IMF Head Christine Lagarde is the latest outside observer to praise Britain’s economic recovery. Sitting on a panel with George Osborne yesterday she praised the UK Government’s unyielding adherence to unprecedented austerity, the stern fortitude with which the harsh economic medicine had been delivered by an iron Chancellor, ignoring all calls for mercy…
Except no, she didn’t. In fact quite the opposite. Far from crediting unbending austerity for the UK’s exceptional recovery she applauded the UK Government for having shown flexibility and balance. She commended the UK for “adjusting to the economic reality in order to provide the right balance of spending cuts, revenue raising and in the order, in the proportion and in the pace that is appropriate to the economy.”
She’s right. For different reasons it often suits both Conservative and Labour voices to paint a picture in primary colours of undeviating adherence to Plan A. But this caricature is wrong. The reality is more nuanced and rather more Liberal Democrat. The Coalition has shown commendable flexibility, for example in reversing some of the capital spending cuts that were inherited from Labour once it became clear they were holding back the recovery. The Coalition has balanced cuts with carefully targeted stimulus. And above all it has been willing to forego substantial amounts of tax revenue and even slow the pace of austerity in order to help create jobs and encourage people to take them up.
This approach has worked. Liberal Democrat policies and influence have been at the heart of it. Three of the five key politicians deciding economic strategy in this Parliament have been Liberal Democrats. Liberal Democrats should be proud of this. It should be front and centre of our election campaign.
Raising the personal allowance has been central. The policy is rightly the top line of our achievements in government. But it is not pointed out often enough that its merits stretch well beyond simply putting more money in people’s pockets (welcome though this is). One of the reasons we were so keen on it was its potential as an effective stimulus. As we noted in our Economic Recovery Plan back in 2009, there was strong evidence that a tax cut of this kind focused on households on low and middle incomes “will have the strongest economic effect as they are the ones whose spending is dropping most dramatically and who are least likely to lock away the extra money into savings.”
The policy has also been influential in what some commentators have called Britain’s ‘jobs miracle’.
Back in June 2010 the Office of Budget Responsibility forecast – somewhat optimistically in some eyes – that UK employment would rise by around a million by 2015, to just over 30 million. In fact, figures out today show it has risen by two million, and now stands at just over 31 million (a record). The share of the working age population in work is at an all-time high. The unemployment rate is down by nearly a third. Numbers claiming Jobseekers Allowance have roughly halved.
This is the best job creation record of any government in living memory.
Of course no one single measure can be credited for this progress. Britain’s flexible jobs market has undoubtedly helped. Vince Cable’s impressive industrial strategy has surely played a role. Tax cuts and incentives for businesses to hire (such as the Employment Allowance) have had a substantial impact. But the huge investment in supporting people in low-paid work has been key. This has combined dramatic increases in the personal allowance with keeping more or less intact Gordon Brown’s structure of in-work tax credits (indeed allowing the amount spent on them to rise from nearly £24 billion to nearly £30 billion), culminating in an exceptional level of subsidy for low-paid work.
CitiGroup’s chief UK economist Michael Saunders – quoted extensively by Fraser Nelson of The Spectator in an article in January – set it out well:
With the increased levels of in-work tax credits since the early 2000s, plus the sharp rise in the personal tax allowance since 2010, the UK has greatly cut the overall tax burden on people in low-paid employment over the last 10-15 years… [T]he government subsidises people in low-paid work. Very few advanced economies have such a structure… These measures have been very successful in encouraging people to seek work…
In a nutshell, businesses have been incentivised to create jobs and people without work have been incentivised to take them.
There has been a wage squeeze – more or less inevitable in a recession – but the Coalition’s income tax cut has served to mitigate it. When the tax take was lower than expected the Government was flexible, going for slower deficit reduction over a longer period rather than slashing budgets further or endangering the recovery with extra tax hikes.
To quote Saunders again: “in effect the government has chosen to borrow to support employment. Given the abundant evidence that a long spell out of work reduces people’s future employability and earning power, such an investment in human capital has clear long-term economic and social merit in our view.”
Absolutely right.
The overall tax burden has increased under the Coalition (the VAT increase being the single biggest increase). Departmental budgets have been cut. These were both necessary to get the deficit down. But austerity is far from the full story. Despite the unprecedentedly tight public finances significant resources have been found to stimulate growth, to tackle inequality (the richest households have seen the biggest increase in their burden since the Coalition took office) and to make work pay for those on lower incomes. This would not have happened to anything like the same extent without the Liberal Democrats in government. The personal allowance is merely the most significant of an array of Lib Dem-inspired measures which have contributed to the economic recovery and the ‘jobs miracle’, from green growth to apprenticeships.
It suits many, on both left and right, to airbrush the Liberal Democrats out of the economic recovery story. But they are wrong. This economic recovery has a Liberal Democrat stripe running through the middle of it. It belongs as much to the orange half of the coalition as the blue half. It belongs as much to Nick Clegg, Vince Cable and Danny Alexander as it does to David Cameron and George Osborne.
This hasn’t been a conscience-less crunching of services. It has been a carefully calibrated rebalancing with growth, investment and job creation at its heart. That is a Liberal Democrat achievement. Lib Dems should shout about it from the rooftops.
* George Crozier was Senior Political Adviser to the Liberal Democrat Parliamentary Party, 1999-2007, and is a member of the executive of the Lewisham local party
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38 Comments
There is much here to agree with, but plenty to disagree with. I’ll restrict myself to the observation that the OP doesn’t really mention productivity. The UK economy’s productivity growth performance since 2010 has been absolutely shocking. This has major implications for long term prosperity and sustainability of the fiscal position. It is in part a product of a period of real wage decline coupled with reducing the cost of labour leading to employers substituting labour for capital.
It’s true that hard-line austerity was ditched around 2012. It’s why the UK still has a deficit that is the third highest in the developed world at £90b this year. Not a bad thing if invested wisely. Sadly, in the cast of transport, housing, infrastructure etc it hasn’t.
The ‘jobs miracle’ also overlooks that tax revenues have been so poor from all these new jobs. National Insurance income is only up about 1.5% on the year with a million more jobs. Something’s up.
Then there’s personal borrowing which is now back up to those dangerous pre-2008 levels. Credit card, loans and overdrafts are up 6% according to the Bank of England.
And production and manufacturing are still doing very poorly, with services, govt and personal borrowing and a housing bubble helping to prop up GDP, whilst GDP per capita is still poor due to population rises.
The economy only looks ‘booming’ if looking at headline job and GDP figures without delving any deeper at all.
I agree the Lib Dems have helped the recovery. Conservatives have been desperately chasing the UKIP vote and distancing the UK away from the world in the process. Going forward, their discounted right to buy policy is bad for taxpayers.
We should also not be afraid to scare a few super rich people away from the UK. If it scares most of them it would be bad, but we can’t just bow down to them all the time like neo-feudalists.
Having said this, I think the economy has already partly crashed. Safe pensions are ridiculously expensive and this can’t just be blamed on providers. House prices are going through the roof, which is unfair to first time buyers.
One answer is to build more houses, but that doesn’t solve the pensions problem. We need to increase the Bank of England base rate, otherwise there is going to be no incentive for banks and insurance companies to increase their interest rates to attract more savers and annuity buyers. They can just keep getting it from the free tap of the BOE.
Regards
If the recovery is faltering, wouldn’t raising interest rates hurt it still further?
Inflation is practically zero, so low nominal interest rates are to be expected.
The economic news is very good: many more real jobs, both full time and part time. I know many people who love part time working so as to fit in with other family and caring responsibilities. It upsets me greatly to hear so called ‘economic experts’ denigrate cleaning or gardening as low paid and unskilled work. I worked as a senior accountant and my self employed gardener had a higher hourly rate than me! The next government must get to grips with the need to build many more homes to match the demand; I like our idea of new Garden Cities. I fear greatly that all the UK’s economic progress will be undone by Labour, SNP, Greens etc who all seem to be keen to try and copy the French socialists mistakes. A Conservative government, would move current successful economic policy to the right and risk everything by their anti European views.
Also tax credits at £30b a year are a staggering subsidy for low pay and high living costs. It’s now the case that for those with children, moving from unemployment into work often means they receive far more in welfare even allowing for tax paid. It’s a crazy situation in the UK where more people going into work places more stresses on the welfare budget and taxpayers but that’s happening with tax credits going from £24b to £30b a year. For comparison jobseekers costs the UK £4b a year.
And as tax credits only go to parents those without children suffer from this policy. They have to suffer low pay and high living costs but get no subsidy and welfare top-up.
Gary – for parents, working part time up to the tax credit eligibility level is what many people do as it make a huge amount of sense. 16 hours a week and with 2 children that 15k tax credit income. They wont be paying tax on that 16 hour job yet receiving FAR more than the unemployed. This explains the deficit in part – tax receipts are low and yet tax credits paid out rising sharply. The UK is one of the few to have this system and we also have one of the biggest deficits.
Lower housing costs & higher wages would benefit all in society. Instead the UK keeps wages low and housing costs high then subsidises parents, and others must suffer. And it’s costing £53b a year (£30b tax credits and £23b housing benefit). Other countries do not do this. This is a big factor in the UK deficit and why it is so stubbornly high. Borrowing £90b a year to build houses to lower costs for all would be so much fairer and cheaper.
Sadly making it the “front and centre of our election campaign” is much too, much too late. In fact it is nearly five years too late. Nick looking and being so comfortable near to the Tories for four years and ten months doomed it to failure from the start. Failing to get a message with any sort of resonance across from the AV referendum through to the Euro Elections confirmed it. It doesn’t take a “political communications professional” to see that. Just judgement.
Where’s the article about the latest Scottish lord ashcroft polling???
Lagarde and Osborne cooked it all up together at Bilderberg.
Good article George.
We should really be trying to replace tax credits with equivalent tax cuts for those eligible, as taking tax with one hand and giving it back in some false display of state generosity makes no sense.
@Stimpson – Indeed.
Ashcroft Poll review
http://scotgoespop.blogspot.co.uk/
Sorry George, nothing could be further from the truth.
I don’t remember it being in the 2010 LD manifesto that we would raise VAT to 20% – rather the opposite in fact. I don’t remember arguing in favour of ridding our public services of hundreds of thousands of workers on the doorstep and I certainly don’t remember agreeing with a plicy of demonising, indeed, punishing the unfortunates who were out of work or disabled.
Sorry George, I didn’t read the article as I found the title so incredible (that is, without credit)
Yes, Osborne has preached hair-shirt austerity while quietly doing something different. In particular, he created a stealth economic stimulus by promoting house price increases and giving the rich more money to spend. The Lib Dems had absolutely nothing to do with this policy. One can praise its good side (it got the economy moving) or condemn its bad side (it promoted inequality and further locked the young out of property ownership). But none of this had anything to do with Osborne’s yellow hangers-on.
Austerity is not an economic remedy. It never has been about economics. It has always been a political measure.
The point of austerity is vengeance. The point of austerity is to punish the weakest and most powerless in society and remove them from the political equation, while rewarding the rich and empowering the powerful. Some die, others are forced into circumstances where not only can they not make their voice heard in the political arena, but they cannot even think politically. It is about showing not just individuals but whole nations that their voices do not count, that they are at the mercy of powerful forces who will dictate how they will live or even whether they will live. It is a form of economic terrorism and torture, designed to show the plebeians who is boss — i.e., not them.
It may come as no surprise that there are a certain number of people who resist these plans. That is why the political landscape is fragmenting, and the old established parties — including the Liberal Democrats — are facing tough times.
David 1
The years of the post World War Two Labour government were noted as years of austerity. In fact in the early 1960s frequent references were made concerning the return of Labour and the return of austerity.
Manfarang, Clement Attlee was not deliberately trying to create austerity. He was coping with the aftermath of WWII- and he didn’t flaunt austerity as government policy.
Jim “And as tax credit,s only go to pa rents those without children suffer from this policy. They have to suffer low pay and high living costs but get no subsidy and welfare top-up.”
No, but they get the massive benefit of not having to spend £20K for each child parents bring up, and when they retire, the care they need and the economic activity that pays their pension is provided by the children they didn’t pay to raise.
That should be £200k per child
How many times can you falsely claim that the personal allowance change targets those on low to middle incomes. In fact, it is the middle to upper income decile households that gained the most from the personal allowance rise (http://www.ifs.org.uk/publications/6045) and will gain the most from any future rise. Things get worse when you consider the overall impact of the changes (http://election2015.ifs.org.uk/distributional-analysis).
The fact is that the coalition has had a deeply regressive tax and benefits policy with the sharpest cuts targeted at the poorest. This is part of the reason that coalition policies were so disastrous for economic growth in the country and the growing economy they inherited flat-lined for three long years.
Jack – “This is part of the reason that coalition policies were so disastrous for economic growth in the country and the growing economy they inherited flat-lined for three long years.”
Don’t spend that big fat cheque from Labour HQ all at once!
Jack: you are deliberately muddling up personal incomes with ‘household incomes’. Sure if a house hold has two parents and three working age children all earning over £10 000, the overall ‘household income’ would be in the upper bracket and the gain from raising the tax threshold would be almost £1900.
So what is your argument? Clearly you think that the outcome I describe is wrong. Are you proposing that taxation should be on households rather than personal incomes? You need to know that you will never be able to persuade Lib Dems to reinstate patriarchal families where everyone belongs to the head of the household – you are wasting your time – you might have better luck with UKIP though.
@Martin: The fact is that in the majority of households in the UK, the budgeting is done at the household level not at the individual level; accordingly the impact of taxation and benefit changes is better considered at the household level than the individual level. Crowing that the personal impact of the personal allowance change is skewed towards people with lower personal impact ignores the fact that many such people are already well off and second income earners in their households, it also ignores the fact that any such change is completely incapable of benefiting the genuinely worst off who, of course, don’t have income that reaches the tax free sum anyway.
Tag in the coalitions VAT rise and fondness for targeting the worst of the cuts at the worst off through the bedroom tax, freeze on benefits and benefits cap and you’ve got a marvelously regressive change in the tax and benefit system in this country.
This is not a record that any Lib Dem should be proud of.
(Incidentally, I find it delightful that in two consecutive posts I’m first accused of being a Labour scrooge and then a UKIP supporter)
Jack – I presume your “growing economy they inherited” was, in fact, the dead cat bounce manufactured by Alistair Darling by his quick fix cut in VAT.
Jack: I am saying your argument is muddled and only likely to have traction with a caricature of a UKIPer. True, you certainly do not appear to be a Liberal, but other than that you could be anything. You see Liberals Democrats try to avoid inflating the power of the state by giving with one hand while taking with the other. I am presuming that you do not want to increase the tax take on the lower paid, though perhaps this is what you would prefer.
Basically, your idea of taxing households rather than individual earners is bonkers and fortunately unworkable. Perhaps this implication is not what you would want, but it is hard to see what you would suggest: it seems that you are against any sort of tax cuts for anyone since I cannot think of a way of cutting taxes that is less regressive (“deeply regressive” in your hyperbolics) than raising the threshold. Reducing the tax rate certainly does benefit the better off, which is, I am sure, what the Tories would have preferred.
That taxes were cut by raising the threshold rather than reducing the rate is ceertainly something Lib Dems can be pleased about.
There are plenty of young people who earn less than a living wage yet under Labour’s tuition fee system may already have an increase in deductions. These are the people who will feel the most positive impact of the rise in the tax threshold.
@Martin: “Basically, your idea of taxing households rather than individual earners is bonkers and fortunately unworkable.”
It’s a good thing I haven’t put forward any such idea then, isn’t it? That’s your own invention. I said if you want to understand the actual, real-world impact of tax changes you need to consider them at the household level not ignore the realities of how real people budget. The fact is that most of the money from the allowance change has gone to middle to upper income households and that it is these households that have benefited the most. It’s a just plain ineffective policy if your aim is to target the lower income end of society.
Thanks for the comments. I’ll try to respond to a few of them.
Alex Marsh – Productivity is a fair thing to bring up. It is a legitimate worry and we need to improve it But it is, in part at least, a consequence of what is for the employer relatively cheap labour.
To quote The Economist from a few weeks ago: “When people are cheap, firms would rather hire than invest in machines or technology. So productivity is held down. That tendency is stronger when banks do not lend much”.
Imagine a firm is selling fewer widgets and has a choice between laying off five workers and freezing pay for all 100 of its workers. Scenario one: The firm lays off five workers and spreads the available work among its remaining employees. Scenario two: It freezes pay for all. Advantages of scenario two: It spreads the pain more widely and more thinly (more fairly?); employment is higher; skills are preserved; workers are in place to help the firm take advantage when the good times return. Disadvantages of scenario two: lower wages; less efficient; lower productivity.
From what I can see firms in the UK have been doing more of scenario two during the downturn of the last few years while firms in the US and elsewhere have been doing more of scenario one.
Given a choice between these two scenarios I think we’ve got it right. And I don’t think it’s an accident – I think government policies (including policies of the previous Labour government left in place by the Coalition) have helped do that.
Of course we still need to improve it. Skills and infrastructure are the key. That’s one reason why the Lib Dem target of a balanced budget by April 2018, but allowing for additional investment in productive economic infrastructure – roads, railways, broadband, housing – is a sensible one.
Jim – You said “The ‘jobs miracle’ also overlooks that tax revenues have been so poor from all these new jobs.”
You’re absolutely right revenues have been poor. If new jobs are disproportionately in low paid sectors and you have put the personal allowance up from £6,000+ to £10,000+, and preserved a reasonably generous set of tax credits, and provided tax breaks such as the Employment Allowance, then each additional job is going to save you significantly less money.
My argument is that it is to the Government’s credit that this was a hit they were willing to take. The choice hasn’t been one between a high employment low wage economy and a high employment high wage society it’s been one between a high employment low wage economy and a low employment high wage society.
That said the minimum wage has been increased by more than inflation, and wages are now rising faster than inflation, so I think the revenues will come faster as time goes on.
I don’t disagree about re-emerging personal borrowing and housing bubbles, though I may be less alarmed by them than you are.
A Social Liberal – I can tell you haven’t read the article as you’ve made some entirely separate points. But I’ll respond to them nonetheless.
VAT – the Liberal Democrats published a costed programme in 2010 but there were large parts of it the Conservatives wouldn’t sign up to. There may also have been an element of the finances being even worse than anticipated. Given that a gap needed to be plugged an increase in VAT was probably the least bad way of plugging it that neither of the two parties would veto.
Making large numbers of public sector workers redundant – I acknowledge the party didn’t specifically argue for this on the doorstep but it was fairly clear that the cuts the party was committed to (and similarly those the Conservatives and Labour were committed to) would entail public sector redundancies. See https://www.libdemvoice.org/vince-launches-new-lib-dem-proposals-tackling-the-fiscal-crisis-16149.html for example.
Demonising and punishing those out of work or disabled – now you definitely haven’t read my article. My central point is we prioritised preserving and creating jobs at the expense, to a degree, of the public finances. If there have been Lib Dems out there demonising the jobless and disabled I’ve missed it. I do remember us blocking plans to cut off young people’s benefits and cut housing benefit for the long-term unemployed (http://www.theguardian.com/society/2011/feb/17/nick-clegg-housing-benefit-cut-dropped).
George, late in here, because of other commitments.
The Lib Dem support in May 2010 for accelerated deficit consolidation delayed the recovery for 2 years and cost the UK £100,000,000,000 pounds or more of lost product and lost life chances.
If the LD leadership decides to barter support for a Euro referendum for inclusion in a Continuing ConLibDem Coaltion the price in terms of lost investment in 2015/17 could dawf that.
There is no justification whatsoever for support for an in out referendum in 2017. It will do great damage to the UK economy. The party needs to tell its leaders that now, in no uncertain terms.
Jack – The personal allowance change was targeted at those on low and middle incomes. This was especially true early on when the higher rate threshold was reduced to deny higher rate taxpayers the benefit of the tax cut. You’re right of course that two income households have gained by more than one income households (and of course two income households tend to be better off). It’s also true that if you are not working or earning less than the personal allowance (working part-time on the minimum wage or similar) already a further increase in the allowance won’t help you. But both parties in the coalition have been clear that ‘making work pay’ has been one of the objectives of the change so the fact that it benefits those in work (especially full-time work) more is quite deliberate.
I would also argue that the Coalition has kept broadly intact a generous set of tax credits put in place by Gordon Brown using tax revenue which turned out to be temporary boom-time revenue from (largely) the booming property and financial services sectors. The Coalition has also done a lot to encourage job creation. As the IFS paper you link to says, they have also ensured the richest have lost the most.
Comment 5
Bill Le Breton – certainly agree with you about the damage uncertainty over UK EU membership is doing. I’m not sure I see this going away though, short of a UKIP disappearance and the Conservative Party performing a u-turn. Election of a government opposed to a referendum might provide a very temporary reassurance to investors but I suspect it would lead to a more anti-European Conservative Party in opposition and all the worries would return.
On accelerated deficit consolidation, I think the Government faced a very difficult trade-off – keeping the markets reassured that we were serious while getting back to sustainable growth ASAP. The cuts in 2010-11 were pretty modest and really just a declaration of intent I think. I’ve yet to hear a convincing case that slightly slower cuts / tax rises initially would have led to growth coming faster, but this is one of those that I don’t think will ever be proved either way.
George Crozier
I am sure that you mean well but there seems to be a fairly broad consensus amongst academic economists that the austerity in 2010-12 led to a massive impact on out growth.
http://www.thenational.scot/news/government-fixation-with-budget-deficit-is-bogus-says-nobel-prize-winning-economist-paul-krugman.1358
You seem to be coming from a political angle where you are looking for evidence of this economic success – funny seeing that the current policy being followed by Osborne is more akin to that set out by Labour (and also the LD pre-Coalition) – what state would we be in if we had actually tried to eliminate the budget deficit completely by 2015 as original set out.
The fact the Coalition has failed in virtually all their targets from 2010 and then had the gall to blame ‘events’ when they have been so busy selling the Global Crash as being totally due to ‘Labour overspending’ – the main crime of the Labour Party was their supine attitude to the banks and their regulation (I assume you think the Tories would have been so much tougher?)
It is a pity that Osborne squeezed all demand out of the markets post election with such pathetic smilies as ‘we are heading for a Greek situation’ and ‘maxing out the country’s credit card’ – all of which your party were compliant with!
George – on my points
VAT – we fought against raising VAT before coalition. that VAT was raised points to it being a Tory led recovery.
Sacking public sector workers – we said nothing about sacking them, that we got rid of so many points to it being a Tory led recovery.
Demonising those on welfare – We did not denigrate those on welfare with the aim of ostracising them, making taking their benefits easier. the Tories did, making this a Tory led recovery.
The recovery, such as it is, comes on the back of unacceptable actions. The coalition Lib Dems might have aquiesced to the way it came about, but to forward the idea that we were the authors of the recovery with all the Nasty Party excesses visited on the country is, I fervently hope, patently not true
I only recently posted a comment on this site saying “It is far too late for us to point out that we modified the Tories deficit reduction plans and economic policies so he (David Cameron) gets the credit for them unchallenged.” Danny Alexander says publically that we followed plan A. However I do accept that from about mid term we changed the plan.
Michael Saunders – “[T]he government subsidises people in low-paid work.”
Or alternatively the government encourages companies to pay low wages by in effect giving them a subsidy to employ people at wages that people can’t afford to live on.
I agree it was a good thing that companies decided to keep people in work rather than get rid of them. Therefore it is a shame that our party doesn’t have a policy of increasing the Minimum Wage by say 2018 above its real value in 2007. We don’t seem to have a clear policy unlike the Labour Party to increase wages and so increase the tax yield and reduce Tax Credit payments.
A way to increase productivity is to reduce average working hours as was successfully done in the nineteenth century and the early 20thcentruy.
It is important to remember that the poorest in society have suffered the most from this coalition’s policies and we failed to get policies agreed to turn this round. These might have been increasing the amount a person can keep before they have their benefits reduced; not abolishing the government Council Benefit scheme and advising Councils to charge 20% to those who had been paying nothing; and making sure that benefits rose in line with inflation.
Our failure to stop the Conservatives from changing the sanctions to three strikes and you are out has been a factor in the increased use of food banks and we should have ensured that the government took action to ensure people didn’t need to use food banks.
George Crozier. Gordon Brown’s tax credits as you call them were the renaming of Thatcher’s Family Credit which was much easier to claim and you were not penalised if your pay went up in the six monthly intervals that you claimed. Why Brown gets blamed is beyond me, Family Credit was much easier to claim and was a Tory invention not a Labour one. Selective memory? Brown should be blamed for giving it to HMRC and the chaos and financial problems for claimants that created. All it did was make people think they were not receiving a benefit, some actually still think it is something like a tax refund! Brown began the scrounger rhetoric which is perhaps why he tried to separate this, to fool and divide the public.