It wasn’t only Covid that killed people before their time. In just the four years after the Coalition between our party and the Conservatives was formed in 2010, the spending squeeze may have caused 57,550 more deaths in England than would have been expected.
Research from the Centre for Health Economics at York University reached this conclusion after studying the cuts in Government expenditure between 2010 and 2015. The research has been reported in the online journal BMJ Open.
The research revealed that real spending on social care and public health rose between 2001-02 and 2009-10, but fell between 2010-11 and 2014-15. This total spending gap attributable to austerity of 15.08% is said to have been likely to have caused 23,662 additional deaths. Meantime real spending on health care rose less between 2010-11 and 2014-15 compared with between 2001-02 and 2009-10 creating a 13.64% spending gap.
The researchers reckoned that a 1% decrease in health care spend would generate 2484 additional deaths, so the loss of 13.64% between 2010/11 and 2014/15 might have caused 33,888 additional deaths. They also figured that a 1% decrease in social care and public health spend would generate 1569 extra deaths. So the ‘loss’ of 15.08% between 2010-11 and 2014-15 might have caused 23,662 additional deaths. Adding these together they calculate a total of 55,550 additional deaths. It is pointed out that their “calculations assume that all health benefits occur contemporaneously with spend, which is unlikely to be the case”.
It also needs to be noted that “primary care and specialised commissioning spending were not included in the measure of overall healthcare spend, because responsibility for these returned to central government in 2013, while data on local spend for these services is not available.” It is likely that the cuts to primary care and specialised commissioning spending and to benefits over the same period would have caused some extra deaths, but the report does not quantify them.
Some of us recognised at the time that austerity was the wrong policy, but now those Liberal Democrats who were in the Coalition government need to recognise the effect their supporting austerity had on the British people.
Does the party need to take action to ensure we never do this again? What can the party do?
We propose a two-pronged approach.
- Make the following administrative changes:
a) Make it a condition of being a PPC that they would pledge never to vote for cuts in social care, public health or health care, or for benefit cuts which would have a detrimental effect of people’s health;
b) Change the party constitution to add breaking an election pledge to the behaviour considered as bringing the party into disrepute. - As part of the “Developing a compelling and distinctive political narrative” (according to the Strategy motion passed at Conference in September 2021) being carried out by the party, prioritise the current shortfalls in nursing staff, care workers and doctors country-wide be urgently redressed by the government It should also demand:
a) That priority be given to support services in health and social care in areas of high deprivation, where life expectancy is lowest;
b) That welfare benefits be increased towards providing them at the poverty line, including disabled and ill people, and those caring for others at home.
In addition, since the country is now facing again a time of austerity and declining living standards, the party should also prioritise and demand measures to help working-age people survive without falling into greater poverty such as:
- making zero-hours contracts illegal;
- providing job guarantees for people of working age unable to find work suitable for them;
- providing subsidies to offset the rise in gas prices this winter;
- restoring the Green Homes Grants scheme to help to meet climate-change requirements;
We urge our party now to renounce austerity and declare for the ending of poverty in our country, as priorities in our narrative and the first steps towards realising our vision of the Liberal Society we are determined to bring about.
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. Katharine Pindar is a long-standing member of the Cumberland Lib Dems.
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87 Comments
1. How are these numerous implied spending commitments to be funded?
2. Between 2010/1 and 2014/5, health care spending rose quite markedly in real terms. It really is stretching an argument beyond breaking point to claim this INCREASE in spending was responsible for so many “extra” deaths.
Surely, you should temper your dislike of austerity with some nuance?
I left the LDs for a couple of years during the Coalition, but you surely don’t need to exaggerate. And there was some good to come out of it as well!
BTW the Blair government’s increase in health spending was regarded as making up for long-term under-funding of the NHS compared to European peers. We are now in the pack of such peers.
It is hardly surprising that austerity killed an estimated 57,550 people, as there is a correlation between income and demand upon the NHS in all age groups.
The Government intends extending National Insurance contributions to people over the age of 66 with an additional levy on everyone to throw more money into the bottomless pit of “more of the same”. We cannot go on building a bigger and bigger first aid camp at the bottom of the cliff without building a fence at the top.
The Netherlands with the highest State Pension in Europe spends 60% of its health budget on older people: Britain with one of the lowest State Pensions spends 80%. Just for good measure the Government has thrown petrol on the fire by stopping the free television licence and reneging on the “triple lock”. The capping of charges for long term care will benefit the rich as people without sufficient savings will still have to sell their houses to pay for their care.
During the last ten years the super-rich have got richer and the majority poorer.
A consequence of this widening inequality is that there are now 3.5 million children living in poverty. The Government has focused on making work pay, but two in three of these children have a parent who is in work. And the Government intended to reduce their income further by withdrawing the additional £20 per week.
Some economists will argue that the bigger the banquet of the super-rich the more crumbs which will fall on the floor for the poor as this trickles down and creates jobs.
It would save money in the long term, and enhance the lives of many, to lift people out of poverty now.
For children and working people it will mean more better paid jobs, reducing pay differentials, bonuses and dividends. This may need regulation to restrict the pay of the highest earners in the large corporations to an agreed multiple of the lowest paid with bonuses restricted to an agreed percentage of profits and shared between all who contributed.
For older people, many of whom prior to 2012 and the abolition of the default retirement age were forced into retirement and condemned to spending the rest of their lives in poverty, it is within the gift of Government to increase pensions now and recoup the cost through the consequential savings.
It is hardly surprising that austerity killed an estimated 57,550 people, as there is a correlation between income and demand upon the NHS in all age groups. Although we must maintain services; we cannot go on building a bigger and bigger first aid camp at the bottom of the cliff without building a fence at the top.
The Netherlands with the highest State Pension in Europe spends 60% of its health budget on older people: Britain with one of the lowest State Pensions spends 80%. And the Government has stopped the free television licence and is reneging on the “triple lock”. The capping of charges for long term care will benefit the rich as people without sufficient savings will still have to sell their houses to pay for their care.
During the last ten years the super-rich have got richer and the majority poorer.
A consequence of this widening inequality is that there are now 3.5 million children living in poverty. The Government has focused on making work pay, but two in three of these children have a parent who is in work. And the Government intended to reduce their income further by withdrawing the additional £20 per week.
Some economists will argue that the bigger the banquet of the super-rich the more crumbs which will fall on the floor for the poor as this trickles down and creates jobs.
It would save money in the long term, and enhance the lives of many, to lift people out of poverty now.
It will mean more better paid jobs, reducing pay differentials, bonuses and dividends. This may need regulation to restrict the pay of the highest earners in the large corporations to an agreed multiple of the lowest paid with bonuses restricted to an agreed percentage of profits and shared between all who contributed.
For older people, many of whom prior to 2012 and the abolition of the default retirement age were forced into retirement and condemned to spending the rest of their lives in poverty, it is within the gift of Government to increase pensions now and recoup the cost through the consequential savings.
It’s good to bring attention to the issue of how cuts can cause excess deaths. But….
Make it a condition of being a PPC that they would pledge never to vote for cuts in social care, public health or health care, or for benefit cuts which would have a detrimental effect of people’s health; Wow! And I thought it was supposed to be Labour and the Tories who had authoritarian tendencies and were less inclined to respect different viewpoints? There is so much wrong with this suggestion. The implied lack of respect for the freedom of conscience of the individual candidate; the issue that MPs are supposed to be primarily answerable to their constituents, not to some diktat imposed by their party, the way it would prevent LibDem MPs from acting appropriately in response to changing circumstances (Can you really guarantee that you only ever want health spending to keep going up and up and up and up and up and there will never be circumstances in which it needs to be reduced?). The way it absolutely prioritises the demands of the health service over the need to maintain reasonably low taxes and keep a stable, growing, economy (if you don’t have that, you can’t pay for health and welfare!). And so on…
b) Change the party constitution to add breaking an election pledge to the behaviour considered as bringing the party into disrepute. Totally unrealistic, I’m afraid. Unexpected circumstances that force policy changes on the Government happen all the time. (Look at the last year and Covid, for example! Would it really bring the party into disrepute if another emergency like Covid forced a Government to abandon some manifesto pledges?)
I must admit the same thoughts occurred to me Simon R, not often we agree??
@ Simon R. “It’s good to bring attention to the issue of how cuts can cause excess deaths”. It’s not a case of ‘can cause excess deaths’, Simon R., it’s a case of ‘did cause excess deaths’. I’m glad Katharine and Michael have drawn attention to it and I applaud whoever edits LDV today for publishing it.
As to the future, sadly, I doubt whether the formal signature on a pledge as described by Katharine and Michael would produce the outcome they desire. I recall a similar pledge and formal signatures before the 2010 election regarding student fees and we know what happened to that. Two of those pre 2010 signatories are still very senior (indeed the most senior) Lib Dem representatives.
@Barry Lofty… haha! Miracles happen occasionally!
Thanks to the above posters for your comments. To our critics, I would respond that it is high time our party took seriously our Preamble commitment that ‘No-one shall be enslaved by poverty’. Our Leader has said, in response to questioning from me during his leadership contest, and again in a Q and A at Conference, that he does put ending poverty first among the party aims he endorses. But as a party we do not put it first.
It is now almost three years since the UN Rapporteur on Extreme Poverty and Human Rights, Philip Alston, came on a fact-finding tour of this country in November 2018 and issued his devastating Statement, showing that 14 million people live in poverty in this country, highlighting the inadequacies and neglect in the roll-out of Universal Credit and in provision of local authority services. He followed it up with a Report in April 2019. Yet our party did not take this up as a call to arms, though many of us have deplored the austerity programme of the Coalition government and the Tory hegemony since.
Christopher Moore, these facts that Michael and I have uncovered have not been invented by us. Only a tiny paragraph in a recent Guardian newspaper alerted us to look for them, and be sufficiently shocked by them to write this piece, after careful research. How can there be ‘nuance’ about evidence that the austerity programme did kill so many? It is more evidence that our leaders in the Coalition government were woefully misguided.
Chris Perry, thank you for your support and further useful facts. We dearly wish our party would indeed commit to ending poverty in our country as our foremost aim. Yes, the numbers of children living in poverty remain much as Philip Alston found them three years ago.
An interesting article. I have sympathy for the suggestion that the constitution should be changed to prevent breaking election pledges but I think the wording would have to be more nuanced to allow the possibility that some items in an election manifesto may have to be compromised in order to form a future coalition deal. The wording should make clear that breaking an ‘absolute commitment’ or ‘red-line commitment’, rather than just items within the election manifesto, would constitute bringing the party into disrepute. This should cover the situation that occurred after the 2010 election where the party made an absolute pledge not to vote to increase tuition fees but 27 Liberal Democrat MPs then voted to increase them from £3,200 to £9,000.
You can have as many people sign as many bits of paper as you like but ultimately its actions not signatures which count. Clegg enjoyed the support of the majority of the membership all through the coalition right up to the disaster of 2015. The small band of Lib Dems that doggedly and courageously fought the Cleggite takeover of the party were right. The wider Lib Dem membership should have listened to them and removed Clegg.
Hello Katherine,
Health spending went up in real terms between 2010/1 and 2014/5. It’s absurd to claim that an increase in spending caused excess deaths. I didn’t like the Coalition, but criticism has to be reasonable.
There’s no way any subsequent government of whatever colour could sustain the average yearly increases in health spending of the Blair government, which were a corrective to the prior historical under-spending.
@Katharine and Michael BG: Your passion to deal with poverty and ill-health is amazing. And on reflection, I possibly phrased my earlier comment a bit harshly. But I would take issue with two things.
Firstly, if you believe in a cause, then I’m pretty sure the thing to do is seek to persuade other people of that cause. Some of the solutions you’re proposing smack of, changing LibDem party rules to force other people to follow your anti-poverty cause. No matter how good a cause is, I don’t think that’s right.
Secondly, I think in a lot of ways you’re not being realistic. On the subject of health, of course any death is awful. But the thing is, no matter how much money you spend on the NHS, you can always argue that another £billion or so will prevent X deaths and therefore it’s terribly callous of the Government not to spend that £billion. So where do you stop? At some point, you have to recognise that we live in a world with finite resources and the economy/the taxpayer can’t support any more spending on health-care. You can argue about where that point is, but a blanket opposition to any cuts, and to any austerity, doesn’t take that reality into account. At some point, the Government does need to try to balance the books, otherwise you’ll eventually run into awful economic problems (which are also likely to cause lots of deaths). For that reason, I wouldn’t be so quick to dismiss the austerity years.
“It’s absurd to claim that an increase in (health) spending caused excess deaths.” We make no such claim, Christopher. It is how spending is directed that counts. There has not been enough health care provided for people who needed it most, the academics have worked out. Poor and old and ill people didn’t have the share of national resources that they needed. The weakest ‘go to the wall’ with the indifference of government about them, as Philip Alston noticed, even referring to ‘callousness’. It has to be stopped.
Thank you to Katharine and Michael for highlighting this problem. Austerity is often lightly dismissed as being simply a necessary exercise of ‘living within one’s means’. For many it isn’t about any sort of life at all.
Austerity, by which I mean the squeezing of the government deficit by raising taxes or cutting spending or both together, has a bad name at the moment. But, probably not bad enough! Regardless of what the left may say about it it doesn’t even do what the right would like it to. If Government cuts its spending it also cuts its own income. If Govt raises taxes it slows the economy which also cuts its income. The deficit isn’t going to end up any lower than it was.
Someone in the UK has to do the borrowing to support the current account deficit in trade. If Govt is borrowing less then then the private sector has to borrow more. The reduction in interest rates, to encourage more private sector borrowing, that we saw after the 2008 GFC was one policy that did at least make some sense from a right wing perspective.
The 57,550 deaths were, according to the study in question, what we saw in the UK. But the rest of the EU, and we were a member at the time in question, had much worse austerity than we did. Does anyone care to come up with a figure for the EU as a whole?
@ Christopher Moore “Health spending went up in real terms between 2010/1 and 2014/5. It’s absurd to claim that an increase in spending caused excess deaths”.
I’m afraid you failed to include spending on Social Care via local government, in that period, Mr Moore. In addition, THE OFFICE OF NATIONAL STATISTICS (ONS) reports :
“Of the G7 group of large, developed economies, UK healthcare spending per person was the second-lowest, with the highest spenders being France, Germany and the United States.
In addition, as a percentage of GDP, UK healthcare spending fell from 9.8% in 2013 to 9.6% in 2017, while healthcare spending as a percentage of GDP rose for four of the remaining six G7 countries”.
It might be worth adding that this isn’t the first time that research has shown a much increased death toll as a result of inadequate Government policies and actions.
A study by the Institute for Public Policy Research (IPPR) thinktank puts the figure at 130,000 over a 7 year period. The 57,000 figure is for a four or five year period. It is now 11 years since the start of the coalition so there are still some extra years to account for. Although Lib Dems will naturally point out that their involvement ended in 2015.
https://www.theguardian.com/politics/2019/jun/01/perfect-storm-austerity-behind-130000-deaths-uk-ippr-report
I have now had the opportunity to read the report referred to by Katharine and Michael in full. I fully agree with one of their conclusions highlighted at the end of the report :
“All three forms of public healthcare-related expenditure save lives and there is evidence that additional social care expenditure is more than twice as productive as additional healthcare expenditure”. Source BMJ Open.
Interesting they also point out that, “the average social care was £ 307 per person, though this varied considerably, ranging from £ 209 in Barnsley to £ 660 in the City of London. I leave it to LDV to decide whether the City of London has more ex-miners suffering from miners’ lung than has Barnsley.
I pointed this out to various Liberal M.P.’s at the time… The rest, as they say, is history.
Brad Barrows,
I would be happy to add “personal” before “election pledge”. The intention was never to make individual MP’s accountable for breaking a manifesto commitment by the party as an action which can be considered as bringing the party into disrepute. The intention is to make the pledge a personal pledge because an MP should be held accountable by the party for actions which are detrimental to people’s health.
Simon R and Barry Lofty,
You seem to have missed the condition for not agreeing to cutting spending on social care, public health, health care and cutting benefit values. The condition is that the cuts have a detrimental effect of people’s health. You seem to be happy to have MP’s that will support cuts to government spending which have detrimental effects of people’s health. I would not. I also think that no party member would think it was a good thing to have MPs who cause harm to others. This is about cutting expenditure not ensuring it is higher to reduce the number of deaths. This is about an MP making conditions worse and this is very different to not spending enough to prevent deaths which is a more passive action.
The pledge is a promise to constituents. The reason for the penalty is that breaking a personal promise by an MP is likely to bring the Party into disrepute. This can cause the popularity of the party to decline. The not being able to fulfil a manifesto commitment is not a personal promise and is not the same thing.
There is no need for our government to balance its budget. There is a need to ensure that government policies do not let inflation get out of control. To do this there are areas of expenditure which we believe should not be cut and especially if these cuts have detrimental effects to people’s health. The government can cut other areas of expenditure or increase taxes.
David Raw,
The breaking of an election pledge is not currently a behaviour that can be considered as bringing the party into disrepute and it wasn’t one in 2010 either. I hope this is the reason no MP who broke their personal pledge during the coalition government faced disciplinary proceeding for their action in supporting increasing student tuition fees.
Andrew Melmoth,
I hope that if these changes were made, then disciplinary proceedings would be started against MP’s who broke the personal pledge they made as a PPC.
The whole approach of linking government actions (or inactions) to x number of excess deaths and then pointing a finger is intellectually and morally flawed from the outset.
We can never truly know the all the consequences of any policy. Elevating health above all other concerns obviously brings its own moral compromises. Making any area of policy a one way spending ratchet is clearly an absurdity. Governments must be able to respond to circumstances they face – which necessarily means cuts in expenditure in certain circumstances.
And examination of public health should also look at poor environmental decisions that have been made in the past. The legacy of the ‘dash for diesel’ made by the last Labour Government has had very serious health implications:
https://www.theguardian.com/environment/2017/apr/04/fuel-duty-cut-for-diesel-cars-was-wrong-says-ex-chief-science-adviser
The fact remains, David and Katherine, that NHS spending went up markedly in real terms between 2010/11 and 2014/5.
It’s worth getting this right.
Btw the Coalition decision to INCREASE NHS spending was criticised at the time by many – Labour party included – as it would imply deeper cuts elsewhere.
David, I made no claim about social care spending or about 2013-7.
I am very much in favour of implementing the Alston report. But we need to get facts right and not exaggerate.
James Fowler. Since I suppose the first duty of government to its citizens is to provide conditions which enable them to stay alive, public health must always be a priority. Our present government recognised this in bringing in measures to try to limit deaths from Covid 19. The importance of social care should also be understood in preserving life, which was neglected very sadly in the neglect of the needs of residents and their carers in care homes last year.
Thanks, David Raw and Peter Martin, for providing evidence of more recent inadequacy in public health spending. Liberal Democrats will need to continue emphasising the importance of ensuring the adequacy of health and social care spending. And as Mark Morris points out, thank you, decisions on environmental spending by government also affect health, especially in relation to air quality.
Michael BG@ Michael I have no hard and fast rules but think you have to be careful on what you commit yourselves too when circumstances can change quite unexpectedly and measures need taking even though they could be unpopular at the time,but it does not mean that I am unsympathetic to the cause you are promoting.
@ Christopher Moore,
Did NHS spending really ” rIse quite markedly in real terms” during the period of the coalition?
Take a look at the graphs on this link:
https://www.economicshelp.org/blog/21664/economics/nhs-spending-cuts/
At best you can say that real spending per capita was level during this time. We can look at the 4th graph down which shows a declining share of GDP allocated to the NHS.
In any case austerity isn’t just about NHS spending. It is also about having too large class sizes, it is about cuts to local councils, it is about burdening our young people with too much debt and failing to regulate the economy to provide the jobs needed to service those debts and at the same time give them some hope of finding a place to live at a price they can afford.
Christopher Moore,
According to Lord Sikka:
£17 billion would be raised by taxing capital gains in exactly the same way as earned income;
£8 billion would be raised by extending NI contributions to unearned income;
£14 billion would be raised by increasing the higher rate of National Insurance to 12%;
“Billions could also be raised by extending the scope of financial transactions tax”
(https://hansard.parliament.uk/Lords/2021-10-13/debates/7CEE6115-3BE0-409E-BACC-517493188571/details#contribution-BEC014A4-3786-4BF7-91D8-69A6D1301839).
In the article we wrote that the research states ‘real spending on health care rose less between 2010-11 and 2014-15 compared with between 2001-02 and 2009-10 creating a 13.64% spending gap’. We didn’t get our facts wrong. We reported the findings of the research.
James Fowler,
I think that most rational people would understand that if the government cut real term spending on social care and the number of elderly people is increasing and so the need for social care would increase above inflation that the level of care is likely to reduce and the number of people not getting the care they need would increase. And so deaths would increase. They wouldn’t need a study of the effects to know the likely outcomes of cutting spending on social care.
After 1997 there were studies about the effects of health spending not being increased above inflation in line with the increase in people’s needs (and an aging population). The effects of doing it again after 2010 should not come as a surprise to our MPs.
I can see no circumstances where the morally correct decision is to decide to cut spending on health care, public health and social care or cut benefit rates which will have a detrimental effect to people’s health. The alternative of increasing taxes will always be a better option. Please can you give an example where making these spending cuts which will have a have a detrimental effect to people’s health is the best option?
@Michael BG: I did see your condition, “the cuts have a detrimental effect of people’s health.” but as far as I can see, that makes no difference. Any cut in health spending is likely to affect someone’s medical treatment, and would therefore still be banned under your proposals, leading to the one-way ratchet where health spending only ever goes up and up. The correct question to ask is always, is this spending on health worth not doing any of the other good things that we could have done instead with that money – and sometimes the answer to that question will be, ‘no’.
“I also think that no party member would think it was a good thing to have MPs who cause harm to others.” Taken literally, that is an impossible standard because every significant Government decision will cause harm to someone. A decision to build a new railway probably helps the environment and those who want to travel along it, even as it harms those whose homes must be knocked down to make way for it. A decision to increase health spending helps some people who are ill, even as it harms those whose taxes must be increased to pay for it. EVERY decision is a balance of overall good vs. some bad side-effects that will harm some people.
And fundamentally, I think that’s the problem with your analysis. As I said earlier, your commitment to health and to eradicate poverty is commendable. But you can’t treat any individual policy area as an absolute: We live in world of finite resources where you can’t do everything, and therefore every goal has to be set against all the other things you might want the Government to do with the finite resources available.
“There is no need for our government to balance its budget. There is a need to ensure that government policies do not let inflation get out of control.” That is a contradiction. An essential part of not letting inflation get out of control is the Government controlling its spending – and in the long run, that implies approximately balancing its budget (or at least, not letting total debt increase as a % of GDP).
@ Michael BG @ Katharine,
“Does the party need to take action to ensure we never do this again? What can the party do?”
I’d suggest that everyone should make some attempt to understand how the national economy actually works rather than assuming government finances are just like our local council but on a larger scale.
I’m not quite sure about some economists on the right. I suspect they do know how it works because, when the chips are down, and we are embroiled in a major war or more recently with the Covid emergency, they do manage to understand it well enough and do what needs to be done.
But the majority of people do not. This piece from George Kendall was typical of how many voters misunderstood the problem at the time.
https://www.libdemvoice.org/opinion-enter-the-storm-with-our-eyes-wide-open-19653.html
The idea was that the Labour Party had spent all the country’s money and there simply wasn’t enough in the kitty to carry on as normal. There needed to be several years of austerity and pain. Well no there didn’t. Austerity is only ever necessary if the economy is overheating and there is an inflation problem. It doesn’t necessarily do anything at all to reduce the government’s deficit. If a govt cuts its spending it cuts its income. If it raises taxes it slows the economy which also cuts it income.
It’s really not that difficult providing we understand that unlike our local council the government is a currency issuer. The author was even unaware that Greece and the UK could not be compared because Greece wasn’t a currency issuer so a different set of macroeconomic rules applied there.
@ Simon R,
“An essential part of not letting inflation get out of control is the Government controlling its spending”
True.
“…..and in the long run, that implies approximately balancing its budget (or at least, not letting total debt increase as a % of GDP).”
Not necessarily. The Government spends money into the economy and it gets some of it back in taxation. It can’t get back more, or even the same, as it spent in the first place. That’s physically impossible. The difference between what it gets back and what it spends is the amount everyone else chooses to hang on to in one way or another. This includes our overseas trading partners who on balance prefer to not spend quite a lot of what they earn selling us stuff.
So if everyone else is spending less than they earn it must follow that Government must spend more to make up for the shortfall in demand in the economy. On the other hand they shouldn’t overdo it an create too much inflation.
So a better way of putting it is that the Government should aim to balance the economy as whole rather than its books.
@Michael BG. I would support cuts in health to increase funding in early years education. I would also support cuts in health to support universally available social housing. To me, they are better moral causes in themselves (a personal perspective I know) but they also represent indirectly preventative health measures.
Elevating health over all other policy concerns just turns us into a lobby group for the NHS, and perhaps even private health care. To be a representative, national Party we can’t lose sight of housing, jobs, education, policing and transport as well.
“Make it a condition of being a PPC that they would pledge never to vote for cuts in social care, public health or health care, or for benefit cuts which would have a detrimental effect of people’s health”
You could get all your PPCs to publicly sign these pledges. That works well, doesn’t it?
More seriously, might it be worth reminding the authors that the human mortality rate is 100% and always will be? The 57000 people you claim died of “austerity” will have died/will die at some stage all the same – how do you attribute their deaths to austerity? If a government spent double – treble – quadruple what they do now on the NHS, and mortal people continue to die all the same (as they do), who do you blame then?
The COVID pandemic has revealed an attitude, which people never used to have, which is an absolute horror of death and a desire to throw everything away and pay any price to avoid it. To try and avoid deaths from COVID we had lockdown and 15% chopped off our economy – we had people dying of cancer who could not get treatment while the NHS dealt only with COVID, but their deaths seemed not to count as they were not COVID deaths – and how do we fund the NHS with no money?
Simon R. and James Fowler – responding to your latest comments addressed to Michael, since he and I are in entire agreement about the contents of our article – Simon: yes, it is entirely likely that health spending will need to continue rising, with our ageing population and new medical treatments coming along. I take it that you will not think the recent decline in life expectancy in poorer areas shown by Professor Marmot is an acceptable misfortune, even though you suggest there may be more important objects of government spending than health care.
James – it doesn’t have to be either-or in terms of spending government funding on early years’ education or social housing rather than health care. I suggest to you that extending mental health funding for schools in view of the hardships children have had to endure in the long, long time of their not being able to attend school is an imperative also. But in any case, as Michael and I are authors of the proposed Beveridge-2 plan within a social contract, we have long campaigned for our party to consider educational and training needs, employment and housing needs as well as health and social care provision and the relief of poverty to combat the modern equivalents of Sir William Beveridge’s Five Giant Evils.
I’m very glad to see we all now agree that NHS spending rose in real terms between 2010/1 and 2014/5. This is merely a fact.
The study effectively draws a straight line from the trend of health spending for the last few years of the Labour government and hence postulates a deficit. No party was ever going to be able to continue that rate of increase from the low base the Labour government inherited.
The Coalition decision to ring-fence health spending from cuts and indeed increase it in real terms was controversial at the time, btw. And it’s absurd to come to the conclusion that the extra spending of those years was associated with extra deaths.
I believe your article would be stronger if you didn’t accept the dubious methodology of the study without any criticism.
Poverty has an effect on health – poorer food – poorer living conditions. If there is less bad health there is less need for hospitals……………..
@Katharine Pindar “even though you suggest there may be more important objects of government spending than health care” To my mind, it’s not about one area being more important than another – it’s about that there are lots of things the Government needs to do, and only a finite amount of money, so you have to prioritise where you can do the most good. You seem happy to accept – even require – that health should always consume an ever-increasing budget, but that requires addressing where the money will come from. Will you tax more? Or will you cut something else that people depend on?
Take a look at this article., which appeared on ConservativeHome today (I’m not a Conservative btw, I just read around). It’s written by a health professional, it doesn’t demand more money, but instead offers a whole series of practical suggestions for how the GPs could deliver better services. I don’t work in that field so cannot judge how good these particular suggestions would be, but it seems to me that article offers a much better approach than just continually demanding that we spend more and more.
Peter Martin,
Thank you for posting the link to the economics help web page where it states, “2010-2015, real spending on the UK NHS grew by 0.84 per cent per year (Kings Fund). But, this is the lowest growth in spending since the Second World War.”
I suppose we should call for economics to be part of the national curriculum so future generations understand how the macro economy works. But little can be done to education those in the media who continue to present the idea that the government’s budget has to balance and government borrowing is a bad thing.
Simon R,
You are arguing that causing harm and causing harm to a persons’ health are the same thing and they are not. The harm caused by paying more taxes should not cause harm to a person’s health and if it does then that tax increase is not one that a Liberal Democrat should support.
Running the economy to try not to let inflation get out of control does not imply the government should balance its budget or the government should keep the national debt below a set percentage of GDP. It is about controlling the economy and ensuring that total demand in the economy does not increase to a level that causes inflation.
While the research does suggest that to reduce the number of deaths spending on health care needs to continue to increase in line with the increase between 2001/02 and 2009/10. This is not what we called for. We called for our PPCs to make a personal promise not to vote for cutting spending on social care, public health or health care, or for benefit cuts which would have a detrimental effect of people’s health; and for our party to prioritise the current shortfalls in nursing staff, care workers and doctors country-wide, and support services in health and social care in areas of high deprivation, where life expectancy is lowest; making zero-hours contracts illegal; providing job guarantees for people of working age unable to find work suitable for them; providing subsidies to offset the rise in gas prices this winter; and restoring the Green Homes Grants scheme to help to meet climate-change requirements. We also called for welfare benefits to be increased towards providing them at the poverty line.
James Fowler,
I am shocked that a Liberal Democrat party member can write that they would support cutting health spending to increase funding for early years education and social housing. You wrote that you believe both have indirect preventative health measures. So you are supporting cutting health spending which has direct health benefits to fund things which you believe have indirect preventative health measures. You seem to be supporting more deaths in the near future for possible indirectly preventative health measures in the more distant future.
Katharine and I have not lost sight of the need for spending on police, transport, housing, education and jobs. (Please look at how much I think should have been allocated in the budget to help unemployed people – https://www.libdemvoice.org/an-alternative-budget-a-budget-for-the-poorest-in-society-68935.html.) Please also see Katharine’s response.
I’d like to ask Michael BG and Katherine Pindar (a) what their overall objectives with regard to sustainable human population (for this country and Planet Earth overall) and climate control and (b) how their proposals could at least start to meet these objectives – please.
Because it bothers me that these issues of trying to avoid death before normal time, the extent of people’ need for health care (should we pay more attention to helping people reduce their need for health care in the first place?) may be being addressed in isolation from all the other problems which beset us.
Before anyone asks, I’m ancient and retired, I don’t have any children and if I need residential care in the fuure the cost will have to come out of my own resources.
@ Christopher Moore,
“……we all now agree that NHS spending rose in real terms between 2010/1 and 2014/5.”
But don’t. Especially when we add back the “quite markedly” of your original claim. A claim made with no supporting reference.
“Real terms” would have to factor in population growth and certainly when we do this there is no rise at all.
We can all appreciate that if funding is denied for the NHS then more people will die. But, historically, economic austerity has had much worse effects.
The second world war arose as a direct consequence of the social and economic failures of the 1930s. There was no need for such a slump. There hadn’t been a mega volcanic eruption or a large asteroid strike to cause a large scale failure of world agriculture. The failures were all self inflicted by pro capitalist politicians who were incapable of understanding the workings of what they supposedly in favour of. That death toll was around 60 million.
More recently the troubles in Northern Ireland were caused by an almost total neglect of the province by the UK government. You cannot allow the levels of unemployment to persist that we saw in the 60s and not expect the civil war that followed.
Nonconformistradical, I think Peter Martin’s latest interesting comment could be related to your own enquiry – because failures tend to be self-inflicted and governments have to do better. We see it in the climate-change near disaster, which we must hope world leaders will combine to moderate in the next two weeks. Growth in the world population can be managed, indeed, if the world leaders keep the world environments sustainable, and avoid the natural population-reducing blunt weapon of pandemics.
I don’t have a personal viewpoint on optimal world or British population size. I think Britain can afford to accommodate a few thousand refugees (very helpful to our economy’s growth, potentially!) and to aim to keep all citizens well and alive as long as possible. Of course you are right, government should encourage people to have less need for health care, and we do have personal responsibility there – eat more sensibly and exercise more, for example, as I know I should! It’s good to have, too, Simon R’s reference to an article on how GPs could provide better services, which I will want to discuss with close friends of mine who have been practice managers in surgeries.
As one gets older, I find, one has to think more about health and social care than one wants to, yet the fact remains that with our ageing population and longer life expectancy compared with our parents these expenses remain priorities for British governments. But hey! the sun is shining again at last in my soggy county, and so it’s time to go out!
Micheal BG and Kathrine. There is nothing shocking about my moral preference for education over health. State provision of education long predated health. I’d rather educate and prevent than endlessly cure the avoidable.
Katherine writes that I pose a false dichotomy because there is enough money for health, education, housing, policing, jobs and, I expect, most things that anyone else cares to add to that wish list.
The denial of the existence of scarcity is what I see as the socialist fallacy. Ironically, if scarcity really did not exist there would be no need for politics. To explain more about the mindset I mean here, recall Diane Abbott’s embarrassing lapse over police funding in 2017. In my view, that happened because she, like other socialists, simply see the answer to any shortage to be government funding, and so understanding the money detail of policies is irrelevant. Abbott wasn’t ignorant, she just saw the issue as unimportant – there’s enough money for everything if only the rich would pay up, so what’s the problem?
The electorate implicitly – though imperfectly – understand the reality of scarcity and the invitable trade offs. They will (rightly) never trust and party or politician who pretends that they don’t exist. It’s one of the reasons voters keep on supporting the Tories, but the they have no monopoly of this truth – which Labour enthusiastically cedes – and we should make them fight for it.
A final irony of this article is that if the authors ready believe that there’s enough money for everything, why bother to prioritize health?
James, there is really nothing much more to say to you, except to repeat that we find astonishing and shocking your readiness to reduce health spending which has direct benefits in helping keep fellow citizens alive in favour of less tangible educational benefits. Finally, yes, we believe the necessary finances can be found through the political choices of our party; and Michael and I (spelled KathArine by the way) have not prioritised health among the five imperatives of the Beveridge-2 plan, but simply report our findings from academic research in this particular case.
@ James Fowler,
“The denial of the existence of scarcity is what I see as the socialist fallacy.”
I’m not sure where you’ve got this idea from. Of course there is always going to be a scarcity of resources. There’s never going to be enough people around to do everything we would like them to. Who has said anything different?
Not we socialists! We do value the concept of human labour. Human labour in conjunction with the benefits of nature provide for all our needs.
So you’re right that we do have to choose how many people will work in our schools and how many people will work in our hospitals. If we allocate more to hospitals there will be fewer available for other things. There’s no getting away from that.
But this isn’t what we saw happen in the period 2010 to 2015. We didn’t hear the argument that we couldn’t have the nurses because the people were needed as teachers! Instead it was all supposedly about the amount of money we had in the kitty.
As we’ve seen during the Pandemic the “money in the kitty” argument doesn’t hold at the macroeconomic level. It’s a variable to be adjusted to suit the real resources available in the economy at any one time. The ruling class know this as well as anyone. When the chips were down in 1939 no-one said we had to surrender because there was “no money in the kitty”. What mattered were the real resources available to us at the time.
WHS
We didn’t claim that 57,550 people died of “austerity”. We are reporting the findings of this research. We didn’t support the government directive to the NHS to stop treating other conditions because of Covid.
Simon R,
I disagree with Dr Emma Mi on eConsults. It often takes longer than ten minutes to fill in. It can be very difficult to attach photos. Also I have found that when talking to the GP after completing an eConsult form that the doctor didn’t know what was important in form and what they should be discussing with me. And I hope it never becomes the norm as she suggests.
James Fowler,
This debate is not about ‘curing the avoidable’ it is about ensuring that members of our party do not make decisions that increase avoidable deaths by cutting spending on health, social care and public health. I don’t understand how you can think it is morally right to increase the number of deaths by cutting spending on health care so you can provide more early years education which if it has an effect on deaths, it is much less. (Michael is spelt with the a before the e.)
Katharine and I have not said there is an unlimited amount of money for the government to spend. In the article we talk about having priorities which assumes that we might not be able to do everything we want. She points out that it should be possible to increase spending on early years education or social housing without cutting spending on health care. I have pointed out that another option is to increase taxes. The government’s choices between financing better services by borrowing or increasing taxes often depends on the amount of spare capacity there is in the economy.
I think you are wrong about when public health and education became responsibilities of government. I think public health has been a responsibility of government even in the middle ages. According to the BBC, government’s tried to do more in the 16th, 17th and 18th centuries (ttps://www.bbc.co.uk/bitesize/guides/z9924qt/revision/2#:~:text=During%20the%2016th%2C%2017th%20and%2018th%20centuries%20there,taxes%20to%20build%20sewers%2C%20but%20few%20towns%20did). The 1848 Public Health Act is significant as it set up local boards of health. The 1870 Education Act is the first act which made local government check that there were enough schools in their area and if not set up a school board to provide them.
You are right, Peter, given the population increase between 2010/11 to 2014/5, the health spending increase per capita was less marked.
The same is, of course, true of the previous Labour government!
And the same is, of course, true of all government spending for the last several decades!
My own feeling is that the Coalition should be compared and contrasted with the equivalent governments in Europe. You would think reading some of the comments on here that the Coalition was a uniquely evil government in a unique country.
I invite all posters to come and visit me in Spain, where the handling of the Crisis was disastrous. Numerous policy errors.
Unemployment went to above 30%, Profound deprivation and poverty that persists to this day. The affluent market town where I live has very active food banks and clothes bank. I used to help on the fund-raising side.
I am also because of work and play closely aware of events in France and Italy. Arguably the Coalition did better than the governments there.
I left the LDs at the time because of my strong disagreement with some of the going along with iniquitous policies. I still believe in being judicious however.
How many of the Orange book ideologues who claimed to be “Liberal to their fingertips” are still actively involved in the Party? One by-election win notwithstanding, there is a mountain to climb to return the Party to the position of steady electoral progress that peaked under Charles Kennedy’s leadership. Austerity was as much the legacy of Nick Clegg and his team as David Cameron. The justification for the cuts (saving future generations from debt ) has been rendered irrelevant by Covid. Remaining MPs need to exorcise the ghosts of Clegg and his team by admitting their mistakes, and provide a clear steer on what modern liberalism is about. No more flip flopping on fundamental policy questions please.
Austerity was the method of governments across Europe.
You are still talking as if the UK was an isolated case! Or as if austerity was the outcome of Orange Book ideology!
Christopher Moore,
There are two reasons for not comparing the UK with EU countries using the Euro. Firstly, we have our own currency and this means we were not constrained by the EU and the European Central Bank not doing enough quantitative easing early enough. Secondly, we should not compare those who did the wrong thing – had austerity, but should compare our results with the alternative of understanding how the economy works and doing the correct thing, and that is stimulating the economy to provide demand, economic growth and to lower unemployment.
In our 2010 manifesto we stated that the economy was too weak to start cutting government spending and increasing taxes. We said that a stimulus was needed. Both of these were correct. However, our MPs and party signed up to the idea that we had to cut government spending. The link Peter Martin provided (29th Oct. 12.47pm) to an article written by George Kendall in May 2010 shows that we agreed to £6 billion of cuts immediately and then would bring in more cuts later that year. David Laws according to his book was keen to get down to finding the cuts in government spending.
Have you read the Orange Book?
It’s an arid collection of essays the central theme of which is how to “improve” public services using market mechanisms. There is nothing intrinsically “Orange” about austerity.
You could be in favour of such mechanisms and against austerity. There were many “orange” New Labour MPs at one point, of course.
I am neither “Orange” nor in favour of austerity.
However, the fact remains that in a comparison with what happened in other European countries, the Coalition didn’t do so badly.
I appreciate that that’s not what some people want to hear; but anyone who’s lived in such countries will know it makes no sense to just look at the UK.
Christopher Moore 31st Oct ’21 – 10:32am:
Austerity was the method of governments across Europe.
That was because the EU put most members into Excessive Deficit Procedure…
‘Austerity has not been a Tory choice, but an EU one’ [July 2019]:
https://joelrwrites.wordpress.com/2019/07/04/austerity-has-not-been-a-tory-choice-but-an-eu-one/
Five years of austerity still was’t enough to get the EU off our backs…
‘Council Decision (EU) 2015/1098 of 19 June 2015 establishing that no effective action has been taken by the United Kingdom in response to the Council Recommendation of 2 December 2009’:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32015D1098
@Peter Martin “When the chips were down in 1939 no-one said we had to surrender because there was “no money in the kitty” You’re comparing a one-off emergency with routine every-year spending, which isn’t a good comparison.
I bet you don’t routinely try to spend more than you earn every year – because you know that would eventually lead your finances and probably your life to disaster. But if one day your bathroom flooded and the water wrecked your kitchen ceiling below, I bet you’d borrow whatever you needed to repair the damage, and leave worrying about paying it back until after you’ve fixed the emergency. Similarly, the fact that the UK Government has racked up huge debts in times of emergency does not justify building up that debt year after year just in order to pay for day-to-day services – because that will likewise eventually lead to economic disaster.
(And yes I do know Government spending isn’t exactly analogous to household spending because of things like the multiplier and the way money circulates within the economy – but that doesn’t change this particular point).
@ Christopher Moore,
“I am neither “Orange” nor in favour of austerity.”
It might surprise you to know that I am favour of some austerity measures under certain circumstances. If the economy is overheating and there is an inflation problem looming then some belt tightening ie reduced Govt spending and/or higher levels of taxation is in order to reduce aggregate demand and so cool things down.
The objection, made by many of us on the left, to austerity as a way of reducing the government’s deficit is primarily because it doesn’t work. It’s a misapplication of a counter inflation policy. It succeeded in bringing down inflation if nothing else.
“……..in a comparison with what happened in other European countries, the Coalition didn’t do so badly………anyone who’s lived in such countries will know it makes no sense to just look at the UK.”
I agree. The UK was bad enough. The EU was even worse. This is why I voted Leave. Not because I have the slightest of anti-European sentiment but because I was appalled at the treatment of the Greek people when they dared stand up against imposed nonsensical economic policies. I find it difficult to understand how some people in both the Labour and Lib Dem parties can be quite so enthusiastic about the EU at the same time as being quite so hostile to misapplied policies of economic austerity.
@ Simon,
You’re still hung up on the idea that the Government is like a household.
However, are good reasons for avoiding the comparisons you have just made. You might like to have a think about the following statement:
The government can neither have nor not have any money, of its own currency.
You just need to think laterally to get the point. This doesn’t mean that the Govt can spend without limit but it does mean that other considerations than the need to pay back what has been “borrowed”, or accurately created, do apply. It’s the avoidance of inflation and nothing else.
Interestingly Richard Murphy, just today, dug up a passage written by Beveridge in 1944 so the point I’m making is nothing new and neither is it politically left wing.
https://www.taxresearch.org.uk/Blog/2021/10/31/william-beveridge-knew-that-modern-monetary-theory-was-right-in-1944-why-cant-modern-politicians-take-note/
We never has what is generally considered economic austerity during the coalition https://blogs.lse.ac.uk/politicsandpolicy/austerity-ending-hypothesis/. Real austerity is what happened in the 1920s after the Geddes Axe further exacerbated by putting the UK back on the gold standard.
The coalition cut taxes significantly with big increases in the personal allowance and big cuts in corporation tax that significantly exceeded VAT increases. Although spending increased in real terms overall, it was mostly on the NHS which needs annual above-inflation increases in resources to meet the needs of an aging population. The tax cuts left other public services and social welfare underfunded. It is only now that these tax cuts are bring reversed (with a freezing of the personal allowance, increases in corporation tax and increases in National insurance) that we are able to restore an element of adequate public service provision. Taxes will need to increase further in the future as the share on GDP needed for public services and pension provision increases.
We now have the highest level of public spending as a % of GDP since the early 1980s and highest tax burden since the 1950s.
The Euro has a fixed rate monetary regime while the UK has a floating rate regime. In a fixed rate regime state spending is reserve constrained. In a floating rate regime it is constrained by inflation. Both monetary systems are spending constrained as a result.
In wartime the population prioritises security over living standards and accepts rationing, high taxation and high inflation. In peacetime those attitudes reverse. Improving living standards becoming the priority and high levels of taxation and inflation arising from debasement of the currency during wartime are no longer acceptable to the general public.
Libdem policies call for the allocation of a greater share of national output to public services and redistribution. It is the tax system that provides the means for allocating these resources. The money supply is a function of the business cycle. Money in the economy is primarily created in the banking sector and government borrowing ebbs and flows depending on whether firms and households are increasing or reducing their borrowing and saving levels i.e. it is cyclical. If private sector borrowing stalls (deleveraging) then government borrowing fills the gap until it restarts. Government borrowing will not (and should not) fill the gap when excessive borrowing has created an asset bubble. Asset prices should deflate instead. It is a mistake to prop up asset bubbles with loose monetary or fiscal policy. The only reason for loosening policy is to provide a stimulus to productive investment and spending. Stimulus is not a substitute for private sector spending or for sustained public investment. It is a short-term pump-priming measure for use when when deleveraging is occurring and automatic stabilisers are insufficient to restore sustainable levels of aggregate demand as measured by the output gap.
Peter Martin,
In the 1960 reprint, Beveridge adds a prologue on how the effects of inflation undermined much of post-war economic policy from 1947 (when the pound was devalued) to 1960 . On pages 5/6 he writes “The aim of the Beveridge report of 1942..was the practical abolition of public charity – National Assistance under Means Test; it was to be replaced by security against want given as a right under social insurance, leaving freedom to every citizen to plan his life and that of his dependents above want. Ten years after in 1952, more than 2,000,000 needed national assistance; social security has been destroyed by rising prices.”
“In 1958, one in four of every man or woman in receipt of a state security pension was having to draw on national assistance as well..”
“Primary responsibility for the nature and management of money rests with the state. Money is created by the state, not for its purposes only or mainly, but to be used by citizens in managing their affairs and planning the lives of themselves and their dependents from youth to age. Money is an instrument of freedom and happiness. But money can be a good instrument for this on two conditions only. That it is so managed as to lead to full employment and that it is kept stable in value, at least for the necessities of life.”
Wage and Price controls were tried for a time in the 1960s and 1970s with little success in a peacetime economy. In 1976 Callaghan told the Labour conference “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
Both Beveridge and Callaghan understood the workings of the UK economy very well. It is these experience in the post-war era that led to the adoption of price stability/inflation targeting as a key element of government economic policy and the granting of operational independence to the Bank of England.
The UK left the gold standard in the 1930s. Under the post-war Bretton Woods system, the US dollar was not convertible to gold by US Citizens. That only applied to International banks, until Nixon closed the gold window in 1971.
@ Joe,
As in my comment to Simon the principle is “It’s the avoidance of inflation and nothing else.”
I probably should have said high inflation. Most govts/central banks have a target, not an upper limit, of 2%. There’s no reason why Governments couldn’t have done a better job in the post war period than they did. It wasn’t necessary to throw out the baby with the bathwater.
Was this the point you were trying to emphasise?
@Peter Martin “You’re still hung up on the idea that the Government is like a household.” No, I’m using it as an analogy because for the point I’m arguing, the analogy works pretty well. And comments need to be short, which makes it hard (for all of us) to go into great detail – so analogies that can be expressed in few words are quite useful.
But let’s step back. I’m pretty sure that you and @Michael BG are wrong about the desirability of continuous deficits, but let’s suppose just for the sake of argument that you are correct, and that it’s fine for the Government to run a significant current spending deficit every year to pay for nice things like healthcare. That doesn’t change that resources are still finite, and once you’ve reached that desirable deficit, if you want to further increase spending in one area, you’ll have to raise taxes or cut spending somewhere else. If your answer to every problem is ‘hey, let’s spend more money!‘, then you haven’t taken account of the problem of finite resources. And especially if your answer to a problem is, ‘Hey, lets FORCE LibDem candidates to promise to only ever spend more, never to spend less, on my favourite (and already extremely large) Government department‘, then you really haven’t taken account of resources being finite. As far as I can see, neither @Michael BG nor @Katharine Pindar has yet been willing to say what other services they will cut in order to fund ever-increasing healthcare spending.
@ Simon R,
“I’m pretty sure that you and @Michael BG are wrong about the desirability of continuous deficits……..”
That’s not what we, or at least I, said.
I said “not necessarily” on the question of the Govt approximately balancing its budgets. It really depends on whether those of us in the Private Domestic Sector and those in the overseas sector are spending more or less than we earn.
If, collectively, we are spending less than we earn the Government will be spending more than it earns and vice versa. Except it’s very unusual for it to be vice versa. This is an accounting identity that there is no getting away from, regardless of the level of activity in the economy. Even if the Government resists the pressure to do what it should be doing the relationship will still hold but the level of activity in the economy will fall leading to recession.
This is what is meant by austerity economics.
Christopher Moore,
Did you read my comment of 31st Oct. 12.03pm? We should not compare the UK with EU countries using the Euro. We should compare what happened in the UK with what would have happened if we had learnt from history and implemented the correct economic policies for the economic conditions.
Jeff,
I note this in the article by Joel R you post a link to, “The United Kingdom, as a non-Eurozone member, cannot be fined or be the subject of punitive action, as it has an exemption to Article 126.”
It only had a treaty obligation to “endeavour to avoid an excessive government deficit”.
I would argue that endeavouring to avoid an excessive government deficit can include increasing the deficit to avoid a worse recession which would make the deficit even worse.
Joe Bourke,
It is good that you recognise that in the UK “state spending is … constrained by inflation”.
Do you agree with Beveridge, that money should be “so managed as to lead to full employment and that it is kept stable in value”.
Simon R,
If the economy is not at full capacity then the government should take action to get it there. Once this state has been achieved tax revenue will increase and if as likely there is inflationary pressure the government will need to increase taxes. All of this will help towards reducing the deficit. But reducing the deficit is not the aim of the policy it is a side effect of following the correct policy.
Running government deficits if the country has its own currency will not lead to economic disaster unless it first brings inflation and the government does not take action to reduce inflation.
Your wrote, “for the sake of argument that you are correct, and that it’s fine for the Government to run a significant current spending deficit every year to pay for nice things like healthcare. That doesn’t change that resources are still finite, and once you’ve reached that desirable deficit, if you want to further increase spending in one area, you’ll have to raise taxes or cut spending somewhere else.”
Indeed, I would expect the economy to reach full capacity and then if the government wants to increase spending on an item such as health care it will have to increase taxes to do so. The Liberal Democrats in the 1990s said this was necessary for education. Do you remember our “one penny on income tax for education”? We said a similar thing in 2019 – “one penny on income tax for the NHS and social care” (https://d3n8a8pro7vhmx.cloudfront.net/libdems/pages/57307/attachments/original/1574351201/Stop_Brexit_and_Build_a_Brighter_Future_COSTINGS.pdf?1574351201 ).
You are misrepresenting what Katharine and I wrote in the article. We said we should not support cutting spending on three items and not cutting the value of benefits. Nothing about having to increase spending above inflation each year.
I have stated above that increasing taxes would be better than cutting spending on health care.
@ Michael BG,
” ‘It only had a treaty obligation to “endeavour to avoid an excessive government deficit”.
I would argue that endeavouring to avoid an excessive government deficit can include increasing the deficit to avoid a worse recession which would make the deficit even worse’ ”
Arguing for an increased Govt deficit to enable a smaller Govt deficit doesn’t sound like the best approach. Also you going along with the assumption that the Government can control its own fiscal balance by adjusting its own spending and taxation revenue.
It can’t.
The Government’s surplus/deficit is equal, to the penny, of everyone else’s deficit/surplus. It is a perfectly good Liberal argument to then say it is not the Government’s business to dictate to everyone else just how much they should spend and save.
Michael BG,
“…if we had learnt from history and implemented the correct economic policies for the economic conditions.”
It is this learning from history that brough Jim Callaghan to tell the Labour party “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
That understanding of stagflation (which should be impossible in the economic model you espouse) led to the development of inflation targeting by central banks with a joint mandate for price stability and full employment.
Peter Martin,
I was always against the UK signing up to use the Euro as our currency, even when it was party policy. The EU is not run in a way that would make a single currency work for the poorest regions. I also think that the Stability & Growth Pact is a bad thing because countries are giving up their power to use fiscal policies to control the economy. In my February 2018 LDV article (https://www.libdemvoice.org/what-more-do-we-need-to-try-to-do-to-persuade-the-british-people-to-vote-to-stay-in-the-eu-56713.html) I suggested that the Stability and Growth Pact should be abolished and replaced with a Full Employment Pact and increasing the EU budget so more money can be transferred to the 42 poorest regions in the EU.
I don’t accept that the government can’t influence its own deficit and that the deficit is controlled by the invisible hand of sectoral balances. If the government increases taxes then their revenue will increase and it does not have to reduce the size of the economy. Therefore government action can reduce and increase the size of the deficit.
However, I accept the equation
C + S + T + M = C + I + G + X
Where
C = consumption
S = savings
T = taxation
M = imports
I = investment
G = government spending
X = exports
However the equation is only true when the economy is in equilibrium (which is a rare event).
It follows then that
S + T + M = I + G + X
Is only true in the rare event that the economy is in equilibrium.
That the Government’s surplus/deficit is equal, to the penny, of everyone else’s deficit/surplus only when the economy is in equilibrium.
Joe Bourke,
I do accept that stagflation can exist and I accept that to get out of such an economic situation will be painful.
I note you didn’t really answer my question. The Bank of England mandate does not include achieving full employment. From this letter (https://www.bankofengland.co.uk/-/media/boe/files/letter/2021/march/2021-mpc-remit-letter.pdf ) it seems to be “price stability” [which Rishi Sunak defines by writing that “the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI)”] and “to achieve strong, sustainable and balanced growth”. Nothing about full employment.
@ Michael BG,
“However the equation is only true when the economy is in equilibrium (which is a rare event).”
The point about a Government deficit being equal to everyone else’s surplus is always true regardless of whether the economy is in equilibrium. You don’t need lots of algebra to show that. You added your proviso before and and I’ve said before that you’ve just made it up!
@ Joe,
You’re constantly quoting Jim Callaghan as he is was some economic sage. An Oracle or fount of all wisdom. MMT doesn’t say that high inflation is impossible. Of course we all know it is quite possible.
Margaret Thatcher and Keith Joseph came along with the complaint that there was something wrong with the established economics of the time and that inflation was a phenomenon related to the quantity of money in circulation. Absolute nonsense though it was! It’s only the amount of spending that matters.
When they were in Government they applied tight monetary and fiscal policies and not surprisingly inflation fell and unemployment rose sharply. Any Keynesian economist could have told them that. They managed to undo most of the progress they made in the early 80s by running a credit boom in the late 80s. They were under the misapprehension that it was only Govt spending and deficits which caused inflation. They learned the hard way that it wasn’t, and that it was quite possible to have double digit levels of inflation at the same time as running a budget surplus!
There really wasn’t much wrong with the economics of the 70s, just like there isn’t much wrong with most modern day cars. They’ll still crash if you drive them badly though!
Michael BG,
The underlying causes of unemployment need to be determined and isolated between cyclical, structural and frictional unemployment. Each requires a different policy approach. Treating any unemployment as cyclical has historically been a major cause of wage/price spirals and inflation that hits those subsisting on the basic essentials of food, shelter, energy, clothing and transport hardest.
Ultra low interest rates sucks demand out of the economy by depriving savers of interest income injected into the economy by state spending on interest while simultaneously inflating asset prices with knock on effects to consumer prices in the real economy. Raising interest rates injects demand via state spending while at the same time slowing excessive credit creation in the banking sector and monetary inflation arising from that source.
Deficits are normal for an expanding economy that is increasing its investment in capital stock. Just as a firm will borrow or raise equity for productive investment in expansion of its business operations, so too will a government borrow to invest in public assets that are consumed over the course of several years. Just as a firm will utilise short-term borrowings to manage periodic fluctuations in the business cycle, so too will the government increase its borrowings during downturns.
These are the purposes of deficit financing. Productive investment and cyclical fiscal support when the economy is undergoing deleveraging.
The post-war UK governments maintained current budget surpluses from 1947 to 1973 and borrowed (ran deficits) for investment in public housing and nationalised industries. The problem arose with nationalised industries. They were largely unproductive compared with European, Japanese and US counterparts. Full employment could not be sustained in the longer term as International competitiveness declined and the governments of those times found that increased investment to stimulate growth simply generated inflation, further declines in productivity and sterling crisis’s. These are the lessons to be learned.
Today with a free floating currency the sterling crisis of years past appear as devaluations as they did in the wake of the 2008 financial crisis and Brexit referendum. The government needs to achieve value for money from its spending, not waste taxpayers money on white elephant or crony projects and invest prudently in productive assets to enable the economy to grow at a sustainable pace.
Peter Martin,
The quantity theory of money theory was originally formulated by Polish mathematician Nicolaus Copernicus in 1517, probably influenced by observing what happend when Spanish galleons brought back large quantities of gold and silver from the New World.
The money supply has two components as developed by Irving Fisher- the quantity of money in the economy and the velocity with which it changes hands. Those components equate to the average price level x the volume of transactions in the economy i.e. total spending or GDP. When velocity (spending) slows then output slows.
New money has to actually circulate in the real economy (broad money) to cause inflation and Inflation is relative—not absolute. i.e. prices tend to be higher than they otherwise would have been if a greater volume of money is involved in economic transactions.
As velocity of money is the rate at which consumers and businesses in an economy collectively spend money, the quantity theory of money equates to spending in the economy. It is simply another way of expressing the level of economic transactions in the economy.
Keynes theory of money and prices suggests that prices are determined primarily by the cost of production. He believed that changes in the quantity of money do not affect the price level (value of money) directly but indirectly through other elements like the rate of interest, the level of investment, income, output and employment. The initial impact of the changes in the total quantity of money falls on the rate of interest rather than on prices.
Keynesian theory suggests that increases in the money supply will not generate inflation until full employment is approached. But he defined full employment as the point at which labour supply tightened and inelasticies in supply began to develop (a rate he estimated as higher than Beveridge’s suggested 3%). Inflation thus develops well before a theoretical level of full employment is reached. There are several causes – greater bargaining power of labour in tight markets; the law of diminishing returns or increasing costs as productivity levels fall; bottlenecks in production etc.
This is why cyclical, structural and frictional unemployment require different policy approached. It is not just about spending (or velocity of money) in the economy. It requires a more intelligent and targeted analysis to address what Keynes referred to as effective demand rather than aggregate demand e.g.job guarantee programs for long-term unemployed as automatic stabilisers.
@ Joe,
The way you’re trying to spin the QTM wasn’t what Keith Joseph was saying in the mid 70’s I actually heard him give a talk in the mid 70s and he was repeating the same line taken by Milton Friedman and others. There was no consideration to velocity of circulation. It about the amount of money in circulation and that was it. They tried but failed to link what was actually observed in the economy with various definitions. M0, MB, M1, M2 etc etc but in the end had to give it up as a bad job.
https://en.wikipedia.org/wiki/Money_supply
There was a clear desire to break with the previous Keynesian consensus at the time even if it was obvious that Keynes was right and they weren’t. So I suspect it was just about making a political point and to try to break the old paradigm.
“Inflation thus develops well before a theoretical level of full employment is reached.”
This has been well known for a long time. Possibly the early Keynesians were too optimistic on this point. MMT economists too don’t disagree but neither do they go along with the need to accept that large scale unemployment is inevitable. This is where the Job Guarantee comes in.
Peter Martin,
I have demonstrated in the past how I see Keynesian economics works on the equation for the economy and during the demonstration the sectoral balance equation does not balance. I didn’t make up the economy equation and how it works but was taught it so I could reproduce in exams.
Joe Bourke,
I didn’t notice you accepting that when you wrote, “inflation targeting by central banks with a joint mandate for price stability and full employment”, that you misrepresented the actual mandate as can be read in Rishi Sunak’s letter of 3rd March 2021.
Earlier you quoted Beveridge’s where he points out that money can be managed to produce full employment and provide stable prices, but you haven’t said whether you agree or not.
Does any economist agree with you about low interest rates reducing aggregate demand in the economy?
It is my understanding that the huge level inflation in the 1970s was the result of a number of bad decisions not Keynesian economics. The most important of these were the decline in oil reserves and the OPEC embargo, reduction in supply and huge increases in prices. (I remember that most motor vehicle journeys were illegal on Sundays because of the Yom Kippur War and the embargo.) Also the money supply was increased too much. (There was some banking reforms in the early 1970s which increased the money supply by 72%.)
I don’t think we agree what level of unemployment is frictional. I think it is about 3 – 3.5%. You should be aware that I do recognise the need to deal with structural unemployment. In my article on what should be in the budget (https://www.libdemvoice.org/an-alternative-budget-a-budget-for-the-poorest-in-society-68935.html ) I suggest £11.7 billion should be spent a year on jobs guarantees and training guarantees to provide the experience and training the unemployed need to apply for the over one million jobs that are available at the moment.
Peter Martin,
When I studied economics we were taught the quantity theory of money:
M x V = P x Q
where
M is money supply,
V velocity of money, how many times the average unit of currency is used,
P is the average price of all the goods and services sold during the year,
Q is the quantity of assets, goods and services sold during the year.
@ Michael BG
I know you have added the proviso about equilibrium, or lack of it, before, but this doesn’t mean you haven’t just made it up! The sectoral balances do balance. Always. You need to provide a reference if you are claiming anything different.
The QTM is what it says. Once you start adding in its velocity of circulation then you’ve moved away from that. Both M x V and P x Q are just ways of expressing the total spending in the economy. This reference calls Fisher’s model the “neo QTM.”
The Fisher model makes more sense if we consider the money supply to consist of a fixed number of coins, or possibly banknotes, which have to move around, but in the era of endogenously created electronic money it is less meaningful. Both M and V are highly variable.
https://www.investopedia.com/terms/q/quantity_theory_of_money.asp
@ Michael BG,
“Does any economist agree with you about low interest rates reducing aggregate demand in the economy?”
The superficial view is that low interest rates discourage saving, therefore encouraging borrowing and spending which will of course increase aggregate demand. It does work like this, at least temporarily, and when interest rates are first lowered.
However, unlike a fiscal stimulus by Govt, a reduction in interest rates, or a temporary monetary stimulus, doesn’t give anyone any extra spending power overall. It merely brings forward future spending power. Therefore borrowers are spenders (reflationary) in the short term but savers (deflationary) in the longer term. The deflation is sometimes known as Fisher Debt Deflation. If we add in the effect of interest rates and inflation the picture is slightly more complicated but it is possible that aggregate demand is slightly reduced overall.
So perhaps surprisingly, Joe isn’t totally out of MMT step on this one. The MMT line is that monetary control of the economy as favoured by so-called New Keynesians is ineffectual and causes more problems than it solves. Fixing interest rates at 0% would have seemed absurd before the 2008 GFC but we were always going to get here in the end. Therefore they should be left where they are and the economy regulated by fiscal means as it should always have been in any case.
Japan has had near zero interest rates for three decades https://www.bbc.co.uk/news/business-19559191#:~:text=In%20part%20to%20help%20small%20companies%20such%20as,but%20it%20has%20not%20offered%20a%20miracle%20cure.
“Low rates do not boost private demand, private risk-taking or entrepreneurship,” according to Mr Koll.”
Any reduction on government spending into the economy (including interest spending) reduces the level of aggregate demand. Whether that is the right policy depends on the objectives of the reduction. Reduction in interest rates below the target rate of inflation is particularly problematical.
When savers cannot earn a return at least equivalent to inflation, the purchasing power of their savings declines over time. The main savers, pensioners and those nearing retirement, become more frugal as a result i.e. the so called paradox of thrift.
In the UK, reduction in interest rates does not mean more houses get built. It just means house prices are inflated so mortgage payments include a larger element of capital and lower proportion of interest.
Firms don’t invest more in response to marginal changes in base rates. SME borrowing rates for overdrafts etc. are often in double digits. Public listed companies utilise large scale borrowing not for increased investment in a low growth environment, but increasingly for stock buybacks to boost share values or to gobble up smaller competitors, increasing the concentration of corporate power in fewer hands.
The state can create money to buy-up idle resources within its own borders (not imports) within the limits of inflation. However, capital resources are rarely left mothballed for any length of time in modern economies. They tend to be sold off and put to new uses. Likewise, flexible employment regulations generally allow for less friction in labour markets.
The big issues facing the UK economy post-Brexit are relatively high inflation that impact om living standards and Japan type rates of low growth going forward.
It is likely that a much more ambitious level of investment in the transition to net zero as well as a return to interest rate levels at least equivalent to the inflation target will be required to address these stagflationary conditions.
Dear colleagues, I have left the pursuance of this thread to our three economists, who are evidently happy to have another of their sometimes difficult to the rest of us though also sometimes interesting debates, Please feel free however to raise any other points you would like to have discussed here!
@ Katharine,
You make me feel guilty about sounding the warning about what is likely to happen in the next few years when a little economic austerity might be in order to control inflation. We can’t do anything about previous periods except learn from them. According to your own figures we had an extra 57550 deaths ‘linked to’ the imposed austerity of 2010 and 2015 that there was no need for in any case. There would be even more deaths if we extend the period beyond the Coalition years.
For those who question that a link was a the same as a cause, there were other social effects to consider. Like an increased support for Brexit and the riots of 2011.
If the economists of the Right have their way we’ll be in for lots more unnecessary austerity to ‘repay’ the costs of the Pandemic. Just quite who we’ll be repaying isn’t made clear but we can be quite sure that it won’t be the workers on the front line of the NHS who do have the most justification for ‘repayment’.
Re Katherine Pindar’s point “I have left the pursuance of this thread to our three economists, who are evidently happy to have another of their sometimes difficult to the rest of us though also sometimes interesting debates, Please feel free however to raise any other points you would like to have discussed here!”
Could it be that others who might wish to raise other points in this thread – and perhaps in others where the economists have been free with their views – feel intimidated i.e. that one of the economists will rubbish anything they say because it doesn’t fit their economic position – and then other economists start an argument about it? Resulting in the whole thread deteriorating into an economic argument?
Perhaps it might help if the economists refrained sometimes from posting and facilitated others having their say on other aspects of the topic?
Thanks for joining in again, Nonconformistradical. I think the politics stays interesting and accessible even when the economics seems dry. There seems to be a lot of alarm now in Tory right-wing circles about the small-state low-tax vision of Conservatism having been abandoned by the Chancellor and the Prime Minister, with demand for its return. But the think tanks seem to suppose Rishi Sunak has little chance of the tax cuts he wants any time soon, and perhaps a predicted lowering of the standard of living for ordinary people in the next couple of years may reduce Tory popularity. However, from our point of view there is also sadly little chance of alleviation for the hardships likely to fall on the people struggling the most, from the 1.3 million people on Universal Credit who can’t work and have been deprived of £20 pounds a week – a huge reduction in their income – to the just-managing householders now facing rising food and fuel price rises with the April tax increases yet to come. We ourselves may gain in popularity in pointing out and opposing these hardships, but it would be good if we could oblige some alleviation of them from government through leading popular dissatisfaction during the hard winter ahead.
How are local government services being affected? We hear of handouts from the budget, but I don’t know yet of their nature or extent. No chance anyway to return to the level of services of 2010, I suppose.
Peter Martin,
Here is a link to Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=14153
He talks of the equation being at rest which seems to be the same as my equilibrium.
He seems to give an example where Investment plus Exports is smaller than Savings and Imports. And Government Spending equals Taxation. He states that what is therefore needed is to increase Government Spending so it is greater than Taxation.
He states that for income to be stable G – T = (S – I) – (X – M). This implies this is not necessary true all the time.
He also seems to be saying that when the equation does not balance it will move into balance and this movement can result in a smaller economy. It doesn’t force the government to spend enough to produce the equilibrium state.
I hope you can recognise that economists do recognise that the equation does not have to balance (when it is not in equilibrium). When in this state the economy will either expand or contract to bring the equation into equilibrium. Therefore the only time it is in equilibrium (or at rest) and the equation balances is when the economy is not growing or contracting. It seems strange that you don’t understand that if one variable changes this change has to work through the economy (this is where economists talk of propensity to {save/invest/spend etc.}).
I was taught that all four variables in the Fisher model can change. (If one changes this has to work though the economy). If M is increased then P may increase (there is inflation) or Q increases (there is economic growth) or both will increase. (I think is also possible for V to decrease instead.) This is the basis of controlling the economy via monetary policy. The central bank increases the money supply hoping this will cause a small amount of inflation (in the UK 2%) and economic growth. M includes electronic money because as you say MV is just one way to express the economy.
People who have borrowed to spend do it in the short-term. However, they repay the debt over the long-term. Therefore the short-term effect of reducing interest rates is to increase spending, and the paying back (deflation) happens over a much longer period. It seems the Fisher Debt Deflation is not caused by lower interest rates, but is started by people paying off their debs.
Joe Bourke,
The article about the Japanese example talks of a company being happy with low interest rates and this would be a help if they had a need to invest, but because of the high value of the yen they don’t.
Of course when a government reduces its spending this reduces aggregate demand. In the same way when a government increases its spending (and doesn’t increase taxes to cover this increase) this increases aggregate demand. I am glad you have finally recognised this.
When interest rates in the UK are decreased this does increase demand for houses as we would expect. However, you are saying that instead of more houses being built and the price of houses remaining stable the price of houses increases. This is likely because it takes a long time to build a house. Just because it happens with houses doesn’t mean it happens with everything. However, if supply can’t be increased of course an increase in demand will cause inflation.
You are correct it does seem that some companies borrow to buy back their shares and so boost share values. And to buy other businesses. This does not mean that other companies don’t borrow to invest.
Is there any evidence in the UK that reducing taxes increases savings and not spending and consumer demand?
@ Michael BG,
Thank you for the link.
Bill does say that:
I + G + X = S + T + M or
Injections = Leakages
And: “The left-hand side of this equation always is brought into equality with the right-hand side.”
But then says “a macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the injections equals the sum of the leakages.”
This sounds slightly contradictory and I must admit that I haven’t resolved it. I might ask Bill. If the Government make a change by say spending more (G) then this will instantly be noticeable by the savings of everyone else (S) increasing too so the equality will still hold even though things are changing rapidly as that money is spent in the economy. The increase in S will only be temporary as the money is then spent but the other terms will change too to maintain the equality.
To get back to the point about austerity: The main case against it is that it doesn’t work as desired by right wing economists. We’re using the sectoral balances to show that. So we do need to be careful about undermining our own argument. We don’t want the highly incorrect counterargument that the sectoral balances only apply when the economy is in equilibrium, ie hardly ever, therefore they don’t prove anything at all.
Peter Martin,
I am surprised that you didn’t already understand that a change to a variable does not immediately change the other variables but the change has to work through.
Indeed the left-hand side does have to be brought into equality with the left-hand side of the equation you posted. This is still true when consumption is added to both sides.
I don’t see the two sentences you posted as contradictory. They are two ways of saying the same thing.
If the government spends £100 today this does not increase anyone’s savings today or tomorrow. Even within a month not all of that £100 will have ended up in consumer’s pockets. And of course it is not only Savings and Consumption that will be increased but also Taxation (as you often point out) and Imports.
For me it is much more important to get people to understand how the economy works than telling them wrongly that the sectoral balances always balance. In economics there is a lot of talk that something is only true when in a state of equilibrium. It is the difference between the theory and what happens in the real world. I have explained via my equation how a change to government spending works though the economy. But people are put off by the algebra and the simple maths.
Economics is principally a behavioural science that seeks an understanding of how people react psychologically and respond behaviourally to interventions, environments and stimuli in a economic context.
Following Keynes creation of macroecnomics, modern policy makers favour the establishment of clear policy goals, or objectives. The main macro-economic objectives agreed by modern policy makers are:
– Stable and sustainable economic growth and development
– Stable prices
– Full employment
– A balance of payments with the rest of the world
– Care for the environment
– An equitable (fair) distribution of income
– A sound and sustainable structure to public finances
Achieving these economic objectives requires the judicious application of monetary, tax , spending, investment and borrowing policies based on the timing of the business cycle and impact of external shocks.
A change in one variable has a corresponding effect on other variable. Most often those effects are non-linear. The velocity is money is not stable it declines during downturns and offsets the impact of increases in the quantity of money. Monetary and Fiscal stimulus is subject to the law of diminishing returns and multipliers turn negative with repeated use. Empirical evidence shows there is an initial short-term effect, then a flattening followed by a decline in output as public and private debt levels grow over time. Economic models based on linear relationships cannot reflect real world impacts.
Movements in sectoral balances are one guide among others to the effectiveness of those policies in achieving macroeconomic objectives or divergence from stable economic conditions.
Economic management is sometimes compared to a sailing the ship of state through rough waters and altering course as weather conditions dictate.
@ Michael BG,
“If the government spends £100 today this does not increase anyone’s savings today or tomorrow. ”
Of course it does. This is the whole point of the sectoral balances. If the Government sends you a payment you’ll see it in your bank account pretty close to instantaneously. That means as a first step your savings have gone up by exactly the same as the Govt spends.
@ Joe,
We can all write lists. The problem is that what people want usually doesn’t make sense from a macroeconomic perspective.
For instance they want:
The Govt to balance its spending.
They want imports and exports to balance.
They want the domestic sector to be able to make net savings.
It doesn’t work. One of them has to give. If the domestic sector is in net surplus, at least one of the other sectors has to be in deficit.
Add in other requirements like having totally stable prices, full employment, significant economic growth at no cost to the environment, significant positive returns on their savings and it gets even worse.
Peter Martin,
I would say that what people want is for governments to do the job of providing public services and a social safety net efficiently and at a reasonable cost while keeping taxes stable and inflation at low levels to avoid cost of living crisis.
You may argue that it doesn’t matter what the government spends on because it is all someone else’s savings or income in the private sector. When the government spends £37 billion on a test and trace system that does nothing to stop the spread of covid, that is OK because it increases the net financial assets of the firms and individuals it hands out contracts to and that is somehow supposed to be a good thing. Others may take a more nuanced view and point out that government incompetence has wasted 37 billion of taxpayers money (and it is taxpayers money that government is spending as agents of the public).
You might suggest that the UK is the beneficiary of real goods and services by consistently running a trade deficit for decades. Others that take a more analytical view of the net international position would point out that the UK is continually having to sell assets to meet its current account deficit such that overseas investors now own the majority of the UK stock market and much of UK infrastructure, high end residential property and treasury bonds.
You might argue that public borrowing is not a burden on future generations. That may be true for countries like Japan or Germany where borrowing is mostly from its own residents, but not so in countries like the UK where borrowing to cover trade deficits is mostly from overseas residents. Those overseas investors will want a real rate of return on their investments from future generations.
You might argue that a government should spend freely until inflation arises and then hike taxes while holding interest rates at zero. That assumes that government deficit spending is the sole cause of inflation – a Thatcherite view. Inflation has multiple causes from global commodity markets, relative strength of labour markets, purchasing power of currency for essential imports, rate of credit creation in the shadow banking sector, demographic and technological trends and onshoring of supply chains among others.
Sectoral balance won’t give you the answer to those problems or even highlight cause and effect as Wynne Godley made clear in his papers. They can be a useful warning sign that economic conditions are destabilising and corrective action is required.
@ Joe,
“You may argue that it doesn’t matter what the government spends on because it is all someone else’s savings or income in the private sector. When the government spends £37 billion on a test and trace system that does nothing to stop the spread of covid, that is OK because it increases the net financial assets of the firms and individuals it hands out contracts to and that is somehow supposed to be a good thing.”
Look, Joe, do you mind sticking to what I’ve actually written rather than what you might have liked me to have?
When Govt spends money it is directing the use of resources in the economy. So naturally those resources should not be wasted. Who’s said anything different?
The decision of the UK to run continual trade deficits hasn’t come from MMT economists. It started in Thatcher’s era with the deregulation of pretty much everything the Tories could think of. This set the pattern which the Anglo Saxon nations followed. So we have been the ones to run trade deficits while the one who have kept a tighter grip on their own economies like Germany, China, Singapore, Japan have run the surpluses.
Having said this, we can’t all be Germany and run 200 bn euro surpluses. Someone has to run the deficits. There are pros and cons to running a trade deficit but even if we decide the former are outweighed by the latter they can’t be wished away and can’t be reversed by the UK alone. Or even by the USA alone. It would require a global solution – otherwise we just end up with trade wars which have in the past turned into real wars.
“You might argue that a government should spend freely until inflation arises and then hike taxes while holding interest rates at zero. That assumes that government deficit spending is the sole cause of inflation”
No it doesn’t. In any case the government should spend the right amount. Not too much and not too little. And on useful things when it does spend too!
I have made the often made point that excess total spending, relative to what is available to buy, and not just Govt spending is responsible for high inflation. So it’s quite tiresome to have to deal with an accusation that I agree with the Thatcherites, and those of similar mentality who run the EU, and who are only interested in Govt spending.
Peter Martin,
“the government should spend the right amount. Not too much and not too little”. That amount is determined by its periodic spending reviews and annual budgets with borrowing deficits subject to adjustment via automatic stabilisers.
Inflation arising from excess total spending does indeed generally arise from private sector spending (induced by excess credit creation) rather than government deficit spending for investment or during recessions. In managing inflation the government should not make matters worse by raising indirect taxes that exacerbate higher retail prices, business taxes that are typically passed on to consumers as costs of production rise or income taxes in tight labour markets that generate inflationary wage/price spirals to make up for reduced disposable incomes or raise taxes to induce recessions and create unemployment.
The UK has not made a conscious decision to run continual trade deficits. Most governments are continually urging and incentivising firms to export more with export finance subsidies, trade missions, free trade agreements etc.
The evolution of the United Kingdom’s balance of external trade depends not only on changes in the volume of goods and services exported and imported but also on the prices at which they are traded. The ratio of export to import prices-the terms of trade-determines the volume of exports necessary to pay for a given volume of imports or, analogously, the volume of imports which can be purchased with the proceeds of a given volume of exports. Other things being equal, if the price of exports falls relative to that of imports (a fall in the terms of trade), the trade balance will deteriorate, and vice versa although lower sterling exchange rates over the past decade do not appear to have resulted in much improvement in the structural trade deficit.
Peter Martin,
When the UK government increases its expenditure it doesn’t send everyone a share of this extra money unlike the USA government which has done this sometimes. The money spent by the government is likely to be given to other parts of government to spend on things, such as equipment and the services of businesses. Indeed some of it will end up in wage packets and other bank accounts (but this takes time). However, it is almost impossible for the whole amount of the extra spending to be in banks at the same time. This is because some of it will be taken in taxes including income tax. Then the money will be spent on other things. The extra money will end up divided between being spent on consumption, taken in tax, spent on imports and being saved. You are presenting the sectoral balances in a much too simplified way. What you are doing is similar to what you say neo-liberals do.
Michael BG,
The Government pays its workers. It pays its business suppliers and contractors. When it spends puts money into their bank accounts as a first step. Therefore savings immediately increase. Shortly afterwards, when the money is respent, they fall again as the money passes through the economy. All your algebraic terms are changing very rapidly when there has been a change in either fiscal or monetary conditions. It probably would not be possible to collect the data fast enough to show that the equality still existed but if we could it would.
@ Joe,
“The UK has not made a conscious decision to run continual trade deficits.”
Possibly the PTB didn’t quite see it that way at the time but, in effect, that’s what they’ve done. Once upon a time the trade figures made the news. Now they don’t. The new consensus is that they aren’t important.
When the decision was made to float the pound possibly many would have expected that trade would naturally balance. If all other countries had taken an equally hands-off approach I expect that would have happened. But the big net exporters ’tilt the table’ to ensure that they do run those net exports. It’s involves holding down their currencies and exporting surplus capital. Often they will set up a Sovereign Wealth Fund to do this and keep down their own exchange rate. Taxes also need to be higher to suppress domestic demand.
Consequently if they arrange to run continual net export surpluses it must follow that those having more liberal free trade and economic policies end up being the ones running continual deficits.