As prices go up in a Brexit-induced inflationary spiral, spare a thought for the poorest in our society. People who are having to rely on state benefits don’t get any cushioning thanks to George Osborne’s benefit freeze. As prices go up, benefits, already at a meagre level, stay the same making it even harder for people to survive.
So, you’d think that Jeremy Corbyn’s lefty Labour Party would be all about ending the freeze. Well, that’s what they briefed reporters on Friday morning ahead of a Corbyn visit to Cambridge. Remember that until 2015, Cambridge was represented by a Liberal Democrat who voted against many of the most contentious elements of the Coalitions social security reforms.
Anyway, Jezza rolls up and, weirdly, gives a much more timid message than his advisers had briefed. From Politics Home:
Party officials briefed journalists that Mr Corbyn would make the promise during a visit to Coatbridge in Lanarkshire yesterday.
A trail of his speech quoted the Labour leader saying: “We will lift the freeze on social security, using part of the billions we set aside for reform in our costed manifesto, by recycling social security savings made by introducing a real Living Wage of £10 an hour, and by building the affordable homes we need.”
But when he came to make the address, Mr Corbyn only said: “We are confident that we will be able to end the benefits freeze.”
A Labour source told The Times: “In his campaign speeches… not everything [prebriefed] is said, but the intention was to say that. It’s in line with our policy.”
A party spokesman said: “We are confident that we will be able to end the benefits freeze.”
It’s the sort of caution that strikes resignation and frustration into the heart of anyone that actually wants to sort stuff out.
Just as a matter of interest, what is the Liberal Democrats’ policy on this? Pretty unequivocal, from the 2017 manifesto
The Liberal Democrats are clear – balancing the books on the backs of the poor and disabled, and demonising people who claim benefits, is neither acceptable nor responsible. Although all government budgets must be scrutinised to minimise waste and ensure value for money, this must not be used as an excuse to attack the poor and vulnerable. In any case it is more effective to tackle the causes of the benefits bill – low pay, high rents, unemployment and ill-health.
That’s why we will reverse unfair Conservative policies like reducing support for younger people and cutting the benefits of people not fit for work. We will reinstate the legally binding poverty targets of the Child Poverty Act. We will:
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Uprate working-age benefits at least in line with inflation.
It has become clear that the Liberal Democrats held the Tories back from doing all sorts of horrible things with benefits. Osborne wanted to implement the benefits freeze during the Coalition but Nick Clegg wouldn’t let him. We stopped them taking Housing Benefits from young people and set the benefit cap, which many of us vehemently disagree with, at a much more humane level. Since we’ve been off the scene, the Tories have shown their usual disdain for those who need the vital safety net that social security provides.
While I would be the first to admit that our record in coalition was far from perfect, there is simply no excuse for the Labour Party to carry the benefits freeze on.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
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53 Comments
Come on, Caron…Half the comments on here are about castigating Labour for promising the unaffordable…:
It seems his “We are confident that we will be able to end the benefits freeze.” is being interpreted in the opposite way to his “We are looking at ways” to reduce the tuition fee debt of former university students….
There is always doubt about Labour. Keir Starmer has a policy announcement in the Observer, but it needs to be followed up to see whether Labour’s leader and shadow chancellor agree. Pity Keir Starmer, he is an intelligent man doing a job which should be important to preserve jobs and wary of the cliff edge. They will not be thanked by those who lose their jobs and their dependents, if other jobs are created elsewhere.
I was looking at the issue of council tax reduction this morning. It was due for review in 2015 https://www.libdemvoice.org/there-should-be-far-more-rebellions-like-the-one-yesterday-31012.html, but appears to have been buried in the long grass along with the freeze on housing benefit uprating.
Even Lord Jenkins, the peer who designed what became known as the “poll tax” in the 1980s has warned that Council Tax Benefit cuts risk creating a “poll tax Mark 2” http://www.bbc.co.uk/news/uk-politics-20039452
ALTER file:///C:/Users/bourjos/Downloads/alter-flyer-lvt-housing-2015-a4-folded.pdf has long campaigned for the replacement of Council tax with a Land Value Tax that would take the great majority of the 6 million recipients of council tax reduction out of the charge altogether.
My adult children are wearing green at the Notting Hill Carnival this weekend in support of the Grenfell Tower residents. They are doing what they can to draw attention to the plight of some of the country’s neediest residents. We Libdems really should be at the forefront of tackling these injustices.
ALTER’s fringe at the Bournemouth conference next month (Sunday, 17th September) is themed “Progressive Alliance for Land Value Tax as solution to the Housing Crisis” and will feature a cross-party panel of speakers. Please do come along, if you can. let’s not fall into the trap that Caron describes above of “…the sort of caution that strikes resignation and frustration into the heart of anyone that actually wants to sort stuff out.”
The council tax reduction review conducted in 2016 http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06672
praised local councils for successful implementation of schemes. However, it highlighted inefficiencies in the current structures, including the need for annual review of the schemes. It also recommended further devolution, including at least part of the prescribed scheme for pensioners, as well as academic research into the impact of localising support on recipients.
Lord Jenkin, I think.
Jenkin / Jenkins
Cornish ancestry, not Welsh. Although why I should wish to claim Patrick Jenkin as Cornish as opposed to Roy Jenkins, goodness knows!
As I said before, lot of people with a lower income than those on benefits (who are exempt) have to pay the full council tax, very unfair tax that either needs to be collected by the revenue and therefore related to household income as well as property value or phased out altogether and replaced by a turnover tax on companies, which would be a huge vote winner right across the population.
Also need a root and branch reform of jcp and jsa to truly serve the aspirational unemployed.
“Jeremy Corbyn’s lefty Labour Party”.
I’m afraid Liberal Democrats are on thin ice when, having shared responsibility for many of the Duncan Smith ‘reforms’, they get holier than thou with the Leader of the Opposition for expressing himself in a moderate and cautious way on the Benefits freeze (and on the public sector wage cap for that matter). As a Trustee of a Food Bank, I see daily evidence of the results of the then Coalition’s handiwork in terms of ATOS and its successors, and delays to PIP and Universal Credit.
“The Liberal Democrats are clear” – maybe – but credibility was shot and it may take years, if ever, to recover. The only way it may start to recover is if Dr Cable was big enough to stand up and say ‘we got it wrong then’. It would also help if some well informed detailed work was done to develop relevant radical policies – and also to talk to Starmer/ Corbyn & Co on the Brexit situation.
I’m afraid parroting the Tory/Daily Mail abuse of Mr Corbyn in a plaintive minor key is going to get nowhere. It’s an automatic shut down for many of the younger generation.
Agree with you, David R., but am also grateful to Caron for reminding us of our policy on benefits. However, I think in view of the losing struggle to get by of the poorest in our society, as recently shown in a report from the Child Poverty Action Group (which I must look up now for the reference), along with the warning from Citizens’ Advice that some benefit claimants are having to wait six weeks in near-destitution for their Universal Credit claims to be met, it is surely time that we update our welfare policy and demand action. How about an emergency motion for Bournemouth on this?
As you know Katharine, I agree with you in principle, we should have good policies on poverty, welfare etc, but it will count as naught until we start to regain the trust of the electorate that Nick, Vince et al lost for us by their endless focus on government, rather than the tricky bit of Liberal Democracy when they were in coalition.
Until we start to recover trust, we will never, I repeat – never be in power again, and so all the wonderful words in our policies will be just that – fine words on a piece of paper and as useless as that. What the country needs is Liberal Democrat actions to put things right.
As David Raw so clearly puts it, “The only way it may start to recover is if Dr Cable was big enough to stand up and say ‘we got it wrong then’.” Until he does we will not recover and indeed simply continue to decline. A nice policy or emergency motion will doubtless make us feel good about ourselves, but will not make one iota of difference to the poor of this country.
perhaps your emergency motion should begin “This party recognises the almighty mess it made in coalition when its parliamentarians concentrated too much on saving the country from the effects of the banking crisis and far too little on saving the people from the Conservatives.”
I’m sure you get my drift.
James
Why all the emphasis on the “aspirational” unemployed? What about those unaspirational? What about the disabled – in particular those with intermittent disability or invisible disability, or energy sapping conditions? Depression? ME? Psychoses?
While we all feed off the agendas of the Sun, the Mail, the Express, the Telegraph etc, we will keep revisiting the same negative language and actions, and will not change anything.
These days, when I hear lib dem on these topics, I think of the bedroom tax with no exemption for a lack of suitable smaller properties (with hasty attempted backtracking before election) and NHS privatisation. I have no faith in the party on issues like this.
Honestly I think you guys haven’t yet accepted that you now have a record in government for the voters to judge you on. It’s an orange book, and nobody likes it.
@ JoeB
It is not clear from your posts regarding the scraping of the national Council Tax Benefit scheme if you support the scraping. I think we should restore the national scheme.
@ Bill Fowler
“As I said before, lot of people with a lower income than those on benefits (who are exempt) have to pay the full council tax”
And I have challenged this as false before, but you haven’t responded. When it was a national scheme the full Council Tax Benefit level was set at the level of Jobseekers Benefit and the State Pension (as far as I know there have been no changes for pensioners it is only working age people who have had to suffer the 10% cut in Council Tax Benefit). Therefore if someone had an income equal to the Jobseekers Allowance they paid no Council Tax and from there, there was a scale of reducing the benefits in line with earnings (20%). Also if a person had savings above a certain level they would get less benefit or no benefit (if savings were over £16,000).
According to Wikipedia, “The rebate would be reduced by a fifth of any qualifying income above a certain level; benefits did not qualify for this calculation, but most other income did.”
Therefore if someone earned £10 a week more than the benefit level they would pay £2 a week. Therefore Council Tax Benefit was related to income. The only way someone would pay the full Council Tax would be if their income above the Jobseekers Level was 5 times the Council Tax (e.g. Council Tax = £1000, earnings (not including benefits) equal £3801.20 + £5,000 = £8801.20).
Of course now there is no national schemes each local authority is free to set up its own scheme for those of working age, but these schemes I believe still have to be applied with regard to income. However I note that Wokingham Council to those of working age does not give any reduction to those in band E or above properties and they all have to pay 10%. I have used the Reading Borough calculator and someone on Jobseekers Allowance has to pay £5.50 a week, while someone earning £73.10 has to pay the same amount, which is just under 25% of the Council Tax.
Do you have any examples of someone paying the full Council Tax and not paying rent with an income under £8801.20 where the Council is still using the old national scheme?
David Evans – hi, again, David, a neat comeback on the old theme, and I enjoyed it! You are right, as is David Raw, to complain about empty words, whether they be easy attacks on Mr Corbyn or easy expressions of alarm and sympathy in an emergency motion. I don’t, as you know, share your complete denunciation of the Coalition policies, and others (including my own Executive, and was that not Tim13 on another thread?) place more emphasis on the positive side of that brave but ultimately unsatisfactory experiment. Perhaps you are both right nonetheless that Sir Vince should start off by apologising for the Coalition’s failures, but we must leave that to his good judgement.
I am amused though, David, that you have found David R. on your side of the discussion here (thoroughly flooring me between you!), because our Scotland-based northern David is always articulate – along with Sue Sutherland – in voicing the need to cease austerity and help the poorest now. It is a necessity both because it is right, and because our party needs to make the public aware of that caring side of our policy and not leave it to Labour. So we surely should further develop our policies which (more broadly) face up to the inequality and unfairness of our society, and I float the idea of an emergency motion to start that development, which would need of course more substantial follow-up – David R’s ‘well-informed detailed work’ – perhaps with Michael BG’s impressive input also .
OK Katharine you have me there. Perhaps, “This party acknowledges that many things it supported in coalition were severely mistaken because its parliamentarians focused too much on saving the country from the effects of the banking crisis and not enough on saving the people from the Conservatives. However in many areas, such as Income tax cuts for the low paid, Free School Meals for under 8s etc etc …”
I agree that all progressive parties should support both ending the benefits freeze and the pay near-freeze for public sector workers.
The problem for Labour is that they are wary of being labelled as “deficit deniers”. So they go into all sorts of contortions about how all their promises have to be “fully costed” etc.
Except they aren’t. If Govt spends more the economy becomes more active and tax receipts increase. If Govt spends less, we have the reverse and tax receipts fall. If policies are fully costed then the effect of this has to be included.
As Keynes was a Liberal and the Libs were the first party to officially adopt Keynesain economics, they should now be the first party to get back to it after years of failed neo-liberalism.
It’s an opportunity for the LibDems to lead the way. Which I’d like to think you’ll take but I’m not holding my breath
Thank you for your kind comment Katharine, I do my best but it does seem as if it isn’t good enough. I find it difficult that we are blamed for supporting tuition fees as well as reducing benefits in the economic situation we found ourselves in during Coalition. I think it would’ve been totally unfair to give help to those who are among the most fortunate while reducing help to those who are the least fortunate, but none of our leaders ever said that and it did involve breaking a promise and we have paid for that over and over again. Of course we have to produce the policies that would create the kind of society we want even if people don’t trust us for decades. At the moment we are a voice of sanity in the Brexit debacle and eventually people will realise that. Then we must be ready to show we have listened by introducing policies that create a much fairer society than we have now.
Bill, I’m interested in the idea of a turnover tax. Many years ago we Lib Dems tried to persuade our Council to charge rent based on turnover but I can’t now remember why we thought that better than rent based on profits. Perhaps you could clarify what this policy for corporate tax would entail? A dear friend of mine donated a small percentage of his company’s profits to local charities as well as this party and this had an amazing effect on the local community. I think we have to start placing a carrot in front of the wealthy to persuade them of the value of philanthropy as an alternative to what they would regard as punitive taxation. My friend and his wife were full of the joy of giving and sharing their good fortune with others in many ways. Although they were founder members of the SDP they were also true Liberals I believe.
A very interesting debate.
The fact that the last Labour government started cracking down on benefit claimants needs highlighting.
No party has a totally ‘clean’ record.
Post coalition liberals need to set out a policy based on the Beveridge principles.
P.S.
@Michael BG
You mention Reading in your contribution. Based on their response to my recent application the policy is to put as many barriers as possible in the way of anybody who wants to claim council tax benefit.
Reading is of course a Labour controlled council.
@ Sue and Katharine At the risk of starting up a mutual admiration society, I want you to know that your posts always admired and respected for your honesty and integrity.
As Katharine well knows, if the ancient glories of a little old football club can be revived, then so can the ancient glories of a little old political party. It needs honesty, integrity and a massive amount of hard work as well as relevant radical policies. As someone (D.W.) says, ‘No limits’.
PS, Katharine….., Dean H. has started another round of Town Foundation School Breakfasts and free match tickets for needy kids – his 23rd in succession. It’s led by dear old Boothy and the team.. “Examiner 18/8/2017 : A scheme started by Hoyle ensures 1,000 healthy breakfasts are served to schoolchildren in the area every single day”.
Good to know, thanks, David, fine Liberal principles being employed in that FC, then! I like your analogy and agree with your conclusion there. Thanks also for your kind words. I don’t suppose with all those grandchildren already here or expected, you’re allowed to make the long journey to Bournemouth? Pity – as also that Sue can’t, I already knew. If either of you want to send in an emergency motion, though, I”m sure I would readily back it!
Peter Martin, I think I understand that basic Keynesian principle you put forward, Peter, that the Government should invest for growth and growth will enhance tax receipts, as I gather has now happened in Portugal. I hope that people like you and Anthony Watts will keep promoting good economic ideas here and elsewhere in the party counsels, but we shall unfortunately have to wait till Spring Conference for the anticipated motion from the Economy Working Group, held up by the General Election. I daresay our economist new Leader will have much that is valuable to contribute to that debate.
Peter Martin – Keynesian economics. Well, we should add some long-term planning and a long-term industrial strategy to “raise the productive capacity of the economy”.
I believe that the party should have some plans to invest funds in automated technology in manufacturing, which is already found to have a significant impact on manufacturing productivity. I mean, we should actually invest in new technology. Britain lags far behind our OECD counterparts and we should play a catch-up game.
David Raw!
If only we had a German leader like the football club I assume you are referring to!
On the subject of Corbyn and “damned if you do, damned if you don’t”. I think the valid criticism of Corbyn is that faced with a choice between stopping tuition fees plus paying off some “aspiratational” amount of graduate debt, and reversing the post 2015 benefit cuts that we voted against and Labour MPs (except Jeremy) abstained on, he chose students and graduates, mainly middle class.
I don’t think the validity of that criticism is lessened by whataboutery on the failings of the Lib Dems in coalition…
Sue Sutherland, as I said to Katharine I understand what you are saying, but the conclusion you reach is that despite the fact that we are the voice of sanity in the Brexit debacle, despite us having a much better record on citizens rights, despite us not being tied dogmatically to one side or the other on so many issues, we are failing, and failing catastrophically.
However, the one thing we have to be aware of is that we are not paying for the broken promise over and over again. It is the people of the UK who are paying a huge cost – Brexit, housing costs, environmental damage etc. And all because we are refusing to face up to what our leaders have done. We don’t ‘have to produce the policies that would create the kind of society we want even if people don’t trust us for decades,’ because that is the easy option and nothing more than just comfort food to avoid facing up to our responsibilities.
We have to win people’s trust by telling them the truth, and that means facing up to and admitting our failure. The only alternative is to accept that people will not trust us for decades, when all the best policies in the world will be useless, and we will just go on letting people down.
David, the only way for us to retrieve our position, as far as I can see, is for the membership to tell our leaders that we will not support austerity any more. I think there needs to be a grass roots uprising for the public to take notice. Otherwise the economic working group may come up with a bit of this and that when we need to shout that we were wrong, we realise that and wish to make amends and improve people’s lives.
@ Sue,
“……is for the membership to tell our leaders that we will not support austerity any more.”
I agree. The difficulty will arise when the leadership come back with arguments along the lines of “we have to live within our means”, “our credit card is maxed out”, “it’s necessary to tighten our belts to restore the nation’s finances”, “there’s no magic money tree” etc etc.
It’s not just the Tories who are fond of this kind of rhetoric. It all sounds very plausible. Because we know what we have to do when our personal finances aren’t in good shape. It’s all nonsense from a sensible macroeconomic viewpoint though!
The membership has to understand WHY it’s all nonsense or they are never going to get anywhere.
In 2010, had it not been that our Coalition negotiating team had actively wanted an economic policy now dubbed “austerity”, we would not have shared a coalition with the Tories on that basis, or quite likely on any basis. I have had this argument with two or three of our then MPs, and all seem to accept that there was a choice, but then fell in with Orange Book style economics. Wrong decision! And no-one seems prepared to criticise. Perhaps this year a serious movement along those lines?
Peter Martin – perhaps they should be enlightened that arguments along the lines of “we have to live within our means”, “our credit card is maxed out”, “it’s necessary to tighten our belts to restore the nation’s finances” are only applied before the abandon of the Gold Standard. We should remind them that the Gold Standard no longer exists now.
The problem with these arguments is that at the 2015 election the majority of Liberal Democrat defectors voted Conservative or UKIP, not Labour ( their vote rose by 1.4%, ours dropped by about 16% , UKIP rose by about 10%, Greens and SNP by about 2%).
The Gold Standard was abandoned over 80 years ago. Perhaps those who ridicule keeping within our means could explain exactly what they would do which has not been tried before without resulting in inflation or economic collapse as in certain South American states.
Peter Martin,
see this paper by Wray http://wer.worldeconomicsassociation.org/files/WEA-WER-7-Wray.pdf
He makes the important point:
“While affordability is not in question, inflation is a danger. To be sure, inflation can occur even at low levels of aggregate demand (witness the stagflation of the 1970s in the USA), but if government spending should drive the economy beyond full employment, then inflation will result. Government spending
can also be inflationary before full employment if it is directed to sectors with a low elasticity of output (where additional demand causes prices to rise without increasing output much). One could envision additional ways in which misdirected spending and poor policy could cause inflation. The point is, however, that the danger is not affordability but rather inflation.
Currency depreciation is also a possibility for floating exchange rate systems: spending more could cause the value of the currency to fall. This might happen, for example, if it induces more imports, or if it simply scares foreign exchange markets (causing a movement out of the currency). If a country pegs, such pressures could also cause a currency crisis as holders of the currency fear that the reserve of gold or
foreign currency is too small. Hence, there is some danger (although usually overstated in the case of floating exchange rate sovereign currencies) that more government spending could cause depreciation.
Again, however, affordability is not the issue (except when the currency is pegged – in which case the problem is the affordability of the reserves that are needed to maintain the peg).
Hence, “more austerity” can be the right answer, but only in specific circumstances. If government is spending so much that prices are rising faster than desired, or if the currency is depreciating more than desired, then the answer could be to reduce spending or raise taxes. The difference here is not subtle. In these cases, it is not affordability but rather inflation or currency depreciation that is the problem. Policy
makers ought to be able to see the difference: austerity is needed not because government is running out of its own currency but rather because prices are rising or currency is depreciating more rapidly than desired.”
@ nvelope2003
“Perhaps those who ridicule keeping within our means could explain exactly what they would do which has not been tried before without resulting in inflation or economic collapse as in certain South American states.”
“Keeping within our means” is fine providing we consider that our means aren’t defined by the ££ that the Treasury and BoE produce between them. Our means are the extent of our productive capacity. They are defined by the available resources in the economy. Raw materials, factories , farms, the number of people available to create or do something useful.
Sure, there’ve been Governments who have got things wrong by pushing their economies too hard and have created high inflation as result. Or, they don’t have effective taxation systems and allow too much corruption. On the other hand we see Governments create recession by unnecessarily cutting spending and raising taxes in a futile attempt to ‘balance the budget’.
All Govt really needs to do is concentrate on keeping the economy ticking over as close to full capacity as possible without creating high inflation. Debts, deficits and exchange rates will take care of themselves.
nvelope2003 – well, you should not say such things to Keynes and FDR. As far as I know, in Britain, austerity was always practiced during periods (Great Depression, Great Recession) in which there should have been a New Deal. Of course, we must not spend recklessly during normal times like Mr. Gordon Brown or Hugo Chavez. It’s funny to see that Britain tended to do the opposite to basic economic principles, unlike other countries: austerity during recessions, deficit spending during normal times.
Besides, the question is also more of how you spend rather than how much you spend. If we spend a lot, but all the money spent is directed to the improvement of national productive capacity, then there would be no collapse. For example, money should be poured into shovel-ready projects rather than white elephants like Hinkey. The prime example was South Korea under general Park Chung Hee.
Finally, you argue that “there is no magic money tree” while the Libdem manifesto pledged to borrow £100bn at the current low interest rate to invest in infrastructure. Well, this is my argument: a Barclays report have found that investment in automation in manufacturing had a ROI of £4.9 per £1 invested. Therefore, we should increase spending by an extra £20-50bn to drive up investment in automated technology.
Besides, you can spend big but still manage to fund your spending through higher taxation like many Continental European countries. If you compare the overall tax rate of the UK to that of other European countries, you should realize that there are lots of rooms for tax hikes in this countries: income tax (all bands not just the top 5%), capital gain tax, corporate tax, financial transaction tax (an EU-wide version could have been possible with Brexit), land value tax.
@ Thomas,
I agree that there was some justification for these arguments when we did have a gold standard, or a pegged currency, but Keynes himself was living at just such a time. Even then, he was arguing, it was counter-productive to drive an economy into recession and expect an improvement in results.
Yet, we still hear the nonsense of “expansionary fiscal contraction”. Anyone who is interested can look it up. I won’t credit it with a reference here. The Troika in the EU, are keen on the concept, even though there’s no evidence at all that there is such a thing.
@ Thomas,
You’re sort of on the right lines but your use of the phrase “ROI of £4.9 per £1 invested” implies that Govts need to make some money. They don’t. Why would they need to make their own IOUs in the sense you mention?
The Govt should be spending less when its income is higher and more when its income is lower. Say we have a £2 trillion economy. It needs that amount of spending to keep it going. A bit more to get some growth maybe.
It doesn’t know how much everyone else is going to spend. Sometimes we go crazy by borrowing and spending too much. Govt tax receipts are high. Then it should spend less/tax more to prevent inflation. At other times we take fright. Property and stock prices fall. We stop borrowing and start saving. Govt tax receipts fall. That’s the time to spend more/tax les to keep the economy moving.
The article that Joe Bourke linked to Taxes are for Redemption, Not Spending by L Randall Wray clearly states that “The government’s deficit (its spending less its tax receipts) must equal the nongovernment sectors’ surplus (receipts from government spending less tax payments). In nominal terms, the equation is guaranteed and we can even assert that it is a position that is desired by the nongovernment sector (for otherwise, it would have spent more – reducing the government’s deficit – or less, raising the deficit).”
In other words governments needs to run a deficit to keep the economy in balance when the nongovernment sector is not spending enough to consume what is being produced.
Randall Wray also states, “When the nongovernment sector reduces its own spending – perhaps in an attempt to increase its saving – the government’s deficit is likely to rise. Indeed, at least to some degree the government’s deficit rises until the nongovernment sectors’ desire to save has been satisfied.”
Randall Wray makes it very clear that a government deficit is not a bad thing. As Joe Bourke points out Randall Wray states that cutting the deficit is only the correct policy if there is an inflation problem which needs fixing by this method or if the nation’s currency is “depreciating more rapidly than desired”. I assume that reducing the monetary supply could also have the same affects.
It therefore must have been stupid of the coalition government to reduce the deficit while increasing the monetary supply by quantitative easing. A policy also carried out in parts of the Euro zone!
Peter Martin – You are right. Actually it was the estimated ROI for the manufacturing sector as a whole. “Investing an additional £1.2bn in automation has the potential to add as much as £60.5bn to the UK economy over the next decade; this represents a return on investment of £49 in economic output for the every £1 invested in manufacturing automation” – Barclays. Since the usage of automated technology is very low in the UK, we can (and should) invest much more than just £1.2bn, maybe £20-30bn or more. And the government must provide a significant part if not most of the funding because most businesses cannot afford to do so themselves. Of course, the ROI will decelerate when the amount of investment goes closer to the steady state position (Solow-Swan growth model), but I don’t think we will reach it soon given our low automation usage.
@ Michael BG,
It’s good that the message about deficits is becoming much better understood. So a politician promising to eliminate the Govt’s deficit is also promising to eliminate everyone else’s surplus. That doesn’t sound much of a vote winner but it is just as true. To the penny.
This is known as a sectoral balance approach, pioneered by the late Prof Wynne Godley. It’s very easy to understand.
Government Deficit = Everyone Else’s Surplus = UK Domestic Non Gov Surplus + Overseas Surplus
Therefore:
Govt Deficit = UK Non Gov Surplus (savings) + Current Account Deficit (Trade)
So this equation immediately explains why we, in the UK, nearly always have a Govt Deficit and why cutting spending and raising taxes to reduce it never works as expected.
@ Michael BG,
“It therefore must have been stupid of the coalition government to reduce the deficit while increasing the monetary supply by quantitative easing. A policy also carried out in parts of the Euro zone!”
QE happens when the central banks buys up gilts and other bonds at the request of Govt. Govt continues to sell gilts into the market as normal which, due to the extra demand, attract a higher price than normal and so the Govt ends up paying a lower rate of interest. Long term interest rates fall which is the main reason for QE measures.
So is this “stupid”? Well not as stupid as raising VAT to 20% in the teeth of the worst recession in years!
So QE lowers interest rates ( this is why they are now ultra low) which then encourages more private sector borrowing. Govt borrowing in the EZ is subject to strict limits. But there’s no limit to the extent of private borrowing. The only hope of getting some growth there is to get the private sector to do the borrowing. Govt borrowing isn’t allowed.
It works for a time but debts then start to build up and we then have a process of debt deflation. Asset bubbles can build and burst leading to crashes with the kind of consequences we have been living with since 2008.
@Peter Martin – “Govt Deficit = UK Non Gov Surplus (savings) + Current Account Deficit (Trade)”
A quick visit to the ONS web site shows that for Q4 2016:
Government budget deficit = £12.6b
Gross savings = £11.0b
Current account deficit = £12.1b
So, 12.6 = 11 + 12.1
I’ll never get the hang of this economics lark……
@ Nick Baird,
It should be net savings.
Neil Wilson does a good job of collecting the figures from ONS data. But I would expect there may be some inconsistencies. It’s difficult to keep track of all international transactions especially if some of them are illegal.
http://www.3spoken.co.uk/2016/04/uk-sectoral-balances-q4-2015.html
So Q4 net savings were around £0.5 billion? What’s the difference between net and gross savings?
@ Nick,
If you save £100 and I borrow £200 then our gross savings, between us, are £100 but our net savings are – £100.
So from the point of view of a government which wants to reduce its own deficit but isn’t interested in the current account or trade deficit it needs to persuade someone else to do the borrowing. Or at least help it out in that direction. So we have very low interest rates and a worrying bubble in the property market. The borrowing which is necessary to fund the CAD is transferred as much as possible from Government to the private sector.
I can’t see it ending well. For one thing interest rates can’t go any lower. For another, asset prices can be temporarily but not permanently inflated.
Peter Martin,
sectoral balances are basically a means of analysing stocks and flows in the economy applyng the principles of double-entry bookkeeping.
It should not be inferred that the state should simply spend whatever the private sector chooses to save – this leads to mis-allocation of resources and misdirected spending.
I do agree that the government should target unemployment as the key determinant of resource usage in the economy and not solely inflation. The US federal reserve has such a joint mandate. Acting as an employer of last resort with a job guarantee scheme makes a lot of sense for the UK economy.
The problem in the UK economy at the moment is its imbalances. Both the state and the household sector are borrowing heavily – the govt to finance its structural deficit and the household sector to finance inflated property purchases and consumer spending.
The corporate sector are reporting high levels of profitability and accumulating cash. Corporate capital investment has tapered off and surplus cash is being used for large scale share buybacks further inflating an already overheated stock market. Companies won’t invest in productive assets unless they are confident of increased demand for their goods and services. Stagnant wages and tapped out consumer credit limits put a cap on these increases in demand.
The external sector are running historically large surpluses with the UK. The post-referendum devaluation of sterling has not seen any real increase (volume increases in exports). Much of the UK trade deficit is recycled into asset purchases in the UK by overseas investors – in high priced property, financial assets, acquisition of UK firms and infrastructure investment.
Creating bubbles in the property market and stock markets while running up unprecedented levels of debt in the private sector is not the sign of a healthy economy.
These are structural issues that need to be addressed. I think they can only be addressed by fundamental reform of the way the economy works i.e. reform of the tax, monetary and credit systems to correct the way in which value created in the economy is distributed. Only when we begin to reverse the gross imbalances in wealth inequality and income distribution that we have seen develop in recent decades will we be able to bring the economy back to a position of some stability.
@ JoeB,
“It should not be inferred that the state should simply spend whatever the private sector chooses to save”
You haven’t understood what the sectoral balances mean.
Firstly you are ignoring the overseas sector. So let’s bring that back in and replace your “private sector” with ‘non-government sector’.
Secondly you are ignoring the taxation revenue received by government. So lets rephrase the whole thing to be:
The difference between what the Government spends and what it receives in taxation revenue , plus other fees, is equal to what the non-government sector chooses to net save.
This isn’t saying anything about which way around the causality might be.
But it does give some insight into what happens when Govts decide to cut spending and/or raise taxes. The deficit will remain the same unless domestic savings decrease and/or the trade deficit decreases. The latter being just the net savings of our overseas trading partners.
Peter,
I understand what sectoral balances mean and I have referred to the external sector in my comment. I agree it gives some insight into what happens when governments decide to cut spending and.or raise taxes. More importantly it reflects the development of imbalances that occur within the economy when external trade deficits are not self-correcting via a free floating exchange rate; and when the corporate sector is accumulating capital while the household sector is expanding mortgage and consumer debt to unsustainable levels; and government deficit spending exceeds economic growth. Those are structural problems that need to be addressed through tax, monetary and distributional reforms.
The accounting relationship between the sectors is just a reflection of the outcome. Creating the conditions where the external deficit can be reduced (via increased exports/import substitution); companies are induced to invest accumulated capital to enhance productivity rather than just the stock-market value of shares; full-employment is pursued with lower taxes on labour to increase demand, and credit issuance by the financial sector is effectively regulated to dampen property and debt bubbles will automatically bring about a lowering of the government deficit as surpluses in the external and corporate sectors are reduced.
Government spending on bridges to nowhere or empty airports, as has been tried in Japan, simply fail to address the underlying structural issues that are the cause of stagnation in the economy.
As Wray notes in his paper “Government spending can also be inflationary before full employment if it is directed to sectors with a low elasticity of output (where additional demand causes prices to rise without increasing output much).”
People of a right wing inclination are keen on such phrases as “bridges to nowhere” to pooh-pooh Government spending designed to stimulate the economy. Usually at the same time they are telling mothers that there is “no money” any longer to support local kindergartens etc. We all have to “tighten our belts” and “there’s no magic money tree”.
This is what Keynes had to say on the subject:
“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”
So he’s saying that we could build a “bridge to nowhere”, or do something even more inefficient, and still be better off for it. Of course we should think ourselves a little smarter than that and do something more useful. We’ve all got good ideas of what we’d like to do but we’re usually told to go away and “fully cost” our proposals which are then translated into so many pence increase in income tax, using a back-of-an-envelope calculation.
That’s not the right approach and anyone understanding the sectoral balances can see why. Govt, economically, has only two worries. Higher than desirable levels of inflation, on the one hand, and higher than acceptable levels of unemployment on the other.
Joe,
You identify some problems in the UK economy, Government and household debt, high profits, lack of private investment.
It seems that the answer could be two-fold the government to tax profits more and increase the Minimum Wage and National Living Wage. The first would reduce government borrowing but not spending; the second will give consumers more money to spend to increase business confidence and both will make it difficult for companies to buy back their shares. Seems wins all round! Perhaps it would even be possible for the government to build more homes and so reduce price pressure on property and use the extra taxes on profits to be your employer of last resort and issue a job or meaningful training guarantee to everyone of working age.
Peter,
Wray writes in his paper “Government spending can also be inflationary before full employment if it is directed to sectors with a low elasticity of output (where additional demand causes prices to rise without increasing output much).”
Such sectors include the housing sector where land available for development is in fixed supply. Lowering of interest rates and support programs to facilitate mortgage lending tend to drive up the cost of housing – an area where we have seen significant inflation in recent years.
The central policy message of Keynesian economics is that in a deep recession, monetary policy is likely to be ineffective, and fiscal stimulation is required, because monetary authorities find it increasingly difficult to lower real interest rates; and even at low interest rates, investment may not be much stimulated. It’s like pushing on a string.
Since interest rates were lowered after the crash, the effect has been mostly real estate investment. Even if central banks succeed in getting treasury rates close to zero, the interest rates at which banks lend to SME’s can remain high; and it is now recognised that availability of credit matters as much as interest rates, especially for small and medium-sized businesses that depend on the ability and willingness of banks to lend.
Keynes saw the issue of an insufficiency of aggregate demand from a global perspective. He was concerned, for instance, about the impact of the surplus countries – those that produced more than they consumed – on global demand. Today, we talk about global imbalance. Surplus countries around the world have accumulated massive reserves. Money saved is money not spent: it contributes to a lack of aggregate demand. Other factors also contribute to the build-up of reserves. Low exchange rates can help promote exports. Aggregate demand was almost certainly lowered by the huge increase in inequality, which in effect redistributed money from those who would spend it to those who didn’t, or at least didn’t spend as much.
When demand in the UK is driven by expanding credit and not by increasing wage income, we become reliant on the external sector to recycle its surplus into UK Property and financial assets or to use a line from Macmillan – reliant on “selling the family silver” to pay the bills.
Michael BG,
I think there is a case for higher corporation tax (on large companies at least) and getting the national minimum wage up to the level of the National Living Wage. The employer of last resort/job guarantee program can serve a similar function to national minimum wage in putting a de facto floor under wage rates.
@ JoeB,
“The central policy message of Keynesian economics is that in a deep recession, monetary policy is likely to be ineffective, and fiscal stimulation is required.”
Is it? Did Keynes say any such thing? If he did, maybe you could supply a reference.
Keynes argued that economies should be controlled by fiscal means to avoid economies getting into recession in the first place. Governments should decide what they want interest rates to be a keep them at that as far as possible. The old idea was that they should be at around 2%. Maybe that could be a 0%. We have that pretty much anyway.
The “monetary policy doesn’t work at the zero bound” argument is largely just a cop-out by the monetarists who would never have predicted that interest rates could possibly get this low in any case. But if you over-rely on monetary policy to create extra private borrowing to keep the economy going , 0% interest rates is always where you’ll end up. Or maybe they’ll even go negative if we abolish cash.
As ever, when the economists get going on LDV, fascinating and insightful stuff! (Okay, depends what fascinates you.)
Of course, what emerges out of all this (as we all wean ourselves from the idea that governments need to raise money per se – and by the way has anyone explained all this to Joe Otten yet?) is that the really big problem we have is the good old trade deficit. Which, oddly, I remember being talked about quite a lot when I was too young to vote (1970s to early 1980s) but which somehow vanished from the debate around the time when Thatcherism went full throttle (I suspect a connection, but won’t attempt to prove it).
So: other than “reinventing the whole global economic system” (which just might be beyond our powers), what can we do to reverse decades of a worsening trade position with the rest of the world? I don’t think “escaping the shackles of the EU” is going to be a big part of the answer…
Malcolm,
you are right to point to the trade deficit as a key economic issue. The IMF has wrapped our knuckles warning that the UK must address Its giant trade deficit http://www.telegraph.co.uk/business/2017/07/28/uk-must-address-giant-trade-deficit-imf-warns/ and urging Britons to needs to save more, train up workers and become a more competitive economy to try to bring down the very large current account deficit.
“Excess deficit countries should move forward with fiscal consolidation, while gradually normalizing monetary policy in tandem with inflation developments and focusing on structural policies that strengthen competitiveness and overall saving. Protectionist policies should be avoided as they are unlikely to reduce external imbalances and are detrimental to domestic and global growth.”
UK “structural reforms focused on broadening the skill base and investing in public infrastructure should boost productivity, improving the competitiveness of the economy,” the IMF said.
“Maintaining financial stability through macroprudential policies should also support private-sector saving. These efforts are particularly important in light of expectations that access to the EU market will become more restrictive.”
@ JoeB,
I suppose I should know better than expect statements of the IMF to be coherent but what is behind this?
“Maintaining financial stability through macroprudential policies should also support private-sector saving”
Increased private sector saving has to mean increased Govt debt. If I buy a NS cert I’m increasing Govt debt. But the IMF don’t like increased Govt Debt so why would they want to support it?