LibLink … Nick Clegg: Politicians must set out plans for the deficit

Over at the Financial Times Nick Clegg has pledged to be straight with the British public about the state of the nation’s finances, and the public spending cuts the Lib Dems will make – called on the other two major parties to do likewise. At the moment, he says, Labour and the Tories are treating fiscal discipline like a “political football”:

Gordon Brown is determined to keep spending, whatever the risks, to create a dividing line with the Conservatives. David Cameron is determined to insist on immediate cuts, whatever the risks, to create a dividing line with Labour. It has become a political game of chicken, each waiting for the other to blink first.

This point-scoring must end: the country needs a rational plan. Significant cuts are necessary. But the hawks must accept that cuts should come only once tests confirm the resilience of the recovery: jobs, growth, credit availability, international conditions and the cost of government borrowing. The timing of fiscal contraction should be governed by economics, not political dogma.

And once that time comes, Nick has pledged the Lib Dems will focus on spending cuts, not tax rises:

That is why the LibDems have been clear that we will scrap the like-for-like replacement of Trident nuclear weapons and the Child Trust Fund. We will impose a £400 limit on public sector pay rises, reform public sector pensions and stop paying means-tested tax credits to above average earners. We will remove great swathes of public administration, such as the central bureaucracy that monitors local government. We must look at all areas of public spending and not ring-fence any departments from potential savings. Only by making substantial cuts will it be possible to cut the deficit, let alone reallocate money to fund our limited proposals for additional spending.

And as for Lib Dem spending proposals?

Any proposal for new spending must be promoted cautiously in this fiscal climate. The markets will have no confidence at all if parties try to buy their way through the election with ever more implausible spending commitments. That is why LibDems, this week, were clear that some of our much-cherished policies, like free childcare for all, free personal care for the elderly and a full citizen’s pension, are not going to be affordable in the next parliament. We have made the decision to limit immediate spending commitments to two key areas, education and infrastructure, both of which will boost economic growth, employment and tax revenue.

And here’s Nick’s parting words to the Pink ‘Un’s readers:

I urge the other parties to be straight, now, about the cuts they would introduce. And I urge them to be straight about the need to limit new spending to areas structurally necessary to build a fairer future. Politicians need to accept that the markets, as well as the voters, are listening. That is why I am unambiguous: the LibDems will never take a risk with Britain’s financial reputation.

You can read the article in full here.

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  • Alex Sabine 16th Jan '10 - 5:19pm

    It seems Nick is trying to position the party between what he portrays as two poles (Labour the incorrigible spenders and Tories the immediate cutters), while simultaneously striking a more hawkish tone than either by calling for a clear public commitment to specified cuts to be made now.

    Thus he says: “The contraction must and will come… To maintain confidence, it is vital that steps are taken now, before the election, to demonstrate clear commitment.”

    Interestingly, he also seems to suspect that the Tories may resort to tax rises rather than serious spending cuts, and implies this would be the soft (and undesirable) option.

    “The sense is growing that the next government may lack the courage for cutbacks and resort, instead, to painful tax rises. That is not the approach of the Liberal Democrats now, nor will it be in government. We have proposed one new tax on the banks, until they can be split up, to ensure they pay for their ongoing implicit taxpayer guarantee. Beyond this, I believe deficit reduction should be focused on spending cuts.”

    This is interesting because it implies Clegg would oppose an increase in VAT were the Tories to introduce that in their proposed emergency budget, and would presumably push for deeper spending cuts instead (albeit to be introduced later). I’m not sure how else his point can be interpreted, unless he seriously thinks Labour are going to win the election or be the largest party in a hung parliament.

    Overall the commitment to fiscal discipline is welcome, although I note that this is addressed to the FT, which tends to like such vows but rarely sees them delivered by governments; would the emphasis be the same to another audience?

  • Alex Sabine 16th Jan '10 - 5:58pm

    He also seems to think the Lib Dems have already been upfront about where the cuts will fall, and it’s true that the list of cuts he reels off is more substantial than that offered so far by the other two parties. However, a number of them will not save much money for several years (eg scrapping like-for-like Trident renewal and reforming public sector pensions), while others won’t save much money full stop (scrapping the Child Trust Fund).

    The statement about not ring-fencing any department looks more promising on paper, but of course it is does not amount to a quantifiable saving.

    It may be unrealistic to expect a comprehensive itemised list, although the measures we are currently committed to don’t add up to big savings in the short term (ditto Osborne’s pledges so far).

    What would be preferable would be to give some idea of the overall scale of the deficit reduction we think is required – ie our working assumption of the structural deficit, say £90bn – and over what timeframe it should be tackled. Vince suggested five years in his Reform pamphlet last year, which remains his most detailed public pronouncement on the subject – but of course isn’t party policy…

    Nick has sometimes seemed to suggest the government’s timeframe of eight years is adequate. In my view that is far too leisurely and the structural deficit needs to be eliminated over five years at most, even if the heavy lifting doesn’t begin until 2011 when hopefully the recovery is better established.

    Experience shows that it is quite possible to cut the deficit by 2% of GDP per year, given fiscal discipline and reasonable but unspectacular growth. If you remotely believe the government’s forecasts of above-trend 3.5% GDP growth then progress on the deficit should be faster still. (Public sector net borrowing fell by 3.4% of GDP in the 1968-69 financial year, 2.5% of GDP in 1981-82 – despite the severe recession – and 2.7% of GDP in 1997-98.)

    We do not want to go into the next downturn still burdened by a structural budget deficit, or will be unable to respond by loosening fiscal policy should that be necessary. Remember, the more you support Keynesian fiscal activism, the more you should support running a surplus in the upswing of the cycle.

    What the Lib Dems should not do is just suggest cutting the deficit by the same amount as the government, on the same timescale, but by different means. That would be repeating the mistakes of the past few years when we supported Labour’s spending and always worked from their baseline figures, implausibly dressing this up as fiscal discipline.

    (While Vince was prescient in warning about the unsustainable boom in asset markets as early as 2003, he never seemed to draw the obvious conclusion that the tax revenue generated from those sectors as a result was also unsustainable, and that the government’s level of spending was therefore highly imprudent. Instead we initially called for even more spending than Labour – albeit funded by tax rises – and then, post-2005 and only after much grumbling from some party members, said we would work to the same overall spending envelope. So we now complain about Brown’s ‘Faustian pact with the City’ but at the time found it convenient to spend all the tax revenue that resulted from it.)

    On the question of when to start the fiscal repair work, Nick of course takes the St Augustine line (“give me chastity and continence, but not yet”). This may be economically justifiable, but it also politically convenient, so it’s a bit rum to accuse the Tories of putting politics first by pushing for early cuts.

    Apparently we are to have a set of objective tests to determine the starting point and pace of fiscal tightening: jobs, growth, credit availability, international conditions and the cost of government borrowing. I get the point about not killing off a nascent recovery, but this sounds suscipiously like 1960s Keynesian fine-tuning of demand: it doesn’t work.

    For example, accurate figures about GDP only become available some months after the fact – economists and statisticians are still debating whether or not the UK recovery began in Q3, Q4 or whether we’re still in recession. But departmental spending has to be fixed in advance, at least one year ahead and more if we want government departments to plan their savings in a rational way that minimises disruption to services.

    The real test will be the patience of the bond markets, our creditors. That’s the reality when governments need to borrow on this scale; if they don’t want the bond markets to dictate policy then they should borrow less and finance their policies through taxation.

    So far the markets have been extraordinarily patient, perhaps on the assumption that the next government will confront reality and take serious steps to put the public finances back in order. But bond yields have been rising and the Treasury is expecting a huge rise in debt interest costs this year (they tried to hide this but it was in one of the leaked Treasury documents).

    Moreover, as Nick notes: “at present, government borrowing is being artificially sustained through quantitative easing whereby, in effect, it buys its own debt”. Since the Bank of England plans to withdraw from QE it’s quite clear this won’t be sustainable for much longer.

    So o win market credibility for delaying the main cuts until 2011 onwards, it is all the more important to set out how big the evntual correction will need to be (it can always be revised in future if the evidence changes – that is no reason not to put a figure on it now), over what timescale we think it should be done, and produce a credible list of savings and departmental budget ceilings that will provide a clear route map for getting there. Our current position does none of these things adequately.

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