy section of the manifesto, rather than a big title “Balancing the Book” like in 2017. This will give us more flexibility to deal with uncertainty, especially when Brexit is looming, which can potentially lead to a budget blackhole and this means a commitment to balanced budget will lead to another phase of austerity that may be on par with 2010-2016. Just look on how Trudeau conveniently ditched the idea of balancing the budget following Trump’s trade war policies as an example. I mean, the manifesto should be more flexible on the matter.

  • Joe Bourke – the state has a vital and essential role in the economy but, when it comes to industrial strategy, it as well for policymakers to recall the words of Friedrich Hayek when he said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”

    But then post-war France and East Asian countries demonstrated that they could know more than Hayek said. I think any Libdem new strategy should concentrate less on pharma/life science, defense & aerospace, or automotive, where the UK already has sizable R&D investments and competitive advantage, so productivity gains will be marginal at best. This problem is what I observe regarding Theresa May’s industrial strategy. The new strategy should focus more on industries that are currently less productive but have strong future potential for productivity gains from application of new modern technologies.

  • Joseph Bourke 8th Apr '19 - 1:39pm

    Thomas,

    I would say that Libdem Policy is far from hell bent on balancing the books – quite the opposite as the policy statement makes clear https://www.libdems.org.uk/economy with both a committment to deficit financing forinvestment and during recessions:

    “Liberal Democrats reject the Conservative Government’s damaging and irrational commitment to run budget surpluses on both capital and revenue, which imposes completely unnecessary deep cuts in spending and limits the scope for much-needed capital investment. But we have no intention of just throwing away our hard-fought efforts to control the deficit during the Coalition years. Liberal Democrats will therefore commit to eliminating the deficit in day-to-day spending by 2020. This means we will be able to keep debt as a share of national wealth falling through the Parliament, unless there is a recession. Once we have brought current expenditure into balance we will ensure that overall public spending grows roughly in line with the economy. This means that we can improve key public services and provide them with the investment they need.

    A long-term stable economy requires more than just discipline over spending. It requires us to invest in people, innovation and infrastructure in order to give our economy the opportunity to remain competitive for the future. The Conservatives have failed to take advantage of historically low interest rates to borrow for the investment that would create jobs now and prepare us and our economy for the future.

    Liberal Democrats will therefore commit to a responsible and realistic £100 billion package of additional infrastructure investment.”

  • Joseph Bourke 8th Apr '19 - 1:44pm

    Thomas,

    on Industrial strategy the policy is stated as follows:
    “We will:
    – Protect the science budget, including the recent £2 billion increase, by continuing to raise it at least in line with inflation. Our long-term goal is to double innovation and research spending across the economy. We would guarantee to underwrite funding for British partners in EU-funded projects like Horizon 2020 who would suffer from cancellation of income on Brexit.
    – Build on the Coalition’s industrial strategy, working with sectors which are critical to Britain’s ability to trade internationally, creating more ‘Catapult’ innovation and technology centres and backing private investment in particular in green innovation.
    – Develop the skilled workforce needed to support this growth with a major expansion of high-quality apprenticeships including Advanced Apprenticeships, backed up with new sector-led National Colleges. We will develop a national skills strategy for key sectors, including low-carbon technologies, to help match skills and people.
    – Invest to ensure that broadband connections and services to be provided before 2020 have a speed of 2 Gbps or more, with fibre to the premises (FTTP) as standard and an unlimited usage cap by 2020 across the whole of the UK. SMEs should be prioritised in the rollout of hyperfast broadband.
    – Aim to double the number of SMEs participating in the digital economy by supporting ICT capital expenditure by businesses in non-digital sectors.
    – Build on the success of Tech City, Tech North and the Cambridge tech cluster with a network across the UK acting as incubators for technology companies.
    – Create a new retail and business strategy to look at the impact of new technology on jobs in key sectors.
    – Commit to build digital skills in the UK and retain coding on the National Curriculum in England.
    – Support growth in the creative industries, including video gaming, by continuing to support the Creative Industries Council and tailored industry-specific tax support, promoting creative skills, supporting modern and flexible patent, copyright and licensing rules, and addressing the barriers to finance faced by small creative businesses.
    – Invest in the future – supporting innovative technologies including the space industry.

  • Joseph Bourke 8th Apr '19 - 4:40pm

    Peter Martin,

    the OBR considers fiscal sustainability on the basis of the interest costs entailed in servicing public debt. The fiscal position is considered unsustainable if the public sector is on course to absorb an ever-growing share of national income simply to pay the interest on its accumulated debt.
    The OBR’s report https://cdn.obr.uk/FSR-July-2018-1.pdf notes:
    “…projections suggest that the public finances are likely to come under significant pressure over the longer term, due to an ageing population and further upward pressure on health spending from factors such as technological advances and the rising prevalence of chronic health conditions. Under our definition of unchanged policy, the Government would end up having to spend more as a share of national income on age-related items such as pensions and(in particular)health care, but the same demographic trends would leave government revenues roughly stable.
    In the absence of offsetting tax risesor spending cuts,this would widen the government’s budget deficit over time and put public sector net debt on an unsustainable upward trajectory. This fiscal challenge from an ageing population and from additional pressures on health spending is common to many developed nations. The long-term outlook for the public finances is less favourable than at the time of our last FSR in January 2017. This is more than explained bythe June health spending announcement,which –in the absence of accompanying offsetting tax or spending measures –increases spending by significantly more than the modest fiscal tightening implied by dropping the Dilnot reforms and accelerating rises in theState Pension age.”

    There are the challenges that future governments will need to address.

  • Peter Martin 8th Apr '19 - 5:59pm

    @ Joe B,

    The Office of Budget Responsibility is a highly neoliberal group established by George Osborne in 2010 as a cover for his senseless imposition of austerity economics. It’s a complete waste of money. I could put it much less politely on request.

    The debt on 5 year bonds is less than 1%. Less than the rate of inflation. Its nonsense to think the Government ‘can’t afford’ to pay that.

  • Peter Martin – agree, even if Britain followed what the Obama Administration had done (which is anything but radical), it would have been better off by now. Granted that the US has the reserve currency, but some forms of their stimulus plan could have been applied in the UK. Actually, the US reduced its deficit at a faster rate.

    Joe Bourke – “Our long-term goal is to double innovation and research spending across the economy” – when will we double R&D spending? We could have given voters a more specific point in time/period. Double the current spending level in 2025-2030 would be great, but double it in 2050 would be insignificant.
    Also, it would have been better had the key word “manufacturing” appeared in the manifesto.

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