Nick Clegg on the “utter nonsense” of Tory spending plans

In another strong demonstration of the differences between the Liberal Democrats and the Conservatives, Nick Clegg went on the Today programme yesterday to talk about deficit reduction and fiscal policy in the next parliament. While the Tories want to reduce the deficit by cutting spending alone, Liberal Democrats want to raise taxes on the wealthy.

From the Guardian:

Nick Clegg insisted taxes would have to rise in the next parliament. Speaking on Radio 4’s Today programme, he said: “What the Conservatives are saying is a complete and utter nonsense. There is not a single developed economy anywhere in the world that has balanced the books and only done so on the backs of the working-age poor, which Osborne has now confirmed several times he wants to do.”

As he set out his party’s plans to remove tax breaks for wealthy pensioners, Clegg also accepted that the public finances were not improving as fast as planned due to tax receipts failing to match forecasts, but he refused to say if this would require the coalition to put back its deficit plans.

He said: “If tax receipts are not as buoyant as predicted then of course that has an effect. Time will tell if that is a semi-permanent effect or a temporary blip, but it means it comes down a little less than predicted.”

There will have to be more austerity in the next Parliament, though:

He added: “Some of the breathless rhetoric that suggests we will enter a new world where the level and scale of the cuts are going to be melodramatically much more than what we have done before I don’t agree. The climb has become slightly deeper but not in a way that I would think is impossible to deliver.”

And he went on to say that the Government had been pragmatic and altered its plans when the situation demanded it. That is for me one of the most important things that the Liberal Democrats brought to the table.

This government has not been dogmatic about deficit-reduction plans. We have been firm, we have been consistent, but when it became obvious that the deficit was not going to be eliminated by the end of this parliament, far from doing what some people urged me to do – which was to chase our tail, cut even more – we said no, it is going to take a little longer, and it will be three years into the next parliament before we wipe the slate clean and balance the books for future generations.

“No one would have thanked us if we had stuck dogmatically to the original timetable and implemented even more stringent cuts. We stuck to the pace which we think is economically socially and politically sensible. If this parliament has been all about rescuing the British economy, pulling the economy back from the brink, from the precipice, which is where we found it back in 2010, I think the next parliament and beyond is about renewing the British economy and making sure that all parts of the country can fairly benefit from the economic recovery as it takes root.

As a social liberal, though, I think that there is so much more that the state could and should be doing to reduce inequality and give everyone a fair crack of the whip. I have no problem with the idea of increasing taxes by some margin to improve public services, most specifically making sure that everyone has somewhere affordable and decent to live.

Scandinavia has shown us how you do that and we should look more to those countries for inspiration. Liberal Democrats have brought some very good things to the table in terms of job-creating capital investment, house-building and giving people more of their own money to spend. While our answers on reducing poverty and creating opportunity are going in the right direction, I think that they could and should be bolder and more radical.

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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39 Comments

  • Tsar Nicolas 2nd Dec '14 - 9:58am

    Putting taxes up is as daft as cutting spending during an economic depression (sorry, recession, I mean, er, recovery).

    The world is in a deflationary spiral and the party leadership is focusing on just one of many deficits that are important. It’s funny that nobody in the political establishment is bothered at all by the international trade deficit – as if our spending abroad can be financed forever by capital inflows from countries like China. One sure way to increase that particular deficit is to further cut our productive capacity by doing silly stuff like putting up taxes.

  • Bill le Breton 2nd Dec '14 - 10:10am

    This is wonderful but our criticism is still based on the artificial target of a current balance by 2017/18 which we share with the Tories.

    So Clegg and Alexander want to achieve the “necessary” reduction in borrowing with a greater reliance on tax rises than the Conservatives.

    But why aim for current balance by 17/18? Why are the service cuts and tax rises necessary? Are they necessary? A growing lobby think they are not.

    Our very good friend and colleague Adam Corlett has co-written a wonderful report for his new employer, the Resolution Foundation, which examines the Tory, Labour and our own published policies. It can be found here: http://resolutionfoundation.org/publications/in-the-balance-public-finances-in-the-next-parliament/

    This report also highlights the possibility (to use the words of Flip Chart Fairy) of “taking longer to reduce the deficit and continuing to borrow for capital spending gives the other parties a lot more room to manoeuvre. For example, by extending the target for a current budget surplus to the end of the decade and borrowing for capital expenditure, a future government would only need to make a further £4 billion in cuts after 2015-16. And that figure includes the increased debt payments brought about by higher borrowing.

    “Using the OBR’s projections for growth and tax revenues, the Resolution Foundation reckon that this would still enable a government to run a small current surplus by the end of the decade. It would be much a slower reduction than the one the Conservatives are advocating but the overall debt-to-GDP ratio would still start to come down by 2020.”

    By shifting our target to 19/20 and by arriving then with a 2% deficit (to GDP) we can fully fund the necessary investment programme AND still have the debt:GDP ratio falling WITHOUT the very harmful £38 billion of cuts/tax rises required to reach our present political aim.

    Now some of you will say that these plans are just that ‘plans’ and slippage is bound to occur. But we saw the effects on consumer, business and banking confidence of accelerated deficit reduction in 2010. By trying to achieve an unrealistic rate of deficit reduction we have actually seen the national debt rise much faster between 2010 and 2015 than would have been had be conducted fiscal consolidation as we set out in our manifesto.

    We are about to do the same – with all three parties campaigning on unrealistic programmes. But these political games have real consequences as we saw between 2010 and 2012, when the fiscal consolidation programme had belatedly to be revised.

    I urge people to read the Reso report and congratulate Adam. But for those who want a quicker resume Flip Chart Fairy does an excellent job here: https://flipchartfairytales.wordpress.com/2014/12/01/2019-a-vanity-project/

  • Tsar Nicolas 2nd Dec '14 - 10:15am

    @Bill le Breton

    Good post, but why not finance capital expenditure by off-the-books measures, such as getting the Bank of England to hand cash to public agencies by the issuing of 100 year bonds at 0 % ? You know, just like the BoE does with the commercial banks.

  • Steve Comer 2nd Dec '14 - 10:16am

    Well said Carol – particularly the last paragraph. In general the Nordic countries have been much better than the UK at long term thinking, long term planning, balancing resources and protecting the environment. Norway is a model for the whole world in using its oil revenues for the benefit of its citizens. By contrast the UK wasted much of the windfall of North Sea oil revenues on tax cuts for the rich and unemployment benefit for the poor in the 1980s and ’90s. (Osborne now wants to do even more of the former while cutting the latter!).

    Difficult decisions have had to be made about public services in Scandinavia, yet they have managed the balancing act of reform without the policy jerks and pain which have characterised the UK since the 1970s (and possibly before).

    So why is this? There are many reasons, but one factor is a stronger belief in the collective good of the society as a whole, and a commitment to high quality public services for all which flows from this. Another factor is the strength of the Trade Union movement in these countries, and the influence that high membership levels bring to bear in public policy. I chaired the Employers Platform of the Council for European Municipalities from 2010-13, and was very struck not only by the high level of participation in Social Dialogue by Employers Organisations and Unions in Scandinavia, but by the way they had managed to deal with massive structural changes with collective agreements which stuck and worked. In Local Government this meant an agreement which retrained and redeployed surplus Officers rather than making them redundant (and losing their skills and experience in the process).

    So the question is which Party Leader best understands the need to learn lessons from our near neighbours in Scandinavia and apply them here? You won’t like this Caron, but I think the answer to my question is probably not Nick Clegg but Nicola Sturgeon!

  • David Evans 2nd Dec '14 - 10:24am

    Sadly a leader who has suported the policies of a government led by the Conservatives for the last four years, suddenly saying Tory spending plans are “utter nonsence” just smacks of desperation. It won’t work on those on the left. It won’t make Nick’s beloved Soft Cons any more likely to vote for us. Who is it designed to impress other than Nick?

  • On this very subject yesterday, I made reference to the Today programme coverage and asked these two questions —

    One assumes that our party leader would not ask our MPs to vote for “complete and utter nonsense”.

    So will there be a 3-line whip on Liberal Democrat MPs to vote against Osborne’s Autumn Statement ???

  • @ Steve Comer
    “You won’t like this Caron, but I think the answer to my question is probably not Nick Clegg but Nicola Sturgeon!”

    Nicola Sturgeon is out to get as much out of remaining in the Union for the Scots in budgetary terms as possible. Fair dos to her, because that is her job as First Minister, but don’t confuse this with some kind of superior ideological stance. It is simply that the Scots have been able to turn the funding screw on Westminster to greater effect than other parts of the UK.

    Ask Nicola Sturgeon what tax rises she plans to ask Scots to endure in order to reach this Scandinavian-style paradise in future and you won’t be getting an answer any time soon.

    @David Evans

    “Sadly a leader who has suported the policies of a government led by the Conservatives for the last four years, suddenly saying Tory spending plans are “utter nonsence” just smacks of desperation.”

    No it doesn’t. It smacks of somebody who has successfully fought on the side of avoiding unnecessarily fast cuts saying he will do so again.

    Pretty consistent and clear, I think.

  • Bill le Breton 2nd Dec '14 - 11:05am

    Tsar Nicholas. You may find it was outlawed by the Maastrict Treaty. Perhaps your economics ended at the same time mine had done – I had to do a lot of catching up to see how the game is now played. They renamed Open Market Operations as Quantitative Easing and targeted this actually conventional money creation mechanism at the holders of bonds rather than the commissioners and builders of bridges, roads, hospitals, green engineering and really fast broadband (which your and my preferred method would have achieved.)

    Will cuts in Government borrowing of £45 billion (including the ones already announced for 2015/16) reduce Aggregate Demand? Yes. Will the private sector be able to compensate for this reduction in the next 5 years? Probably not. Will the Bank of England offset the effects by boosting aggregate demand??????? If I was sure that the MPC doves were strong enough to deliver that, I would be less worried. But already the hawks are straining at the leash. And the New Keynsians still think monetary policy won’t work at the ZLB.

    What is really interesting about Clegg’s statement is ““No one would have thanked us if we had stuck dogmatically to the original timetable and implemented even more stringent cuts.”

    Well of course they did stick to the time table for two long and highly damaging years.

    And of course by insisting on his new fiscal consolidation plan he is REPEATING exactly the same mistake.

    It doesn’t fit the required political narrative but the UK economy was not on a precipice in the spring of 2010. Growth was returning. NGDP growth was back to the long term trend of 5%.

  • Alex Sabine 2nd Dec '14 - 11:09am

    It is alarming that Nick Clegg continues to equate ‘balancing the books’ with ‘wiping the slate clean’ or (as he usually puts it more grandly) ‘wiping the slate clean for future generations’. This shows either a fundamental lack of understanding of how the public finances work or a cynical attempt to deceive the public.

    ‘Balancing the books’ can be taken as shorthand for eliminating the budget deficit, the government’s annual overdraft or the additional amount of debt it is taking on each year. As things stand this is hovering around £100 billion per year, one of the highest anywhere in the world, and progress has either stalled or gone into reverse this year.

    In that context I’m not sure any of the tax or spending pledges by any of the parties for the next Parliament are remotely credible. As happened before the last election, the three parties are in vote-buying mode and are making policy with reference to each other rather than the still-daunting fiscal challenge that will confront the next government.

    Whatever administration is cobbled together after the next election will presumably declare that it has discovered the books were worse than expected (or that some external crisis has forced its hand) and will therefore unfortunately have to renege on some of the rash promises made a few short months ago. After the hard struggle of the past 4-5 years making a worthwhile start on tackling the entrenched fiscal problems, it is depressing to see this cycle begin all over again, since it will surely only fuel public disillusion.

    In any event, it must be highly questionable that the next government will have ‘balanced the books’ wihin three years of the next Parliament. It is just about possible, in that in the past there have been periods when the deficit has come down quite rapidly once some economic momentum has been established, such as in 1994-99 for example. But both Tory and Labour governments over that period were in full ‘Scrooge’ mode and not handing out goodies on either the tax or spending side: moving from heavy deficit into surplus involved the Tories breaking their promises on tax and Labour sticking to Tory spending plans while simultaneously taking lumps out of people’s occupational pensions. Moreover, there was a more traditional correlation between GDP growth and growth in tax receipts which has been absent this time, at least so far, as the fragility of the tax base left in place by Gordon Brown has been laid bare and the economy has lost much of its tax-producing froth.

    Returning to Clegg’s mantra, ‘wiping the slate clean for future generations’, this surely implies not simply reducing or eliminating the deficit (itself a distant prospect) but making real inroads into the accumulated stock of debt that current and future generations will have to service.

    It is a rather silly phrase, since no British government in our lifetime is likely to retire the national debt in its entirety, but if we take it figuratively rather than literally then it could perhaps mean tackling the huge additional debt blow-out since 2008 (which of course was added to the existing substantial debt burden), if not by actually repaying all that debt then by eroding its real burden as GDP rises. So, if Clegg’s formula means anything in economic terms it might mean whittling the debt-to-GDP ratio back down to 40% or so, roughly where it stood before the financial crisis.

    The reality, of course, is that since the British government is still borrowing a gargantuam sum every year, debt is continuing to pile up not to abate, not only in absolute terms (which it will continue to do until we stop borrowing) but also as a percentage of the growing GDP. There is no prospect of this going into reverse until the deficit is down to 2-3% of GDP, and no prospect of making real inroads until we start to run year-on-year budget surpluses. Instead the debt ratio is expected to climb to almost 80% of GDP on the narrow net debt measure used by the Treasury and OBR, and around 100% on the gross public debt measures typically used by external bodies like the OECD and the IMF.

    In the meantime, of course, as the stock of debt rises so do the interest charges; indeed it is only ultra-low financing costs (helped by QE and central bank financing) that have enabled the government to borrow such epic sums. If bond yields and global interest rates remain on the floor we might be able to continue on this path for a while longer, but if and when they turn the headache in terms of debt servicing costs will be very nasty indeed, either crowding out other public spending, taking a chunk out of household budgets in higher taxes or (perhaps more likely) a combination of both. Even with these ultra-low gilt yields the debt interest bill is now mounting, imposing a large and volatile burden on the public finances.

    So, by any reckoning and any stretch of the imagination, Clegg’s claim of wiping the slate clean is fantasy. It is time he found a more modest metaphor that better fits the reality: or else policies that gave some hope of justifying the hyperbole…

  • Tsar Nicolas 2nd Dec '14 - 11:15am

    @Bill le Breton

    So QE for anyone other than banks is outlawed? I’m sure this can be gotten around with a political will, but if not, it is a good reason for Brexit. however, I doubt that UKIP would agree with me on that point.

    I can understand why EZ countries can have such restrictions on them but not why anyone using their own currency should be caught in the trap.

    Thanks for that information, though.

  • To be honest, I think the recovery has happened despite Osborne’s efforts rather than because of them. When he entered office there was already growth and the immediate effect of his spending plans was a sharp dip. We are now back to high levels of borrowing. So to me it’s time to set modest and realistic deficit reduction targets rather than claim you can wipe it out in the space of one, two or even three parliaments.

  • Firstly the politics. If Clegg is so hostile to the Tory plans then surely either the Tory plans would have to change massively or we can rule out another Lib/Con coalition. Given neither of those things will happen I think we can assume that Clegg’s comments do not amount to much. He will endorse the current Tory plans with a few concessions. Secondly he talks about altering plans where necessary. Sounds good,but I’m afraid there’s no evidence that Cameron and Osborne would have done things differently on their own when growth disappointed and Clegg doesn’t claim he forced them to. The Lib Dems only get so much airtime and there is simply no point in defending things the Tories would have done anyway. Why? Because he’s effectively endorsing the Tories as much as his own party and they seem an irrelevance.

  • Tsar Nicolas 2nd Dec '14 - 11:35am

    @Bill le Breton

    On reading your post, I emailed an organisation called positive money and received this response.

    http://www.positivemoney.org/faqs/surely-your-reforms-are-not-possible-under-the-maastricht-treaty/

  • On the economics, it’s amazing what a bunch of small ‘c’ conservative stick in the muds our politicians are on the economy. What’s striking right now is how radical many dry, establishment type economists are thinking. Yet all our politicians debate is the speed of belt tightening. We’ve had all this money go into the bottom of the banking system. We have a growth/demand/debt problem yet we keep targeting low inflation. Why not have a nominal GDP target of 5%? Even if inflation was at 3-4% it would be eating into our debt levels.

  • Those who do not accept economic restraint seem to be ignoring the factors that produced the present slump, many of which were insufficient economic restraints in the first place. The argument seems to be if the bubble bursts we need to be making a bigger bubble. I think that Clegg’s hyperbole about ‘wiping the slate clean for future generations’ can be understood: although it is an exageration he has a valid point.

    There is a parallel in how we treat the environment and limited resources: we may not be able to “wipe the slate clean”, but we can mitigate the problems. Not only is this a parallel, but how we approach the economy and the environment are inextricably linked.

    However, Nick Clegg’s candour is limited: he admits to a need for tax increases, yet apart from an intention to take more from or give back less to “wealthy pensioners” there is little else to suggest where the money is coming from.

  • Bill le Breton 2nd Dec '14 - 12:43pm

    Martin, if the policy produces a smaller economy for those future generations than would otherwise have been the case and, on top of that, fewer/worse schools, hospitals, physical and electronic infrastructure then those children and grandchildren will not thank us for our folly.

    Clegg at last admits that the 2010 emergency budget did great harm and its programme of accelerated deficit reduction had to be abandoned two years into the most expensive experiment in UK history.

    Now he is saying they he will attempt to reduce public spending by £45 billion at a time when the private sector is timidly beginning to invest some of its resources/take up some of its borrowing options and when even the PM is saying that the red lights are flashing in the global economy.

    This will yet again reduce the size of the economy that our children should have had if their ‘fathers’ had been better political managers of the economy. The cuts to welfare will further increase the social divisions that are growing in our society and may lead to further reductions in the liberty enjoyed by those children, as civic strife is met by further curtailment of their life chances.

    The only explanation is that he continues to think that ‘tough choices’ however imprudent are a campaigning virtue – a winning image. He argued this prior to 2010. He argued this on taking office in 2010 and he has pulled the same bunny out of the hat now. His advisers are incompetent. He uses ‘wiping the slate clean’ in a way that deliberately misinforms. His political instincts remain utterly illiberal.

  • David Evans 2nd Dec '14 - 12:49pm

    … and his political legacy toxic to us for at least a generation.

  • Bill le Breton 2nd Dec '14 - 1:03pm

    This is my favourite chart at the moment: file:///C:/Users/user/Desktop/PSNB%20history%20Duncan%20Weldon%20%[email protected]%29%20_%20Twitter.htm

    It shows Public Sector Net Borrowing as a percentage of GDP between 1956 and 2014.

    It shows two things. 1) that there were not many years (6 in fact out of 58) when Governments ‘wiped a little of the slate clean’

    2) those years in which it tried to ‘wipe the slate clean’ were followed by periods of higher than average increases in Public Sector Net Borrowing.

    Trying to ‘wipe the slate clean’ is counter productive. Just grow the economy by 5% as Frank B suggests.

    Oh – and one last thing. DID ANYONE HEAR GRANT SCHAPS on Sunday night saying that the Tories were going to “end” unemployment? By end I assumed he meant getting unemployment down to just frictional unemployment. Liberal Democrats should be wary that the Tories are about to steal Beveridge’s clothes.

  • Bill le Breton 2nd Dec '14 - 1:04pm

    Trying again with that link file:///C:/Users/user/Desktop/PSNB%20history%20Duncan%20Weldon%20%[email protected]%29%20_%20Twitter.htm You may have to cut and paste it.

  • Geoffrey Payne 2nd Dec '14 - 1:20pm

    Bill, that link is to your disc drive on your own computer.

  • Does anyone know if our MPs will vote for “complete and utter nonsense”?

    How will the leader and other Liberal Democrat MPs vote on Osborne’s Autumn Statement ???

  • @ Bill le Breton

    “Will cuts in Government borrowing of £45 billion (including the ones already announced for 2015/16) reduce Aggregate Demand? Yes.
    Will the private sector be able to compensate for this reduction in the next 5 years? Probably not.”

    Er, wrong Bill. The answer is probably yes. £45bn in a UK economy worth £1.6 trillion is 2.8% of output, over five years that’s 0.56% of GDP per year.

    The question is, whether our welfare state and public services can cope with that level of cuts, given the ring fencing of certain areas. The answer there is probably no.

    You’ve made the same old mistake of assuming that the performance of the UK economy is solely or even mainly to do with fiscal policy, which is clearly, given any basic knowledge of economics, totally wrong.

    What we need to be doing is to see what we can do to raise the growth rate of the economy, bringing up tax revenues and lowering spending as a percentage of GDP.

    The failure of the deficit to come down as projected is to do with lower than expected growth (due to high commodity prices, falling North Sea oil and gas output, a contracting finance sector and the Eurozone crisis hitting exports). We need to be looking at how we can turbo-charge the UK economy through better targeted investment in skills, research and infrastructure to raise the growth rate and cut the deficit that way.

    The Liberal Democrats need to be demonstrating that they are the party of growth. This is the only way we can find our way out of the financial impasse the big two parties are in at the moment.

  • @ John Tilley

    “Does anyone know if our MPs will vote for “complete and utter nonsense”?How will the leader and other Liberal Democrat MPs vote on Osborne’s Autumn Statement ???”

    The Tories’ nonsensical tax cuts won’t be included in the statement, so why should they vote against it?

  • I don’t really see any new ideas on the economy coming from anyone, least of all the Lib Dems. A paltry green investment bank hardly counts. As for dualling various roads……. come on this is small beer. We have to properly understand the mess we are in. We borrowed a whole load of money from the developing nations who thought we were a stable economy who knew what we were doing. Rather than investing in the future, most of this credit went towards allowing people to buy increasingly expensive houses. So at the end of all this all we are left with is a massive debt burden that needs to be financed and a load of overpriced housing. It is a debacle. Probably the most astonishing misallocation of resources in our country’s history. Labour don’t want to talk about it because they were in power when it happened. The Tories have a narrow minded concern with protecting the wealthiest in society from higher taxes and finding excuses to roll back the welfare state. Ukip want to blame it all on immigrants(!!!!) and the Lib Dems are over the moon because they’ve got their hands on ministerial red boxes. It’s a shambles and the very messy general election result that seems likely next year should surprise no-one. Will we have a stable government in May next year?

  • Bill le Breton 2nd Dec '14 - 1:58pm

    RC, I am sure that you realise that the whole budget is not available for cuts, and that you are therefore playing games. No, that is rude. But then your habit of starting critiques with Der and Er etc unbecome you.

    The actual area of the budget available for cuts is much reduced by decisions on protection and by parts of the budget that are delegated. Frankly, I wish you’d do some research one day. Now that is rude. And I am never unintentionally rude.

    This was made quite clear on Newsnight last night. But better still try reading the Resolution Foundation report. There’s an excellent appendix on how Government Finance works. Of course any Councillor who served on a Finance Committee or had the privilege of leading a council eg John Tilley will have a head start on you.

  • I agree with what Nick is saying, but then again I agreed with him in 2010 when he said that is wasn’t fair to saddle our young with a life time of debt if they wanted an education and look what happened there…

    It is totally wrong to attempt to balance the books on the back of those who have the least. And I see no reason why wealthy pensioners (who are now the richest generation) should be given special tax breaks simply because they are old. So I like what I’m hearing from Nick, but there’s a problem…

    The problem I have is that for the last four and a half years Nick has been helping the Tories do just that. Balance the books on the backs of the poorest.

    In the Lib/Con government tax for those earning over £150,000 a year has been cut. Pensions (a huge part of government spending) have been index linked and ‘triple locked’. Another massive expense that the elderly use disproportionately, the NHS, has been ‘ring fenced’. Young people have £9,000 tuition fees. Those on benefits have had the bedroom tax and the benefits cap… The housing crisis has gotten worse and 10,000’s of working people have been reduced to relying on food banks. It just goes on and on. It’s too late to be saying stuff like this now and after Nick’s record in government, how can we even believe that he means any of it?

  • Bill le Breton 2nd Dec '14 - 2:40pm
  • @Bill

    Regarding ring fencing and its impact on other areas of spending, I said as much in my comment.

    “The question is, whether our welfare state and public services can cope with that level of cuts, given the ring fencing of certain areas. The answer there is probably no.”

    So I am not arguing with you there.

    Your comment was about the size of the cuts in relation to the economy, saying they were too large and wouldn’t be compensated for by the private sector. One look at the basic figures suggests otherwise.

    As regards my “rudeness”, well sorry, but laying out an economic argument based on the premise that aggregate demand depends on fiscal policy and apparently failing to take into account other factors does seem to betray a lack of overall knowledge about how the UK economy works.

    The only point I’ll accept is about the “ers”, which I’ll leave out in future, because they add nothing and clearly annoy you. The only annoyance I want to cause you is in having to accept that the argument you just made about cuts in relation to aggregate demand is wrong.

  • Bill le Breton 2nd Dec '14 - 4:08pm

    RC My apologies and thanks for pointing me back to your comment in which you do as you say write, “The question is, whether our welfare state and public services can cope with that level of cuts, given the ring fencing of certain areas. The answer there is probably no.” And we don’t have to.

    You may recall that I think the level of aggregate demand is largely determined by central bank policy. A competent central bank could offset the reduction in Govt Ex, but as I wrote in my reply to Nicholas, I am not confident that the MPC will deliver sufficient growth in NGDP to offset these cuts. Since news came of Carney’s appointment NGDP seems to have been growing at a relatively steady rate of 4% a year. Not a coincidence, I think. As for many years (until 2008) the growth rate was consistent around 5% this 1% reduction from that level however suggests that the Bank does not think a higher level is sustainable. That is not encouraging for those hoping the Bank will offset these proposed cuts.

    We shall see whether the private sector is able or willing to step in. I see no sign of them being crowded out at present. And 5 – 10 year rates do not suggest that markets see much growth in the next five years either.

    So, are these cuts or tax rises strictly necessary? Would the country be in a better shape in 2020 if we aimed for a current balance in that year rather than in 17/18? Would a deficit of 2% of GDP in 19/20, used to finance the capital programme, be really so bad given the Government’s ability to borrow at these low interest rates? Don’t ‘savers’ need some kind of deficit that requires their savings in return for relatively safe near-money assets eg gilts?

    That 2% deficit would require just £4 billion of cuts or tax increases over and above the £8.5 billion proposed for 2015/16 (says the Resolution Foundation). Perhaps we could abolish all employment taxes instead of the questionable further extension of the IT threshold and really go for full employment.

    To me that would be much more of a Liberal economic policy – worthy of the great 1929 manifesto.

  • Tsar Nicolas 2nd Dec '14 - 5:15pm

    @Bill le Breton

    “Oh – and one last thing. DID ANYONE HEAR GRANT SCHAPS on Sunday night saying that the Tories were going to “end” unemployment? By end I assumed he meant getting unemployment down to just frictional unemployment. Liberal Democrats should be wary that the Tories are about to steal Beveridge’s clothes.”

    I think you are taking an optimistic view, Bill. I rather suspect that he means to redefine unemployment in such a way that it no longer exists.

    A good example comes from the United States where John Williams of Shadowstats has pointed out that by using the same measure of unemployment used during the Clinton years, you get an unemployment rate of not around 7% but something like 25%. Which goes a long way towards explaining why, even in a welfare-hostile polity like the United States, you can still get close to 60 million people reliant on food stamps.

  • Bill le Breton 2nd Dec '14 - 5:28pm

    I was surprised no-one pulled him up on it. Let’s keep our ears open when the spinners are out after tomorrow’s statement.

  • I agree with Tsar Nicolas (first comment) that it’s very odd that no-one in the political establishment seems that bothered by the international trade deficit. This is weird – and dangerous.

    I read the other day that the UK’s international debt is now around 400% of GDP which would dwarf the government’s budget deficit and would be completely unsustainable. Is that so? Can someone confirm or supply a more accurate figure? If it’s anything like that we are certainly missing the main event here.

  • David Evershed 3rd Dec '14 - 1:17am

    The difficulty of putting excessive government spending back in its box shows how cavalier were Gordon Brown and Tony Blair from 2002 through to 2010 – buying the votes of public sector workers with unsustainable salary rises.

    Every element of government spending should be subject to productivity improvement and cost saving, including the ring fenced health, schooling, defence equipment and international development.

  • David Evershed 3rd Dec ’14 – 1:17am
    ” – buying the votes of public sector workers with unsustainable salary rises.”

    David, do you have any evidence to back this statement?
    It does not seem to fit with reality.
    My personal experience of the Blair/Browne years is the opposite of what you suggest. Exactly who were those public sector workers who had these salary rises?
    In the last three years before I retired in 2011 we had no salary rises whatsoever and for my former colleagues that continued for a further three years since when they have never had no more than 1%. In anybody’s terms that is a real terms reduction in salaries over the last seven years.
    Who were those pubIic sector workers that you know of who kept getting unsustainable pay rises?
    Do you have any real examples?
    Or have you just accepted the dogmatic rhetoric of those who blame the workers instead of those who dodge their responsibilities and hide their profits in tax havens?
    Or were you thinking of bankers who were bailed out with public money, were you classing casino bankers in the City of London as public sector workers?

  • Alex Sabine 3rd Dec '14 - 12:40pm

    @ John Tilley

    There was a large increase in the public sector headcount during the Labour years, particularly in the period 2000-05, and this was the main driver of a higher total pay bill, which by 2009 was more than 13% of national income compared to 11% a decade earlier. However Labour also increased pay per head in real terms, again especially in 2000-05 when real pay per head rose by 3.3% per year.

    You are right that Labour began to constrain public sector pay growth in 2006-08, but it then increased it again in real terms and as a share of national income in 2008. During the financial crisis (2008-10) public sector pay grew faster than private sector pay, but recent restraint has narrowed the public/private differential sharply.

  • Alex Sabine 3rd Dec ’14 – 12:40pm

    If you look back I was responding to the claim that there had been “unsustainable salary rises” for public sector workers.
    There were not unsustainable salary rises. That’s the fact of the matter.

    The size of the public sector relative to the private sector, or comparative reductions in public/private salaries after 2008 are neither here nor there in a discussion about a false claim that there had been salary rises (sustainable or otherwise).

  • Alex Sabine 3rd Dec '14 - 6:45pm

    @ John Tilley

    I didn’t mention the size of the public sector relative to the private sector. I cited 2 main pieces of evidence:
    1. The size of the public sector paybill both in absolute terms and in relation to the size of the economy
    2. The growth in the cost of pay per head

    The point is that to gauge affordability or ‘sustainability’ you have to look at the total paybill, and this in turn depends on the number of people employed and the cost of each of those jobs (pay per head). In both respects there was rapid growth during Labour’s term of office. It is also useful to compare this growth to the growth in overall GDP, since if the growth in the public sector paybill outstrips the growth in GDP there need to be offsetting tax rises or cuts in transfer payments to compensate (which there weren’t).

    To judge whether or not it was sustainable we have to look at how this increase in overall public sector payroll costs was financed. Given that Labour borrowed £30 billion plus per year even when the economy was running above its trend, and that the revenue it did raise relied to a dangerous extent on financial and housing bubbles which spectacularly burst in 2008, I’d say the evidence is pretty much in on that.

  • Alex Sabine
    Please look back to my comment — it started in response to David Evershed like this —

    JohnTilley 3rd Dec ’14 – 8:13am
    David Evershed 3rd Dec ’14 – 1:17am
    ” – buying the votes of public sector workers with unsustainable salary rises.”

    I replied to a false claim that the votes of public sector workers were being bought with unsustainable salary rises.

    There were no salary rises and that is why your own particular definition of sustainability is not relevant.

    You may have chosen to define sustainability by using headcount , or total paybill or wind direction but if there were no pay rises , there were no pay rises.

  • Alex Sabine 4th Dec '14 - 12:46am

    But the point is that there were substantial pay rises – that is what growth in pay per head means. You have to be very selective in your choice of time period to claim otherwise.

    I acknowledged that pay rises tailed off just before the financial crisis, but noted that it rose again in 2008 even as it contracted in the rest of the economy. Those are the facts, as various IFS studies have shown.

    http://www.ifs.org.uk/budgets/gb2011/11chap7.pdf

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