LIB DEMS: by default, the only party for Business and sound economic management

The “new normal” was coined as a new lexicon by Mohamed El-Erian, the then head of the global financial firm PIMCO to describe the post-script of global finance following the financial crisis of 2007-08. 

With the torrent of news and scandal, it feels as though we are all becoming immune of not sensitised to an almost daily feed of political shocks and ever-more worsening language in the current political maelstrom. The new normal.

One aspect of the current pre-election phase – but also a reflection of a structural shift – is the position on public finances for the two parties. As Lib Dems should be able to capitalise on as the ONLY sensible party for economic stewardshipmost sensible centrists and business will recognise that the Tories have lost this mantle.

I wrote earlier about PM Johnson’s rapidly escalating fiscal promises that are clearly a pre-election gambit – a well-worn political strategy of governing parties over generations. I also highlighted the risks that the fiscal costs of a de facto government “bail out” by the Treasury in the event of a No Deal could easily get into figures and a scale that would test the UK’s reputation for economic management at the least, and the worst, risk a full-blown economic-financial crisis.  

A further extension into 2020 (June most likely) is now the baseline scenario. I’ll outline why separately.

A quick review therefore of the fiscal issues is apt but without going into policies specifically, or even the legality for some of Labour’s positions eg on sequestration of private school assets. 

These are my 3 main conclusions for the current new normal for economic management in the UK:

  1. Both Labour and Tories are in a “spendthrift arms race”. Despite claims, it is not clear that the policies add up or indeed how they will be financed – not least in the current environment where the economic growth (that finances taxes) is slowing and the budget deficit (i.e. the UK’s overdraft through borrowing) is growing. To be honest, I’m not sure a costing has been done for LibDem policies but at least they are within the current fiscal framework.
  2. After a decade of austerity, there is a clear structural shift away underway from the post financial crisis world from the need for balanced budgets and towards old-school Keynesian rise in public expenditure to reboot the economy. Whilst we generally support this based on evidenced-based policy we should clearly highlight that we alone are now business-friendly and fiscally prudent yet focussed on real priorities.
  3. The spendthrift polity is inconsistent with EU rules – something not yet commented upon in the press – because the UK Budget deficit would balloon over 3% of GDP. The EU’s Stability and Growth Pact (SGP) – as part of the EU co-ordination of fiscal policies – requires all 28 EU Member States to run budget deficits of a maximum of 3% of GDP and to have debt of under 60% of GDP. The UK has been previously subject to the so-called “Excessive Deficit Procedure” in 2009 and again in 2015 by breaching these norms and whilst the UK is technically exempt from real fines (geek note: Protocol 15 the EU Treaties), the EU and the Commission will not want to see this seriously breached so long as the UK remains a member state (or even if/when it leaves). As THE REMAIN PARTY, we should clearly argue that we will stick with the SGP and instead that the UK will push perhaps for a rise in the SGP limit to say 4% (something even Germany and France may be open to given its current economic woes) within the EU.

 

 

* With experience across academia, think tanks, central banking, EU Accession and reforms across 40 developing and transition countries, Dr Rupinder Singh works with multilateral organisations and governments as an independent adviser. He is an Executive member of Liberal International (British Group).

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20 Comments

  • Peter Martin 3rd Oct '19 - 10:53am

    There is still a lot of erroneous thinking about govt deficits. The govt spends money into the economy. It gets back some in taxes. It cant get back more than it has created so it is nearly always in deficit.

    Does it matter what the deficit is? Possibly. It depends on the level of savings in the economy, the degree of economic activity and the rate of inflation. It doesn’t matter what silly rules the EU may wish to impose on us with their SGP. This should really be the ISP.

    The Instabilty and stagnation pact.

  • Keynesian is not just reckless spending, it’s reckless spending with your fingers crossed.
    Keynes came up with his idea when we were still a massive exporter of manufactured goods. In our current reality it’s economic suicide and will only benefit all the nations which export to us.
    The only reason Keynesian nonsense has such traction can be expressed in one word.
    Desperation.
    The LibDem economic policy has only three other components.
    – “support” (whatever that means) the latest high tech wonder of the moment
    – establish the National St Jude Investment Bank
    – award the “Vince Cable Cross” to “responsible capitalists” (whoever they are)

    The rest is just more duties and obligations loaded onto employers.

  • Richard Underhill. 3rd Oct '19 - 2:25pm

    Having been reading the writings of a respected, earlier US President the level of income of the USA government derived from tariffs is noteworthy. Their current President is raising large sums from tariffs as a result of trade wars with China, Iran and even the European Union. It seems that the current British PM is picking up on such ideas from across the Atlantic, while promising to reduce income tax for higher earners.

  • Peter,
    As you can’t answer the question ” What do you do if faith is lost in your currency” anything else you say is just so much tinfoil wrapped rubbish. Please deal with reality a lose of faith kills the value of a currency, the fact you can’t or won’t see that totally undermines anything else you attempt to say.
    Hard rain and what is your solution? Quick to disparage but short of solutions seems to be your modus operandi.

  • Come the GE the Lib Dem’s should pledge to cut taxes and spend more on the NHS and welfare. How? By cancelling Brexit. By doing this we should whack an outrageous claim on the side of the bus that we will spend 350 million a week more than Labour and the Tories on the NHS by cancelling Brexit and delivering an economic boom which will raise the tax take.

    The Tories and Labour will claim we are lying , but the onus would be on them to prove that. Good luck!

  • If the LibDems were true to their historic beliefs, the party would campaign at the general election for:
    – higher taxes on unearned wealth, including higher inheritance taxes and an end to tax free family trusts such as those which Kate Middleton’s family and the Dukes of Westminster life off tax free from generation to generation
    – a restoration of child benefit to those couples where one of them earns more than £50,000, removing needless complexity in the tax system, rewarding mid/higher earners, and making the point to mid/higher earners in southern England and London that the Tories have spent years putting up their taxes

  • @frankie
    There are no quick, one line solutions as are beloved by politicians.
    It took two world wars, a failed Empire and decades of self indulgence and a sense of British superiority and entitlement to get here.
    The way out is too drastic for sensitive ears and would only fall on stony ground.
    As a teaser though, to start – the absurd HoL is abolished, the seat on the UN Security Council is surrendered, the independent nuclear deterrent is decommissioned…
    And that is just the first morning. It gets worse, much worse.
    Most voices here just think a bit of tinkering will fix it and a bit of wealth redistribution.
    It’s far, far beyond that.

  • Peter Martin 4th Oct '19 - 7:00am

    If “faith is lost in the currency” we have higher than desirable levels of inflation. The task of the govt is to steer a sensible miďdle path between high inflation and having a recessed economy.

    The problem in the euro zone is that the SGP effectively limits the movement of the steering wheel. This forces governments to be too inflation averse.

  • I am interested to see that it is thought that the abolition of the House of Lords should be seen as drastic. If this essential step is seen by most of the party as drastic then I am in the wrong party. As far as our membership of the security council is concerned – should we not be looking at the structure of the United Nations. A good source of ideas is the success of the European Union, a democratic organisation which balances national and international decision making in the spheres it is responsible for.
    As far as decommissioning our nuclear weapons – the word independent is inappropriate since we are heavily reliant on the US – this has long been a matter of debate within the party.
    My view is that we focus on peace rather than war. As a starter we need to aim for as much money being spent on peace as war. A good start would be to resolve to end the killing of civilians either directly or by supplying weapons in other countries.
    If we are to gain control of our environment and our ecosystems these would be very timid first steps.

  • Nonconformistradical 4th Oct '19 - 8:54am

    @Tom Harney
    “I am interested to see that it is thought that the abolition of the House of Lords should be seen as drastic. If this essential step is seen by most of the party as drastic then I am in the wrong party.”

    Are you suggesting you favour a single chamber Parliament? If so then what checks and balances would you want to see in place?

  • Peter Martin 5th Oct '19 - 12:30pm

    @ Dr Rupinder Singh,

    I always think it’s bad manners for someone to write a controversial article but then refuse to answer valid criticisms in the comment section.

    Be as controversial as you like. That’s fair enough. But at least have the courtesy to respond. Otherwise just switch off the ‘comments’ allowed click box.

  • No I have never suggested a single chamber parliament. We certainly need checks and balances now though as we have seen recently.

  • @ nonn,, whatever
    My own view on a second chamber is based on three principles.
    1 it should not be elected as it would comprise the legitimacy of the HoC
    2 it should not be hereditary and
    3 term served should be limited ie no for life incumbents.

    Which means appointees My first suggestion would be to allocate seats to professional institutions, learned societies, the faiths, major charities and from another bigger list of even small charities and societies chosen by random selection.
    Each body would appoint and send their one or two representatives for a five year term. Every twenty years a Royal Commission would review the list and allocations.
    Not perfect but the current criteria for the HoL are repulsive.

  • Sorry compromise.

  • Laurence Cox 5th Oct '19 - 3:54pm

    @Hard Rain

    Which means appointees. My first suggestion would be to allocate seats to professional institutions, learned societies, the faiths, major charities and from another bigger list of even small charities and societies chosen by random selection.

    Your suggestion just means that ‘the great and the good’ get representation in the HoL. If we are to go away from the Party’s current position of a mainly or wholly elected Lords, then the only legitimate alternative is random selection from the electorate, just like jury service.

  • Nonconformistradical 5th Oct '19 - 4:31pm

    “Your suggestion just means that ‘the great and the good’ get representation in the HoL. If we are to go away from the Party’s current position of a mainly or wholly elected Lords, then the only legitimate alternative is random selection from the electorate, just like jury service.”

    I’d suggest we need first to define what we expect a reformed HoL to do, then consider the required competencies of the members to fulfil those functions, then worry about how to fill the positions – and also we need to learn the good and the bad from 2nd chambers in other countries.

  • @Laurence
    I don’t know what experience you have of jury service but it is twelve people, the majority of whom bitterly resent being there at all.
    And that’s only for a couple of weeks.
    If it is voluntary service then you get the self selecting elite who can afford the time and like the sound of their own voices.

  • Hard Rain – “Keynesian is not just reckless spending, it’s reckless spending with your fingers crossed.
    Keynes came up with his idea when we were still a massive exporter of manufactured goods. In our current reality it’s economic suicide and will only benefit all the nations which export to us.” – Keynesian policies are for Depression/Downturn periods, and for those times, the alternatives are much worse and will eventually result in “mobs with pitchforks going around the streets” or even worse (see Germany in 1932). Under those conditions, Keynesian still works even for deficit countries like the US in 2009-2010. Also, whether deficit spending works also depends on government sourcing policies and taxation/tariffs/trade barriers.

    “– “support” (whatever that means) the latest high tech wonder of the moment
    – establish the National St Jude Investment Bank” – the number of countries that can ever become an industrial powerhouse without these policies is well, zero, I repeat, a big fat zero.

    “– a restoration of child benefit to those couples where one of them earns more than £50,000, removing needless complexity in the tax system, rewarding mid/higher earners, and making the point to mid/higher earners in southern England and London that the Tories have spent years putting up their taxes” – a moderate middle/upper-middle class tax cuts should be balanced with a small tax hike in top rate, although I would like to add more thresholds (like 150k, 200k, 250k for example) above the current 80k threshold.

    And, aren’t the Tories all about tax cuts? Are you suggesting otherwise?

    I also recommend the party to take a little more flexible stance towards balancing budget so that we may be able to actually flank Corbyn from the left (after all of his big spending policies, he still promises to balance the budget within one term a.k.a massive tax hikes). I mean, being more flexible with balancing budget objective allows us to reverse previous austerity/cuts while being able to stay quiet when it comes to tax hikes: the Justin Trudeau playbook that allowed him to outflank the socialists from the left 4 years ago – the “budget will balance itself” talking point.

  • @Thomas
    Thank you for your reply but it still doesn’t work. Look at the graphs of the UK’s current account. It’s relentlessly down. It fluctuates around that line but it is down. Only down.
    It isn’t an underlying flat line so that a nice bit of Keynesian deficit spending will smooth out the troughs and which can be recovered from the peaks. Overall it goes down and the concept of Keynesian spending is frankly a lie to pacify those who should be woken up to this reality.
    When I ask “So when does the Great Revival” happen? And from where?”
    The best response I have had is “from everywhere” and the “multiplier”. Just Fairyland answers.
    The next great myth is the motive for the St Jude Investment Bank, and that is that there are lots of two person outfits with a brilliant idea in a garden shed. They only need a little taxpayer dosh and they will found new industrial giants.
    Utter, self consoling delusions. No such scenario exists.
    One of our sons left Oxford with a physics masters. His first job was on a team of Oxbridge graduates who were employed by a group of business angel investors to use their contacts to find any good projects to invest in. Some he felt were rich individuals but others were just fronting very big players. There is already far more investment money available than British projects. The St Jude Bank will be the inverse of Dragon’s Den. It will give public money to the basket cases rather than the promising ideas.
    I appreciate your motives and agree with the need for a “strategy” but we are in the economic equivalent of the day after Dunkirk and we need a wholesale realignment of our national effort to survive.
    The proposals we have are not even worth the term “tinkering”. Window dressing and self delusion are closer.

  • Rupinder Singh 7th Oct '19 - 9:45am

    Thank you for your feedback and views. My brief responses:

    1. There was no real challenge to the headline that both Labour and Tories are on pledging a major – wishlist/uncosted if not unfunded – expansion in fiscal outlays.

    2. Macroeconomic theory: not really the place to discuss in detail but expansion in fiscal deficits can, through the multiplier effect, lead to a proportionately higher GDP. The fiscal deficit is, yes, only 1 of many other key economic variables to grapple with for broader economic management and generally country risk is based on both internal (ie fiscal) and external (ie Balance of Payments) accounts with inflation and the labour market. Yes in aggregate Investment = Savings.
    3. The coalition government was right – at the time – to focus on fiscal consolidation and risk of high debt financing/ratings/possible run on pound. We are now in a ‘new normal’ environment of low – and negative – interest rates in developed markets so arguably sustainable fiscal deficits can, under certain circumstances, be higher than otherwise
    4. Stability Pact: I was involved in debates in the 90s on the point and I have a lot of sympathy that the rigidity of the rules can be counter-productive as in the case of Italy without other structural reforms. On the other hand the EU has to have a fiscal-monetary framework for “co-ordination” and if we’re in the EU we follow them but argue for modification. UK monetary policy, even if outside the Eurozone tracks Euro and Dollar – and the same was true during the Gold Standard and broader gold-silver parities prior to this – and this will remain the case even in the Goldilocks vision of hardline Brexiters

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