All parties have a mixture of deficit hawks and doves – those who believe in balanced budgets and those who aren’t too bothered. The Lib Dems are no exception, but I think we are different in the motivations underlying these positions.
Many Tories often seem to see deficit reduction as an end in and of itself, not even necessarily because they want to see a smaller state and lower taxes, but simply because their ideology teaches that budget deficits are Bad Things.
And in recent years, some Labour figures have begun to sound like their ideology teaches that budget deficits are inherently Good Things.
I’ve written before about the rather facile debate the country engages in over the deficit, but fortunately we in the Lib Dems conduct things on a slightly higher level.
In the debate we have had in the party those of differing views have made clear not just their positions on the deficit, but the motivations underlying them.
Here, for example, is Prateek Buch (one of the leading, and certainly the most articulate, of the party’s “doves”):
The government insists on balancing its own finances through a mixture of spending cuts and tax rises, ignoring the suppression of demand and therefore growth that this prolonged austerity creates. This balance-sheet approach to economic policy is not only self-defeating through Keynes’ famous ‘paradox of thrift,’ it distracts from the crucial work needed to fix the underlying economic problems that caused the budget deficit to balloon. A clear example is the piecemeal way in which the slashing of capital investment – acknowledged by Vince Cable and Nick Clegg as a grave mistake – is being reversed. Government guarantees have proven ineffective at a time of uncertainty and demand, so now we see a tiny bit of ‘extra’ capital spending, which is funded by further cuts elsewhere in a misguided attempt to remain fiscally neutral.
I am happy at this point to admit to agreeing with Vince, Nick and Prateek that continuing with Labour’s planned cuts to capital expenditure was an error. However, it’s easy to see why the decision was taken: cancelling future plans to invest is much simpler than cutting budgets that people are already enjoying. Beyond capital spending, there are few easy choices.
But I remain of the view that the coalition’s approach to fiscal policy is the right one.
Not because I have an ideological belief in a state of a certain size.
Not even because I think the overall tax burden is currently too great.
The primary reason I want to see the government balance its budget is because I want future generations to enjoy good quality public services. I want us to be able to improve schools and hospitals, to have a top quality public transport system, and to maintain a defence budget that allows us to play a role on the world stage.
And I want future generations to enjoy these things without paying a much higher proportion of their incomes in tax.
Yet the more we borrow today, the more we pay in the years to come to service the debts we are accruing now, and the less we have to spend on public services and social security. Because Vince Cable is correct when he says that:
Government borrowing ultimately has to be paid for—it is deferred taxation or inflation, and that is not a satisfactory way forward either.
We are already spending tens of billions every year to service the national debt: an amount that will continue to increase until we stop spending more than we raise in taxation.
And we will not start reducing the amount we spend servicing our debt until we start paying it off. And we won’t start paying it off until we start running a surplus.
So ultimately I agree with Danny Alexander, writing in today’s Independent:
As Chief Secretary, I have presided over the most sustained period of fiscal consolidation in modern times. But those cuts are necessary as a means to an end, not an end in themselves.
The review set out at the autumn statement is about ensuring the job the Liberal Democrats started, cleaning up Labour’s economic mess, is finished in the next Parliament. It is emphatically not about an ideological commitment to a smaller state.
The Coalition’s economic plan is about delivering a stronger economy in a fairer society where everyone can get on in life. We are making good progress, but the work won’t stop when our deficit goal is met. Endlessly shrinking the state would be a diversion from our plan, and we won’t sign up to it. Getting our debt down and fairer taxes to deliver the investment and public services we need is the right mix to secure Britain’s long term prosperity. It is the responsibility of Liberal Democrats to anchor British politics in the centre ground – economic responsibility matched with social fairness. That is why when the serious work of dealing with the deficit is done, we will not support a fiscal lurch to left or right.
We should aim for a budget surplus. Not by an arbitrary deadline, and not by abandoning the other measures we need to implement to build a liberal society. But aim for it we should, because that liberal society will be transient indeed if we don’t.
* Nick Thornsby is a day editor at Lib Dem Voice.
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57 Comments
*gets the popcorn*
“However, it’s easy to see why the decision was taken: cancelling future plans to invest is much simpler than cutting budgets that people are already enjoying. Beyond capital spending, there are few easy choices.”
I have a general rule that if something is the easy way to do something, it is probably the wrong way, as well.
There also seems to be the age old error of mixing up debt with deficit in this piece.
Firstly, a budget surplus isn’t required to pay down the debt: in fact the level of deficit at which the debt-to-GDP ration falls is some way off a budget surplus. This is because the combination of inflation and growth will cause the debt to fall in meaningful terms on a balanced budget. Which brings me to my second point: why isn’t anyone talking about the beneficial effects of inflation? There is NO evidence that super-low inflation rates are beneficial to the economy; yet we continue to target a level of 2%. Why not aim for a higher target – say 4-5% – and allow inflation to deal with our debts? This would benefit not just the national debt but also individual debts and do so much more painlessly than ineffectual cuts or rather more sensible tax rises.
The obvious answer is that the only debt we should take on is debt that can be invested into society such that it grows faster than the interest on the debt does.
So we should look at how much we’re being charged, look at the return on investment, and plan accordingly.
I’m afraid this will be one of the few times that I disagree wit h you Nick .
If we take a glance at public spending deficits/surpluses over the post-war period, it certainly looks worrying to begin with – far more deficits than surpluses would indicate a chronic, troubling overspend culture.
But a debt/GDP graph seems to tell a different story – from the mid-1980s public debt declines from over 40 per cent of GDP to barely 25 per cent in the early 1990s. Public finances were certainly more restrained as the 1990s ended, but we only actually ran two very small budget surpluses in the last years of the Thatcher government, neither of which were big enough to make such a big impact.
This isn’t to say we should run a large deficit all the time, but that running small deficits, equivalent to a couple of percent of GDP, are probably not the end of the world – it’s possible to reduce public debt while doing that, allowing the Treasury more flexibility to borrow during recessions.
In short, although it seems counterintuitive, we can reduce our debt (as a proportion of GDP, which is all that matters in reality) while running a minor budget deficit.
Making sure public debt doesn’t grow faster than GDP is a good idea, but that does not typically require a balanced budget or surplus. That doesn’t mean our current fiscal path (especially in the decades ahead) doesn’t need seriously addressing, but I do not see the case for mathematical balance here.
Ultimately, this article is irrelevant because any debate about balancing budgets has to be about how to meet the huge demographic pressures facing governments in the decades to come. Set against that, a ‘balanced budget’ will inevitably result in ‘endlessly shrinking the state’. It is a facile argument.
Bizarrely, and probably deliberately, this piece does not link to Prateek’s Independent article yesterday which provoked the response from Danny Alexander. It can be read here: http://www.independent.co.uk/voices/comment/the-lib-dems-should-not-sign-up-to-osbornes-austerity-straitjacket-8996281.html.
The key point Prateek makes is rather different: that what the Autumn Statement and Danny Alexander is proposing rips up the uneasy compromise that emerged at Glasgow:
‘….the ink is barely dry on a hard-fought deal struck by the party to fight the next election on our “own distinctive economic policies,” including fiscal plans to aid investment in “people, business and infrastructure,” not on the same terms as Tory austerians. Any deal to balance the budget in the next Parliament no matter the state of the economy – and more importantly, peoples’ living standards – flies in the face of that independent economic position.’
It is a matter for the Liberal Democrats, politically. We had agreed not to extend economic measures by this Coalition going beyond those in the Coalition, as it compromises the Party’s independence and its entire election strategy. How strange that this article ignores that basic fact…..
There’s a big hole in the argument if you go from ‘we must make sure future generations can afford good services/sensible rates of tax’ to ‘we must have a surplus’. That’s because how burdensome debt is depends not just on its total value, but also on how inflation is eating into its real value, how economic growth is making its value rise or fall compared to our overall wealth and what the level of interest rates are.
It’s been a regular feature of the British economy to have deficits and also at the same time been getting debt under control – because growth and inflation have eaten into the debt problem at a greater rate than the deficits were adding to it.
Indeed in a world with a shrinking economy, rising interest rates and/or falling prices, you can have a budget surplus and the debt actually getting harder and harder to afford.
I’m neither a deficit dove or hawk and I am not convinced in the benefits of legislating for a surplus. Surplus’s should only be run in the good times, but there are still huge structural problems with the economy.
Jack, the problem with inflating the debt away is that it will increase the cost of future borrowing and also inflate many people’s pensions away.
Best wishes
@ jack – “Why not aim for a higher target – say 4-5% – and allow inflation to deal with our debts?”
investment.
we want it, lots of it!
investors typically are lary of governments that disregard their future profit as a cheap n cheerful way of financing debt.
it looks bad.
Nick – thanks for describing me as leading and articulate, not always the case but thanks anyway 🙂
Jack, Michael, Gareth and Mark have covered why balanced budgets are not something we should aim for – they simply aren’t relevant to building the sort of society liberals are interested in, not any more so than healthy and sustainable public finances.
Your appear to argue that even if we fail to actually balance the budget, trying to will lower future debt payments which is a good thing. Problem is, having a target for balance (even one without a time limit) will force decision-makers into perverse choices, cutting our nose to spite our face.
will try to blog again on this soon, as there are one or two interesting charts – oooh, charts!! – that shed some light. whatever the economics, as Gareth and others have said, there is certainly a grave political price to pay for making the wrong choice on this…
We should not be fixated on totemic figures like this mythical budget surplus. As others have pointed out, you can run a small deficit while reducing the ratio of debt to GDP if GDP is rising fast enough.
What matters is what you are doing within the public spending envelope and where that is directed. If you have a small deficit but are using deficit financing to invest in infrastructure, top class education systems etc, that might be just as effective in reducing debt to GDP if not more so than clinging to a symbolic surplus while killing future growth and productivity enhancements by depriving the country of desperately needed long term public investment.
Government debt to GDP is a ratio. Every ratio has two parts to it and we ignore this very obvious fact at our peril.
As Jack, Mark, and Mike at least have said, the extent to which debt interest is a burden to future taxpayers depends just as much on growth as the level of debt.
You’re arguing for debt reduction as an investment in the future, which is fine, but the question should be: are there any investments that give a better return? I’d be inclined to agree with the Social Market Foundation that investments in science and research, and skills, for example, would boost productivity and reduce debt/GDP better than reducing the absolute level of debt. http://www.smf.co.uk/research/economic-policy/osbornes-new-choice-smf-pre-autumn-statement-briefing/
We also need to be careful what measure of the deficit we’re using. Do you just want a surplus on the current budget, or to entirely end borrowing for infrastructure investment that future taxpayers will benefit from?
Another problem with a fixation with short term budget management is that it leads to aberrant decision making. For example, we are still selling off public assets left right and centre (the “centre” bit probably being Vince Cable). Yet those assets are engaged in delivering public services (post, rail etc.) and in selling them off, we are forgoing any future income stream to the public purse while also condemning future generations to pay (probably exorbitant) user fees to usually foreign owners for a largely indifferent and sometimes dreadful service (Heathrow, energy companies, rail companies etc. etc.). This too is a burden on future generations.
Whichever side of the argument you are, David Cameron’s aim to cut the top rate of tax must appear wrong: http://www.telegraph.co.uk/news/politics/10509537/David-Cameron-hints-he-wants-to-cut-the-top-rate-of-income-tax-to-40-per-cent.html
I am shocked that some people (Prateek and perhaps others) don’t think a balanced budget is necessary. Maybe not in the next few years, but we can’t just run deficits forever? I’m arguing against a surplus over the next five years, but not a balance.
We need to be very sceptical about these fiscal multipliers, it is possible for government to lose money on investments and that just leaves you with bigger interest payments.
Popcorn all gone 🙁
it is not now that it matters, it is in 30 years time:
http://www.bis.org/publ/work300.pdf
“And in recent years, some Labour figures have begun to sound like their ideology teaches that budget deficits are inherently Good Things.”
Utter tripe. Come on, give one instance of anything remotely like that.
How about some commitment to reducing off balance sheet borrowing? Everyone’s done lots of it, and it’s more expensive that borrowing in the up front way. The public hate it. Be the first party to commit to doing something about it. At least get them included in headline debt figures in a meaningful way.
Alexander’s been going flat out for it recently, saying “infrastructure” as often as possible. I’m afraid a surplus means nothing if you’ve stacked up off borrowing on the quiet.
Clearly there are four views, those in favour of balanced or surplus budgets at all times, those in favour of Keynesian management of surpluses in good times and deficit in bad, those who regard a small defict as good economic management and those who have no issue with a deficit whatever the size. Then there are those who actually care at least as much about what the money is spent on.
I’m relatively relaxed about whether the target here is a small surplus or a small deficit. The dividing line seems to be whether to get there (whichever it is) with grim determination, or whether to resist all the way.
Certainly to aim for a small surplus would be the Keynsian thing to do, if Keynsians weren’t all Keynsians-only-during-a-recession. And for what it’s worth, I do think the evidence (Germany versus Greece) is that countries that countries that show restraint in borrowing perform more strongly than those that don’t. But I recognise the temptation is always to spend money or cut taxes now, and win votes, rather than cut borrowing and leave some future government of a different colour to enjoy the dividend. So while leaving a small deficit is bad policy for the country, it is no worse than governments normally achieve.
I would also reject the idea that there is any particular logical link between deficit reduction and a smaller state. You can cut the deficit by raising taxes rather than cutting spending if you want a larger state. Or you can borrow to cut taxes if you are deficit-dove supply-sider (like Reagan). What I suspect happens is that very few people form their own views on macroeconomic policy, but because left-wingers are seen more often to be pro-borrowing, and right-wingers anti-borrowing, most people fall into line. This is a propaganda victory for the right, because the historical record is not that clear, but as left-wingers and right-wingers come to believe it, the potential for economic credibility on the left is damaged.
“, I do think the evidence (Germany versus Greece) is that countries that countries that show restraint in borrowing perform more strongly than those that don’t.”
Germany was missing its Euro deficits all the time earlier in the decade, during a period when the world economy was doing well. Given the arguments we hear all the time about Brown’s deficits being awful because of the growth around, Germany’s must be considered pretty awful too.
They were making pretty painful reforms in that time, that in broad economic terms seem to have paid off. Could they have done them with a forced balanced budget?
“Certainly to aim for a small surplus would be the Keynsian thing to do”
Would it though?
What if the interest rates are very low and the existing debt very prudently scheduled, and there were lots of investment projects waiting to be done with excellent rates of return?
More generally, I see this article has the increasingly common delusion that your motivations and reasonings are on a different plane to the rest of us. We’ve seen it with Clegg’s “serious votes” stuff, as though the left leaning Lib Dems are a flippant lot who don’t understand “grown up politics”.
Nice sighting of “clearing up Labour’s mess” from Alexander. That’s the mess that Labour caused in Ireland, America, Holland, Iceland, Spain, Greece, Estonia etc.
You inherited very prudently scheduled debt. That’s why the markets loved lending to us. Robert Peston called this out years ago.
http://www.bbc.co.uk/news/business-15717770
” although both Spain and France have smaller deficits than the UK, they will have to borrow comparable amounts to the UK in total – more than Britain in the case of France (according to Bloomberg data) – because so much of Spain’s and France’s debt is short-term, and needs repaying next year.
It’s the number “13.99” which tells you the UK isn’t bust and probably won’t go bust. That’s the average maturity of British government debt, the number of years that we as taxpayers have to pay off what we owe our creditors.
Those 13.99 years should surely be long enough to reconstruct our economy to generate growth in a balanced and sustainable way, to prove that we can pay our way in the world”
I guess, as this debate here shows, the Lib Dem lesson from that is to go for good headline figures on the deficit/surplus, to the exclusion of all else.
Interesting discussion (and I hope you can replenish your supplies, Jennie!).
@ Mark, Prateek and Mike
I think we are in agreement on the desirability of reducing the burden of debt servicing on the public finances (do correct me if wrong though!). So the question then becomes how we achieve that, and there is the potential for a disagreement over the degree to / speed at which we do so.
We can of course reduce the burden in relative terms while running a small deficit through the combination of GDP growth and inflation. However, with tolerable/desirable levels of inflation and sustainable levels of growth that is likely to be a slow process (particularly if, as I believe, our economy is at a stage in its development where the trend rate of growth is going to be lower than it has recently been).
So I see a surplus as a faster route to achieving what we all agree is a desirable aim.
There are also two other aspects which I didn’t touch on in my piece for want of space.
First, at times when the economy is growing strongly of its own accord, it makes sense (on Keynesian principles) to run a surplus to prevent over-heating and flatten out the business cycle.
Secondly, running a surplus puts us in a better position to weather the next recession and reduces the need to go through this whole process of austerity again afterwards (or at least to the same extent).
@ Liberal Al
I have re-read my piece and I can’t see an instance of me confusing the debt and deficit – would you care to highlight it?
Finance theory seems to teach that high risk = high return, which gives justification to the left, but the problem with this is that if everybody follows it then it just creates a bubble in risky assets.
I’m simplifying and I don’t have a PhD, but we need to be smarter than just think equities will out-perform bonds over the long term so we should just sell bonds (in the form of UK government borrowing) and buy equities.
Nick –
If the economy is going to be at a trend level of growth lower than the pre-crisis trend (we’ll see), then won’t real rates of interest also likely be negative, or very low ? I assume we’re talking about the sort of ‘secular stagnation’ stuff that’s become popular recently. In this case, though growth will have less of an impact on debt, but yields are likely to be very low, and interest payments suitably diminished.
Everyone –
Does anyone have a reference to Keynes actually arguing for a surplus? Other than vague quotes that the Treasury should be more frugal during periods of growth, I have never found a directly sourced suggestion by Keynes that a surplus should ever be run. I’m inclined to believe that it never happened.
But isn’t there another possibility here?
‘The primary reason I want to see the government balance its budget is because I want future generations to enjoy good quality public services. I want us to be able to improve schools and hospitals, to have a top quality public transport system, and to maintain a defence budget that allows us to play a role on the world stage.
And I want future generations to enjoy these things without paying a much higher proportion of their incomes in tax.’
Great. So fund those things through (say) insurance schemes and charges instead of tax. If people wish to invest in healthcare, let them make that choice. This need not mean an ideological commitment to a small state – simply a commitment to FUND things other than through tax. If people want say an annual fuel payment let them draw down money from their house price wealth rather than draw upon tax. It’s no different to having housing funded via payments to BTL landlords rather than to state bodies.
A land value tax would go some way to reifying this idea, though I realise that I’ll probably drive for McLaren before that happens.
I realise, of course, that this might be provocative – I apologise if so. But the point remains why are we so afraid of insurance based provision? Are we more afraid of it than permanent deficit?
The other question here is about what, if any, quantitative tightening happens, but we are some way from that debate.
Simon Wren Lewis, unimpressed with Lib Dem policy on deficits.
http://mainlymacro.blogspot.co.uk/2013/08/bringing-economics-back-into-fiscal.html
” Let’s take the example of the coalition partners in the current UK government: the Liberal Democrats. Now some might simply use guilt by association, but I prefer to be charitable. Perhaps they were bounced into supporting austerity by events in 2010 and advice they received from certain quarters. As the 2015 election comes nearer, the LibDems are trying to differentiate themselves from the Conservatives on many issues, and they do have a reputation for progressive thinking.
So have a look (pdf, page 37) at the key motion on the economy to be discussed at their September conference. It has Nick Clegg’s name on it, so we can assume it reflects the leadership’s thinking. It starts thus:
“Conference welcomes recent improvements in the UK economy, specifically that:
I. Faced with the highest budget deficit in post-war history in 2010 as a consequence of the banking crisis and Labour’s mismanagement, the Government has managed to reduce the structural deficit by a third since it came to power.”
Point number two then talks about recent GDP growth figures. So the best thing that has happened to the UK economy recently has been that the deficit has come down. The message seems clear: reduction of the budget deficit is the number one priority and all else has to be subsumed to that.
Now you might in Clegg’s defense say that he has to put it this way, as he has been part of a government which has made deficit reduction the overriding priority. I think that is simply wrong. He could say instead that the focus on deficit reduction was appropriate given all the uncertainty as the Eurozone crisis broke. However now it is clear that this was a crisis specific to the Eurozone, and with interest rates on UK borrowing really low and likely to stay there, the UK can make reducing unemployment the priority, while still of course operating a prudent fiscal policy in the longer term. In other words, he could begin to de-prioritise deficit reduction. The fact that he chooses to do the complete opposite suggests he is content to see fiscal policy as an extension of household financial management. We will see in September whether the Party as a whole is happy to follow its leader in ignoring 80 years of macroeconomic analysis.”
The party duly voted with the leadership.
http://mainlymacro.blogspot.co.uk/2013/08/bringing-economics-back-into-fiscal.html
If you think the country’s economic problems are primarily because the state got too big stand with Osborne and Alexander. If you think the state getting too big was a product of an unsustainable credit bubble then the policy response should be different – recessions following credit bubbles are often long and drawn out, and marked by under investment (which funnily enough describes our experience) . The debate (in the Party at least) is, broadly, not about cuts vs. spending on services, but cuts vs. investment. However, Conference has overwhelming endorsed the later, but the position is now being unpicked by a narrow elite (group of children) within the Party who have decided they know better.
Joe Otten wrote:
“And for what it’s worth, I do think the evidence (Germany versus Greece) is that countries that countries that show restraint in borrowing perform more strongly than those that don’t.”
As much as I am reluctant to admit it, German pressure for austerity within the EU is a significant reason as to why the UK’s austerity drive has been so unsuccessful – the austerity drive within the Eurozone has dragged down the whole continent. I find your economic analysis fundamentally naive and indicative of the current Government.
I’m afraid this post misses the elephant in the room which is that TOTAL DEBT is what matters – not just the amount of government debt.
Government debt matters because, as others have pointed out, it has to be serviced and that cost is a drag on the economy in future years. But that is equally true of private debt; actually rather more so per pound owing because private interest rates are substantially higher.
Many Conservatives apparently believe that, to paraphrase Animal Farm: “Private sector, good; Public sector, bad” and blithely assume that the private sector can do no wrong – the Efficient Market Hypothesis and all that. At any rate the Conservative habit (shared equally by Labour) of ignoring private debt set the scene for an explosion of private debt from the late 1990s when it combined with Labour’s ‘Lite Touch’ regulation, which really meant ‘no regulation’ as the banks soon discovered.
So, unrestrained by regulators, the banks were free to go on a wild lending spree and the economy boomed. By accident (so I assume) Gordon Brown had stumbled into a Keynesian boom with a twist – it was financed by private deficit spending rather than by government spending and it wasn’t in response to a depression (its original purpose).
As the economy boomed so tax revenues surged and Labour politicians revelled in glory. For the bankers it was payday. The more money they could lend at interest the greater their profits and bonuses. Those who saw that it was wildly unsustainable and could only end in tears (as some certainly did) could comfort themselves with the acronym IBGYBG – I’ll Be Gone, You’ll Be Gone. Yes really! And many senior bankers did just that, easing into comfortable retirement with a pension pot of millions.
The hangover they left us is an immense and unstable pile of private debt which, if it collapsed, would bring down the whole banking sector like a house of cards.
For the moment the government has it temporarily stabilised with super-low interest rates and other less visible market interventions. Inevitably it’s exerting a huge drag on the economy right now – never mind the future. Far too many don’t have jobs which is a waste of ‘resources’, not to mention lives. Austerity does nothing to repair the damage.
So, worries about future debt are a distraction; the problem is here and now. The debt that accumulated in the years leading up to the crash is what must be sorted out – and quickly. But that is precisely what this government is not prepared to do – it appears the Tories’ City paymasters call the tune.
The banks need to be ‘resolved’ (it would be bankruptcy but that would give the economy a heart attack) then collared and leashed and made to serve the real economy instead of enriching a few.
I challenge Nick to find any properly documented cases where austerity has rescued a country from a depression except where strong exports have saved the day. (See my two comments on Prateek Buch’s recent post for why).
https://www.libdemvoice.org/social-liberal-forum-autumn-statement-2013-37471.html
@ Mike
The point about the trend rate is in my view slightly incidental one, given the amounts we are talking about.
The cost of government debt is one thing yet to be discussed. The problem with the argument that we should borrow because it is cheap to do so is that the debt either has to be renewed after the lifetime of the gilt, and the return is unlikely to be so low next time. Or the debt has to be repaid, and we need to be running a surplus to do that.
Hmmm…
The way we’ve dealt with debts in the past is to increase our capacity to pay them by growing the economy. Debt as % of GDP has always been the measure of the debt’s significance.
What kind of surplus are you thinking of?
It would have to be pretty hefty to dent our debt.
Makes me suspect that there would always be a better use for that money…
LJP “why are we so afraid of insurance based provision?”
you forget the most important clause in all insurance policies:
“In the event of any claim this policy becomes immediately null and void”
Gareth Epps 12th Dec ’13 – 2:44pm
Ultimately, this article is irrelevant …
…, this piece does not link to Prateek’s Independent article yesterday which provoked the response from Danny Alexander. It can be read here: http://www.independent.co.uk/voices/comment/the-lib-dems-should-not-sign-up-to-osbornes-austerity-straitjacket-8996281.html.
… Danny Alexander … rips up the uneasy compromise that emerged at Glasgow:
‘….the ink is barely dry on a hard-fought deal struck by the party to fight the next election on our “own distinctive economic policies,”
Prateek Buch wrote –
“Should Clegg sign up to Osborne’s plans, especially as at the Lib Dems’ Glasgow conference in September he conceded the need to tax the wealthy more, he’ll have to answer not only for what the charter commits the nation to, but for what his party stands for if not a distinctive vision on the economy.”
Prateek Buch neatly points up the key decision for Liberal Democrats.
Are Liberal Democrats going to put up with this?
Or are they going to get rid of Clegg?
There’s a lot of good sense in the OP by Nick Thornsby. But I draw the line at agreeing with Danny Alexander. Why oh why does he have to keep going on and on about ‘clearing up Labour’s mess’? It is facile.
Everyone, except this government it seems, knows damn well that most of the mess was caused by the bankers (none of whom have been held properly to account by this government and it’s prosecutors). The policies Labour followed which led to it being worse than it might have been were primarily those being advocated even more strongly by the Tories (like bank deregulation). What about some even-handedness, Danny?
I’ve supported the Lib Dems (and either the Liberals or SDP before merger) in every general election of my adult life, but I am seriously considering changing my vote next time. In my opinion the Liberal Democrats nationally have been far too cosy with the Tories, especially over economic policy, which has been a disaster for most of the people I care about.
The real “facile debate” is the one about a sovereighn nation speaking about a “balanced budget”.
Despite Maggie, a Nation is NOT like a household, it does not need , and should not borrow at all. It has the power and the duty to supply its citizens with a medium of exchange suffcient to meet their needs. No more, and certainly no less. The interest we now pay is unessesary.
There ARE easy alternatives, as Keynes taught us, but has been written out of his script. What he advised as nessesary injections of money into the economy should be at ZERO or near ZERO interest.
UK Liberals in Government have done this before.
If the beancounter worshippers at the city shrine need something to balance, let that be production and consumption.
“Great. So fund those things through (say) insurance schemes ”
Yes, this works so well in the USA, does it not?
@Nick, your article begins by talking about deficit reduction, but then goes on to talk about debt reduction without any differentiation between the two issues; this implies that you see deficit reduction as an intrinsic part of debt reduction or the two terms as mutually interchangeable.
Neither of these positions are correct. The fact is that this Government’s drive for deficit reduction has never been about reducing public debt and the only times that it has been portrayed as so is when it is politically convenient to portray it as such.
There is a discussion to be had about public debt, but that is a separate one to the issue of deficit reduction because by-and-large the effects they have on one another as issues are not intrinsic. I would actually suggest that a surplus economy is not a particularly effective way to reduce public debt overall, if reducing public debt is your primary objective. You can reduce your deficit and still see public debt rise (as we have seen under this Government), and you increase the overall deficit, whilst still seeing the public debt fall.
Debt is Debt, wether public or private.
It is the result of there not being enough money in circulation to meet the peoples needs.
We will always have this horror so long as the creation of money is in private hands, and they dictate the terms and the price of its issue.
This determination is a primary public requirement, and it should be in public hands, not dictated and executed for purely private greed.
@ liberal Al – insurance schemes seem to work alright in France…
@GPPurnell
“But I draw the line at agreeing with Danny Alexander. Why oh why does he have to keep going on and on about ‘clearing up Labour’s mess’? It is facile.”
Agreed & you know what ? Even Danny Alexander agrees !!
In an interview with the Guardian, DA was asked:
Which words or phrases do you most overuse?
“The mess Labour left behind.”
http://www.theguardian.com/lifeandstyle/2013/dec/07/danny-alexander-interview
Given how often he uses the phrase, he’s either lying to the Guardian or under orders from Osborne to utter it at every opportunity & by golly, he’s uttered it a lot !
The French health care system is one of universal health care largely financed by government national health insurance. Approximately 77% of health expenditures are covered by government funded agencies. That is completely different to a general insurance system and subised by social security.
It should also be noted that the French system is facing massive issues with raising costs (to the public purse).
@ Liberal Al
I’m sorry that was your interpretation. Given that the fundamental point of the piece is that we should run a surplus in order to reduce the national debt, I don’t think that confusion is evident at all!
What is this nonsense of substituting further debt with the outright gamble of an insurance scheme?
Out of the frying pan, into the fire.
We have a very long history, at least Five Thousand years, of dealing with debt, either private or State. And that is FORGIVENESS.
Yes, I can hear the howls from here. But if you refuse to face the reality about how money, ALL money comes into existence as debt, then have a care about what a Liberal should or could do if ever the electorate trusted us with the real levers of power.
Gladstone knew full well he had the city as mortal enemies. Nothing has changed since his day. It is a chancre in our midst, and the people will know no peace while it rules, and our elected representative dance to their fatal tune.
Joe Otten
I would also reject the idea that there is any particular logical link between deficit reduction and a smaller state. You can cut the deficit by raising taxes rather than cutting spending if you want a larger state
Indeed. As Hilaire Belloc (among other things, Liberal MP for Salford South 1906-1910) put it:
It is the business of the wealthy man
To give employment to the artisan.
The wealthy man in this country has neglected this business. I think we need to put it straight: if those with wealth do not use it to generate employment, there will be an inevitable call on them to pay more in taxes in order to deal with the consequences. We are told we are in difficult times, therefore we must cut, cut, cut public expenditure – but it seems to me these cuts are not working because they just have knock-on effects which force rises in public expenditure elsewhere. For example, one department is told to cut its budget so it does, sacks people, says “there, look, cuts made, job done”, and, lo and behold, another department finds itself having to pay out more in benefits, and the various other knock-on effects on spending cut in as well, such as big rises in health spending due to depression and anxiety caused by being sacked or being worried about being sacked. From what I have heard from many people who work in public service, there are just many, many, many ways, quite often a bit more subtle than the above, where supposed cost savings work out causing more spending later on.
If people put their money into pumping up house price booms – as the wealthy do in this country – rather than the sort of enterprise that would generate employment, then I think we do have to be clear and say that means we have to take money from the house price boom in the form of the sort of taxation that the Daily Mail would call “an attack on the middle classes”. I think we need to be honest about that, rather than use the sort of hand-wavy argument the political left like to use on the lines “there must be some rich people somewhere we can tax – but obviously not any of you” – it’s a bit like the Nimby approach to solving the housing problem “build loads of houses – but obviously not in your backyard”. Here “you” and “yours” tends to end up meaning everyone. Sorry, the precise way in which this could be done can be open to debate, but we need to be much more bold than the “mansion tax”, and that got enough screams. Why is it that the little old lady in the big house is considered sacrosanct – when she could pay property tax with equity withdrawal, so it would not actually lead to her being thrown out of that house – when others who are much less fortunate are being forced into horrible suffering, such as that caused by the “bedroom tax”?
Ken Palmerton 13th Dec ’13 – 4:22pm
Gladstone knew full well he had the city as mortal enemies. Nothing has changed since his day.
Well put Ken Palmerton.
A lot of people who mention Gladstone nowadays seem to have no idea about what he actually said and did.
My favourite Gladstone quote remains:
“The finance of the country is intimately associated with the liberties of the country. It is a powerful leverage by which English Liberty has been gradually acquired … It lies at the root of English Liberty, and if the House of Commons can by any possibility lose the power of the control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison …That power can never be wrenched out of your hands… That powerful leverage has been what is commonly known as the power of the purse – the control of the House of Commons over public expenditure – your main guarantee for purity – the root of English liberty. No violence, no tyranny, whether of experiments or of such methods as are likely to be made in this country, could ever for a moment have a chance of prevailing against the energies of that great assembly. No, if these powers of the House of Commons come to be encroached upon, it will be by tacit and insidious methods, and therefore I say that public attention should be called to this.”
Something the eurozone is giving serious consideration too right now, i should imagine!
Totally agree with this piece. I have no problem with deficit spending, provided that a surplus is run in the good times to replace what was spent in the bad times. Those who argue that the Debt can just go up and up and up and it’ll never matter are being as short-sighted as those who deny climate change because they don’t want to face up to the hard choices.
I’d like to chip in to the whole “clearing up Labour’s mess” meme that is reused in this blog. The fact is that Labour bought into what could be consider part of the old deficit hawk-supply side thinking characterised by Reagan, and to a lesser extent Thatcher. This was almost universal among the Western liberal democracies. This is just a fact.
Lets not get into silly propaganda. Labour are guilty of much more than creating the financial mess we are in. Lets focus on the real and not on political parlour games.
Also, can I just commend everyone for, on the whole, responding on this thread with thoughtful comments and keeping the ad hominems to a minimum.
When the coalition came to power people generally realised there was a crisis with overspending and the growing Gov’t debt levels. That was the time to cut public dector salaries (not staff nmbers) by 10 % to immediately bring the structural deficit to zero.
It would have been hard to get political and public agreement but the recognition of the crisis should have meant it was possible. Then by now we would be on the road to recovery without the deficit level we have today.
Now we will have to freeze public sector p[ay for another 10 years to have any chance of getting the deficit under control but people will have forgotten there is a crisis and be less accepting of the need to do this.
Paul, meet Tubby, who says I am wrong because Germany has been borrowing heavily.
My point, which I only referred to in passing, is that over decades, Germany has followed strong monetary and fiscal policy, and this has been good for Germany. Not least for having ample capacity for Keynsian borrowing when needed. Countries with a tradition of weak fiscal policy have not been so fortunate.
Memories of the Weimar republic have served Germany extremely well. Tragically, voters in the rest of Europe are less likely to see a pound on the national debt as a pound out of their pockets.
I daresay this is terribly naive if you disagree with it, and you could argue that Teutonic industriousness has prevailed despite constrictive macroecomic policy; if you desire hard enough for it to be true.
I suppose you could also argue that causation runs the other way, that countries poorer than Germany have needed to borrow more to keep up. I expect that is what they (we) all told themselves at the time. But if this high borrowing was good macroeconomics, these places should have caught up at least a little, rather than falling further behind.
jedibeeftrix
No, if these powers of the House of Commons come to be encroached upon, it will be by tacit and insidious methods, and therefore I say that public attention should be called to this.
Yes, it’s called “privatisation”. We’ve only recently seen the latest of this, with the power of the House of Commons over the postal service taken away as it is sold off to private hands.
Well Nick, I’ve completely failed to convince you or even get noticed by you in the various posts I have contributed to LDV arguing that deficits are inevitable in advanced technology economies, and that money is virtual and can be issued without being linked to gold dug from the ground or debt incurred from bonds. Money issue should observe one constraint alone – GDP output.
So your call for a budget surplus is not only wrong, entirely and completely wrong, it is impossible to achieve. We must get away from the simplistic popular accountant’s financial view of economics which is the current received wisdom which you, Danny Alexander (who’s never read any economics) and many others too readily follow.
Analysis of the real underlying economy, shows that the problem is the divergence of productivity from real wages. Productivity has increased, causing real wages to flat line. There is insufficient demand to purchase GDP output. This is the problem. Between 2001 and 2007, real GDP grew by 19.5%. Disposable consumer income grew by 11.5%. Hence the demand gap. Bridging it with consumer credit and government deficit, hence more debt, was the mistake. It can only be bridged by a citizen’s income funded by QE funding, ie freely issued without incurring debt.
Contrary to the usual objections, this will work, is the only solution to the problem, and will not be inflationary if money issue is constrained to output GDP. Moreover, it is actually happening, implicitly, unrealised and unnoticed in the UK economy, but explicitly in Sweden where a citizen’s income has been legislated, and in Switzerland where it is to be voted on. There is growing realisation that this solution is inevitable and there’s a major conference in Montreal on the issue hosted by BIEN next year. It’s about time we took notice and gave the proposal the attention it needs. Let’s stop using accountancy to analyse economics.
jedibeeftrix 14th Dec ’13 – 9:21am
My favourite Gladstone quote remains:
Good quote but not relevant to the eurozone in the way you suggest.
Why not remind the readership of LDV of the timing and context of this quote?
And by context I do not mean Norman Tebbit, or the various swivel-eyed websites of UKIP and the Tory far right sympathisers who like to misuse this quote from Gladstone because they think it makes them look terribly clever.
Tell us about the speech in Hastings by Gladstone on March 17, 1891: was it the one that included the following? –
Mr. Gladstone said that in 1880 ten million pounds were let apart for naval expenditures, the payments extending over a period of seven years, This was an objectionable method of granting money, besides, It ought to be remembered that the fashion of ships changed. What, he asked, would be thought of a lady ordering and paying ior bonnets for the next seven years, based on the present fashions.
One might argue that it is much more relevant to today’s debate on the future of Trident rather than the eurozone.