Economic policy is always a mixture of fiscal, monetary and political policy.
“Nick, George has come up with another of his jolly good wheezes. You remember that Plan A malarkey ..?”
Well, dear reader, you do remember Plan A, don’t you?
Eliminate the deficit by 2015; keep fingers crossed Expansionary Fiscal Contraction (EFC) works; use a 20:80 ratio of tax increases to spending cuts; provide monetary stimulus; flush out the Labour Party, and keep Vince and the ‘SDPers’ in their box.
Well, it put a spanner in the recovery-works and, with no sign of EFC or King’s stimulus working, it was pretty soon shelved – with the deficit horizon pushed back, and back, and back.
Although an economic failure, Plan A was a political success: the majority of the public did sign up to the moral position that debt was bad. Labour were discomforted, especially when the 16a Recovery Bus finally turned up. Ditto Vince and the ‘SDP/Social Liberal Alliance’.
So why not bring forth Son of Plan A, fifteen months before the election?
The politics, with its £25 billion of cuts or tax hikes, seems already to be working: Labour daring not to challenge the scale and the speed of the deficit reductions; the Prime Minister getting ready to welcome back his UKIP defectors, once they’ve used the Euros to give him a ritual kicking, and Nick Clegg playing his differentiation card with the Tories over the tax to cuts ratio with the added attraction that the New-Nick routine (‘feared by the rich, loved by the poor’) will bring a few of his own Labour defectors back into the fold, silencing Nick Harvey.
But it is a high risk policy. The Coalition needs contrary reactions; both the feel good factor of a strong recovery and an acceptance that ‘the job’s not over’. That is quite a difficult trick. And then there’s the effect on confidence. The downbeat talk around Plan A knocked business and consumer confidence, seriously delaying recovery.
However, there is an alternative. There always is.
The main plank of the Fiscal Compact is more moral than economic. It is the decision to get the budget deficit down to 0 by 2019/20 and thereafter to run a budget surplus of 1%, in the hope of reducing the National Debt.
The OBR has provided a graph showing the effects on Public Sector Net Debt of this strategy and also, usefully, the path of a strategy which reduces the deficit to 2% and then runs on at that level.
The range of options are infinite but a 1% deficit level path, mid way between the two plotted above, has advantages for the country and the Liberal Democrats. It provides a turn round (from 1% surplus to 1% deficit) of £20 billion: more than enough to expose Osborne’s £25b cuts for the political play it is. And, if outturn nominal growth over the five years, beats the anaemic OBR estimates, which are based on a pessimistic view of the output gap, the tax take will be even healthier. (See Professor Wren-Lewis’ view on that.)
These alternatives, which do not exclude one another, would create or sustain more life chances, increase the projected tax take, reduce the benefit bill, significantly reduce the level of cuts/tax hikes required and still seriously improve the deficit to GDP ratio. What’s not to like?
So, why are Liberal Democrats supporting Son of Plan A?
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Dundee Chess Congress 2024 #dundeewestend
GUEST POST No sign of an end to defections in local government
Monday night is Parish Council night...
Latest voting intention and leadership ratings opinion polls
Welsh Labour hospitality row
Steve Trevethan
Nonconformistradical
Jenny Barnes
Mick Taylor
Mark Frankel
29 Comments
The Conservatives wanted an 80/20 cuts versus tax rises ratio, the Liberal Democrat manifesto was based on 70/30. The final official “Plan A” didn’t specify a ratio, but George Osborne did agree to Liberal Democrat demands to reinvest some of the cuts. The coalition negotiations are covered in David Laws’s enthralling book “22 Days in May”.
Regarding a 1% surplus or a 1% deficit target – I think we should just aim for a balanced budget.
Lib Dems have also secured tax increases for higher earners, such as capital gains tax, and stopped further tax cuts for the rich in inheritance and income tax. So I don’t think the 80-20 figure should be used :).
spend, roughly speaking, what the people are willing to tolerate in taxation (loosely defined as popular enough to get elected).
yes, at the height of the cycle we should run a surplus, and a deficit when revenues are constrained ( how much is acceptable again coming down to public trust as expressed by a lections).
Unemployment is down. Income is up. Tax is down. Pensions are up. Business is up.
Economic failure? By what measure? You’ve been predicting catastrophe for the past four years and so far it looks like you were just wrong.
John, does it really matter if people use screen names? If it helps them to get their concerns off their chest, which they may feel inhibited to do if their friends or colleagues could see what their concerns were?
Rather than being an impediment to communication, surely you can see that it is in fact a rather refreshing opportunity? It means that difficult topics can be discussed. As far as I can see everybody is making interesting comments, which other members are also free to disagree with.
After all Democracy does require an open approach and freedom of speech. Are you a Democrat?! Just checking, I am sure you are underneath that authoritarian pose.
Andrew Suffield 9th Jan ’14 – 9:33pm
“Unemployment is down. Income is up. Tax is down. Pensions are up. Business is up.
Economic failure? By what measure? You’ve been predicting catastrophe for the past four years and so far it looks like you were just wrong.”
Andrew, I don’t know which part of the country you live in, or what job you do. But if you were to adopt this sort of panglossian position on the doorstep in great swathes of the UK, or happen to knock on the door of one of the millions of us who’ve seen our pensions slashed, and our wages fall in real terms by more than 10% since 2010, you’d be lucky to get back down the garden path with all your leaflets intact.
In the last three years, I personally have seen my real income decline dramatically, my wife was made redundant as a direct result of the cuts to local authority funds, my town’s high-street has been partially gutted, with 1 in 4 units now empty, two of my good friends have been made redundant, and many of my ex-students, with good degrees from good universities, are still either unemployed or working minimum-wage mcjobs while wondering how they’ll ever either pay off their student loans, or get on the housing ladder while Osborne pumps the market full of helium again.
And I live in one of the wealthier suburbs of London. I won’t even bother to describe what life is like in my home town of St Helens. Nor can I imagine what it must be like to be one of the poor people relying on benefits. I’m aware of stories of families from my school which make me want to weep.
Seriously, there is a very great gulf between what the Tories are crowing about in terms of a statistical “recovery”, and the experiences of actual people (who aren’t members of the directorship/city kleptocracy).
I know the right-wing press are pulling out all the stops to tell their suffering readers that a recovery is under way, but I suspect only those who were Tory supporters in the first place are likely to be either experiencing it, or be willing to allow themselves to have the wool pulled over their eyes.
Occasionally, some contributors to this website can seem to be doing an impression of the three monkeys. Your post does seem more than a little detached from reality. People don’t live in ONS statistical releases. They live in towns and cities, and it remains incredibly grim in an awful lot of those places.
@Andrew Suffield “Economic failure? By what measure? ” Well how about the measure put forward by George Osborne in 2010 – George Osborne confirms intention to eliminate deficit by 2015 in first Commons clash with Alan Johnson.
Not sure what the point of this article is. £20 billion is not a lot of money in terms of the whole economy, margin of error stuff really rather than a different economic strategy. The manipulation of the figures by Osborne to show deficit reduction year on year being a case in point. The deficit has hardly changed, the cuts , made have often been of the wrong things – services and infrastructure rather than electoral freebies and stuff we can do without – Trident, aircraft carriers. Money still goes on the wrong things – 22 billion on Houisng beenfit but next to nothing on new coucnil houses. More effort put into trying toi save a few million via a bedroom tax than stopping tax avoidance. That is the real problem with the Governments economic policy.
it’s all terribly fun to split hairs on how much of a surplus or deficit we can get away with, but it does look a little blase if you believe the proponents have any understanding of the debt profile the country faces in the coming generation:
http://www.bis.org/publ/work300.pdf
This as a result of demographic decline at a time where we likewise have a declining relative technological advantage with which to preserve a high-value high-margin economy.
The article is about political and campaigning policy.
It asks the question: Should we have signed the Fiscal Compact with the Conservatives in December 2013 – which commits us to finding a further £25 billion of cuts or tax increases, in order to to reaching a balanced budget by 2019/20 and a 1% surplus thereafter? And proposes an alternative political stance for us today that does not necessitate £20 billion of these cuts.
RC, surely you of all people ought to know that I believe that, in the UK, nominal growth is determine by monetary policy. I have never argued that it depends on fiscal policy. Quite the reverse. In a system like ours with an inflation targeting central bank, fiscal policy is always offset by monetary policy. It is you who do not understand modern economics and you who do not read with an open mind.
Nor does this post argue that the OBR forecasts, and therefore the figures in the Fiscal Compact stemming from the OBR forecast, will turn out to be accurate. They are not so much ‘economic facts’ as ‘political facts’.
Political debate and press scrutiny up to the election will be based on figures provided by the OBR. It will be difficult to argue against the figures, but there are options/alternatives within them. It is also likely that, now that the OBR exists, pressure will mount for all political parties going into a general election to have their economic policies reviewed by the OBR.
It is these figures (political facts) and the decision to aim for a surplus (political policy) that dictates the necessity to be able to answer yesterday, today and tomorrow – how do you plan to raise income from taxation and spending given that you have signed up to this borrowing policy (to be repaying debt by 2020) ?
By aiming for a 1% deficit rather than this 1% surplus a Liberal Democrat programme would have at least £20 billion more coming in –thus reducing the necessity to cut services and/raise taxes by this amount. Shooting Osborne’s fox.
I find is puzzling that commentators here find it difficult to appreciate that.
Andrew. The recovery has been a very long time coming. It has been the slowest recovery from a recession – including from the Great Depression. That is a lot of life chances and opportunities lost.
I have argued consistently here that when markets expected the Bank of England to deliver growth in nominal gross domestic productivity of 5 or 6%, recovery would begin. Under King’s stewardship of the Bank of England it stubbornly refused to do so, or to declare for this. NGDP is now being managed by Carney and running at +6%.
As soon as Carney was appointed, markets expected him (because of his comments to the Bank of Canada about similar matters there) to provide that growth in NGDP. The recovery began. Exactly what I have been campaigning for for three or four years now. Of course, this is why Osborne head-hunted Carney in the first place.
Provided the MPC continues to reassure markets that this growth will continue at a steady rate, around 5%, the recovery will continue. (That @RC is monetary stimulus delivering growth.)
There is a small worry that the OBR figures see growth in NGDP dipping from 5% to 4.5% in the last two years of its forecast.
I for one believe the extra cuts and tax rises are unnecessary and that by aiming for a 1% deficit rather than a 1% surplus we would have a policy to champion immediately that is distinct from both the Tories and Labour.
Bill, why is it that you love nominal growth, rather than real growth? I have a better word for nominal growth: fictitious growth.
@ Bill le Breton
“Should we have signed the Fiscal Compact with the Conservatives in December 2013”
Did we? When was that announced and who were the signatories exactly?
“RC, surely you of all people ought to know that I believe that, in the UK, nominal growth is determined by monetary policy. I have never argued that it depends on fiscal policy.”
I’m sorry, but I have to disagree with you there, yet again. Fiscal policy does influence nominal GDP growth through its impact as ONE of the four basic components of demand (consumer spending, investment, government spending and exports minus imports, C+I+G+X-M).
But importantly government spending is only one component, and I and X-M have both been below expectations, as has C, for reasons like high energy, food and commodity prices, the Eurozone crisis etc. none of which are to do with government policy.
Blaming recent UK GDP performance on “Expansionary Fiscal Contraction” or some such invented concept is really poor analysis. No-one from the Liberal Democrats says fiscal retrenchment on its own is expansionary. Of course it isn’t. It’s just a regrettable necessity and one that all too many people on the left of the party it seems are determined to ignore in terms of “magic money tree” economics, where no cuts need to be made and no painful choices have to be taken.
Meanwhile, I still can’t get you to accept the fundamental point that growth in nominal GDP is really just an abstract concept, because what matters is how it is split between price increases and the rise in output. That is where the heart of the problem has lain in the past three years. Because price rises in food and energy etc. have been higher than expected, that split has been more towards inflation and less towards output than was originally forecast. That is what has put the pressure on living standards and on real demand.
Bill, it is real terms demand and output that matters in determining prosperity and economic growth, not nominal GDP. And sadly, real terms demand is something over which the government has little control.
More than once Bill has patiently explained to me that my 1970 A-level in economics does not really equip me to follow all this stuff. But I know a bit about political campaigning and policy. When I read what he writes I can feel that he has a point, even with my inadequate grasp of the subject. I am less impressed by his critics, some of whom seem more intent on showing off their knowledge of the lexicon of economic terms rather than answering Bill’s political points.
Given that this economic compact with the Conservative leadership is crucial and indeed probably the only given reason for The Coalition, why is there so little debate.??? Are people shy of defending the Clegg/Alexander compact?
The usual suspects who rush to defend The Coalition on virtually every other policy area are notably quiet. (Peter Tyzack, Mich Taylor et al – where are you?)
Is it that nobody understands economics and the impact on political campaigning and policy formulation?
Are people frightened off by those formulas and sciences sounding abbreviations ?
Are Liberal Democrats just staggering blindly into £25 billion of cuts because they prefer to debate bicycle sheds?
Can any of the usual suspects who defend The Coalition at the drop of a hat answer the point below ?
Bill le Breton 10th Jan ’14 – 8:55am
The article is about political and campaigning policy.
It asks the question: Should we have signed the Fiscal Compact with the Conservatives in December 2013 – which commits us to finding a further £25 billion of cuts or tax increases, in order to to reaching a balanced budget by 2019/20 and a 1% surplus thereafter? And proposes an alternative political stance for us today that does not necessitate £20 billion of these cuts.
Bill, for those of us whose A levels were even earlier than 1970 and didn’t include economics, could you explain more about the Fiscal Compact? My five minutes Googling tells me it is an EU agreement, but it requires only a budget in balance or in surplus, it does not mandate a surplus.
As you say though, it appears that we have committed to finding £25 billion per year in order to achieve a surplus.
This would seem to put Clegg into perspective. He has made a big song and dance about how evil it would be to seek the whole £25 billion from cuts, and how it would be better to seek 20% of the money from tax rises instead. But he hasn’t argued with the £25 billion figure, which suggests that you are right, he has signed up to that. Like RC, I missed it. Did the news get buried somehow?
Given that none of these various cunning plans ever remotely work out in practice, it seems valid for you and others to consider a more substantial departure, such as merely balancing the budget, or indeed accepting that the deficit need not necessarily be reduced all the way to zero.
The Keynesians talk about mending the roof while the sun is shining. They don’t say you’ve got to plan to climb up on that roof in x years time and stick to your plan, never mind whether it still turns out to be raining cats when x years has gone by!
@David Allen
You’ve hit on precisely the point that I have been trying to make. There are plenty of factors that affect the economy which are not under the immediate control of the government through fiscal policy or any other means e.g. energy prices or external financial crises in key export markets.
In fact, projections of government revenue (and to some extent spending) are so much prey to unforeseen circumstances affecting GDP growth, good and bad, as to make projections beyond a couple of years ahead utterly academic. All you can do is to head roughly in the right direction, hoping that the currents and waves you will face along the way help you steer roughly the right course and keep off the rocks.
Sadly, under the circumstances of a massive ramping up of debt levels in recent years due to the hole in the finances bequeathed by Labour, “roughly the right direction” means that with an economy in recovery, we should be looking to bring down levels of debt as a percentage of GDP as soon as is possible.
Unless we can find even more ingenious ways of taxing the rich which don’t lead to business people fleeing the country or going in investment strike, a large chunk of that adjustment is going to come from more spending cuts. Saying that your aim is to minimise that impact of more cuts on the poorest in society but not denying that the adjustment has to take place for the country’s long term good just seems to me like common sense and sound, Liberal Democrat policy.
@Eddie, nominal GDP is not fictitious, anything but, and it is the figures for nominal GDP which OBR forecast and which figures for tax receipts are derived from.
The Office for National Statistics first calculates NGDP and it is from this figure that they calculate RGDP.
The OBR report, The Economic and Fiscal Outlook, December 2013? provides the figures that the Chancellor has to use when formulating the Autumn Statement. http://cdn.budgetresponsibility.independent.gov.uk/Economic-and-fiscal-outlook-December-2013.pdf
Nominal GDP is also extremely useful because it is another expression for Aggregate Demand and would therefore make a sensible target for a Central Bank.
Have you read Mark Carney’s paper given to the Bank of Canada in December 2012 which sets out the arguments for and against various targets and other forms of guidance (including Forward Guidance which was his innovation on arriving at the Bank of England last summer). It is a guide to how Central Banks operate and to be found here: http://www.bankofcanada.ca/2012/12/publications/speeches/guidance/
It really is hopeless if critics here are not up to speed with at the very least these two documents.
David and others, The Fiscal Compact is the phrase used for the agreement by the Quad around the Autumn Statement and expenditure and income figures (including borrowing) for the years up to 2019/2020.
Although Nick Clegg said at his press conference that the Chancellor was wrong, for all of them to fall on welfare, but you need to read the actual words: “”I literally don’t know of a serious economist who believes that you only do it from that lopsided, unbalanced approach. Almost all, serious economists say you have some kind of mix.”
You see that he is not opposing the need to find a further £25 billion, only that the mix should be more tax and fewer cuts. This is because he is signed up to borrowing figures – The Fiscal Compact. He proposes a mansion tax. Will that bring in £2 billion? Where is the rest of the £23 billion coming from?
I would be delighted if someone from his office posted here that Clegg is both able and willing to set borrowing figures for now until £2019/2020 different from those proposed by Osborne. I venture to suggest he can’t.
@ Caracatus.
However, £20bn is a whole heap of money (and thus pain and loss) to those areas who have to find it. Think Global, Act Local is the mantra. Thinking of the big picture it is, as you say, margin off error stuff. When you put it into action by cutting specific benefits it is a big amount. For example the Bedroom Tax was optimistically estimated to save about £500m each year. Even if it did achieve this, over the six year period to 2019/20, it would save £3bn. So to save £25 billion you need eight, yes eight bedroom taxes. Do you really want to sign up to eight more bedroom taxes worth of grief just to save a rounding error?
Does anyone remember Nick Clegg making very much of a thought out case for the economic policies that he has shackled the party with?
In fact does anyone remember Nick Clegg saying much about economics at all other than he was jolly scared around the time of the last general lectionaries that we might have riots like they had in Greece ?
Bill says –
Iwould be delighted if someone from his office posted here that Clegg is both able and willing to set borrowing figures for now until £2019/2020 different from those proposed by Osborne. I venture to suggest he can’t.
Bill is being polite. I doubt very much if Clegg or any of the 20 or so highly paid special advisors working for him in the Cabinet Office will do any such thing. Or rather I doubt that they are capable of doing any such thing.
Surely it is reasonable to assume that if Clegg were capable of writing such a piece, he would have done it long before now. Or am I missing something ?
RC writes; “In fact, projections of government revenue (and to some extent spending) are so much prey to unforeseen circumstances affecting GDP growth, good and bad, as to make projections beyond a couple of years ahead utterly academic.”
That is stating the obvious. A forecast is a forecast. The difference here is that political debate always centres on the forecasts not the outturns, which occur after the election.
Budgets are assumptions. In politics you have to publish your assumptions and defend them. That is what Liberal Democrat Council groups do every year.
With the OBR probably having to run a calculator over the draft income and expenditure proposals in the three manifestos, its role, its forecasts, become even more significant. Where once they were a private briefing from the Treasury, they are now in the public domain – just like the Director of Resource’s report to a budget meeting in a council.
Nick Clegg, unless he denies it, has said that the Liberal Democrat budgets between now and 2019/20 will reduce the deficit to 0 (and that he would like to see a 1% surplus thereafter). The figures provided by the OBR say that to achieve this (and the £12,500 income tax free allowance by 2019) he must identify tax rises and spending cuts amounting to £25 billion, He has not contested that figure – only how he will finance it by a different combination of cuts and taxes. And if he thinks he can do so without the major part of the burden falling on the poor and the vulnerable he is deceiving himself.
I say that ,if he said that the Liberal Democrats will aim for a 1% deficit in 2019/2020, that figure falls to £5 billion. We could then attack Osborne (and Balls).
You may have noticed that yesterday Sig. Draghi talked about considering “all possible instruments” to prevent Japanese-style deflation from gripping the EZ. The presumption in the markets is that what he is saying is “QE, here we come!”, although I have doubts about how well this will play in Berlin (or at the constitutional court in Karlsruhe), but it got the algos all worked up today.
In the meantime Mr. Osborne is promising savings from cutting welfare to the undeserving poor (i.e. those with a propensity to not vote at all or who at a minimum don’t vote Tory) while guaranteeing the triple-lock for (Tory-inclined) pensioners even though they have been one of the few groups not to experience real-terms income loss over the last 6 years. “We’re all in it together”. Oh, yes.
If the UK economy is to grow (generating jobs and tax revenues and blah blah blah) then we need a functional EZ market that we can export to. Perhaps Mr. Osborne should spend less time demonizing the domestic lower classes and more time working on a nice get-well-soon card to Frau Merkel, since staatskunst is a more productive art than blowing dog-whistles.
Bill, nominal GDP is not another expression for aggregate demand. Aggregate demand takes into consideration changes in the monetary base, whereas nominal GDP does not.
There are arguments that increasing the monetary base can boost aggregate demand, or simply demand, but you don’t make these arguments and instead say that printing sterling on a computer screen boosts demand simply because prices have gone up.
Eddie, how do you increase the monetary base if not electronically? That is precisely what I have argued for. What/who increases the monetary base, a fairy at the end of the garden?
NGDP = PY= MV (Y is your RGDP) = total value of expenditure in the economy:Aggregate Demand. The level of AD is totally in the control of the Central Bank. If he detects that it is falling, it can increase it and vice versa.
When people think a recession is coming they try to be the first to sell assets and get into cash or repay debt. That is, they increase their demand for money to hold. Repaying debt destroys money. (M) Increasing demand for money to hold reduces the velocity of exchange (V). Put that in the equation above and NGDP falls. It fell 8% in 2008! With the Bank’s policy rate at 5%!
Looks like you are seeing the importance of NGDP
Bill, NGDP only equals aggregate demand if the monetary base remains constant. You can’t just boost the monetary base (print money) and then use the same formula. This is really common sense stuff: printing money is not a sure way to make us richer.
John Tilley,
I see you have been trying to defend Bill, but I ask you to look at our exchanges above and see how he doesn’t know what he is talking about. RC and I think others have clocked onto this too.
He keeps bringing up the same formula, but it doesn’t even apply to the situation he is talking about. If anyone is in doubt: trust your instincts and believe us that printing money will not make you demand two burgers instead of one.
What makes the whole thing laughable, is the one thing that might make someone demand two burgers instead of one (increased confidence) he doesn’t even mention and instead tries to fit the round formula into the square hole of an economy with newly printed money.
This is the Bank of England’s justification for QE (“temporary” money printing), that it might give people a false perception of being richer so they consume more goods and services and the whole thing becomes self-fulfilling with increased demand and therefore increased production and increased jobs.
The big problem with this is many people are on fixed incomes, so whilst some people are feeling more confident with an increased stock market and house prices, others are just seeing prices increase, whilst their income remains static, adding to a “cost of living crisis”.
Economists has lost its way, it needs to explain and teach things in simple terms that people understand. It needs to go back to being more of a philosophy and less of a science.
Eddie Sammon 11th Jan ’14 – 1:18am
Eddie, I think I mentioned earlier that my knowledge of economics does not go much beyond sixth form studies and an A-level from an age when Keynes ruled the world. Bill does not need me to defend him.
However, it is apparent to me that Bill is approaching this from the point of view of a campaigner who has more than once in LDV tried to stimulate some debate on what is the cornerstone of the Clegg / Cameron three-legged race. those reacting to Bill’s suggestions)
Apologies, bashed wrong bit of screen before I had finished sentence. As I was saying ….
Those reacting to Bill’s suggestions do not seem to be grasping the political and campaigning points.
I am not that interested in a n academic debate on economics, but I would be very interested in trying to understand why Clegg and his advisors have signed up to what even I can see is a right wing Conservative policy that will inflict untold damage on the lives of poor people.
Who are the people who advise Clegg oon this ? We are not told who the economists are that he listens to .
Thanks John. I agree that it would be good to hear more from the party’s chief economic advisers. It would be useful if we could engage them in debate.