Party groups respond to the Spending Round

Here’s your usual round-up of comments from Lib Dem party groups following yesterday’s spending round announcements.

Both Liberal Reform and the Social Liberal Forum issued press releases. Here’s what the SLF said:

Danny Alexander MP will tomorrow announce details of capital spending plans, a result of hard-fought negotiations led by Vince Cable and others. The Social Liberal Forumm recognises that further cuts to current spending in the Chancellor’s Spending Review today are unlikely to repair public finances in the absence of robust economic recovery. Today’s announcements are insufficient to tackle our real economic challenges following the banking crisis and the alarming collapse in living standards; which may take a substantial hit when details of the welfare spending cap emerge.

Liberal Democrats have protected some key areas of spending, whilst agreeing to some very difficult cuts elsewhere, but Britain needs a more effective economic approach beyond hoping that cutting government spending will heal the economy.

SLF has consistently argued for greater investment in infrastructure as a key tool in boosting the economy while banks, businesses and households repair their balance sheets. We are therefore eager to learn the details of increases to infrastructure investment; if such an increase is being proposed, which some reports dispute. However, the scale of investment and how it is carried out needs to be far more ambitious to meet demand; we would like to have seen significant investment in affordable housing and green technology by allowing local government to borrow and invest, alongside a radical shakeup of banking. Furthermore, the government must ensure that the new spending, if it is new money being pledged and not simply future spending brought forward, injects much-needed confidence into the wider economy.

The additional cuts to total welfare spending, local government, transport and public sector pay will squeeze already-strained local services, adding more pressure on the cost of living. Such decisions are the painful consequence of prioritising a balanced budget over a balanced economy and society.

Increases in capital spending, reversing some of the damaging cuts from the last five years, must signal the beginning of a new economic strategy that recognises the role of public investment at a time of crisis. The government must now focus less on its own short-term balance sheet, and more on the radical reforms to banking, investment and green growth needed to kickstart a sustainable recovery. Without such an approach underpinning green growth, cutting yet more central government spending beyond 2016 will be self-defeating at best and actively harmful at worst.

And Liberal Reform:

Commenting on today’s spending review, Alan Muhammed, co-chair of Liberal Reform, a Liberal Democrat internal party pressure group, said:

“The Liberal Democrats cannot achieve their aim of creating a stronger economy and a fairer society without putting the public finances back on a sustainable footing. Reducing the deficit is not an alternative to economic growth, it is a prerequisite to growth that is not built on foundations of ever increasing debt.

“We applaud the commitment of our party’s ministers to bringing the deficit under control while also protecting areas of spending that can make the biggest contribution to creating a liberal society. We are particularly pleased to see the schools budget protected in real terms, allowing schools minister David Laws to go on delivering the pupil premium and improving educational standards.

“We also welcome the reinvestment of some of efficiency savings made in day-to-day spending in capital infrastructure projects, which will total an extra £18bn over the next Parliament. Labour’s disproportionate cuts to capital spending, continued by the coalition, were a damaging mistake.

“The move away from automatic pay rises and towards rewarding performance is also welcome both for the savings it brings and the potential to improve the delivery of public services.

“There is one area where we would have liked to see the coalition be more ambitious, and that is social security spending for the wealthy. In these straitened times, universal handouts like winter fuel payments and free TV licenses are indefensible. It is time to focus welfare on those who truly need it.”

I’m not aware of any other comments from party groups – please do highlight in the comments if you are.

* Nick Thornsby is a day editor at Lib Dem Voice.

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  • Kevin White 27th Jun '13 - 2:19pm

    Well said SLF

  • Liberal Reform writes ‘ We are particularly pleased to see the schools budget protected in real terms, allowing schools minister David Laws to go on delivering the pupil premium’

    What you actually mean is a real terms freeze. This is not a success. Stop deluding yourselves.

  • Liberal reform writes ‘In these straitened times, universal handouts like winter fuel payments and free TV licenses are indefensible. It is time to focus welfare on those who truly need it.”

    Is Liberal Reform in favour of excluding the rich from the NHS? After all, do they really need such a handout like free healthcare?

    Here’s me thinking winter fuel payments etc were recognition that people who have worked all their lives, paid into the system etc were getting something back in their old age but nope its a handout and they are all a bunch of scroungers. I don’t think people who get these benefits see them as ‘handouts’ but a right as a citizen.

  • Nick T Nick Thornsby 27th Jun '13 - 4:44pm

    @ Dave

    The wealthy need healthcare. They do not need handouts.

  • Eddie Sammon 27th Jun '13 - 6:14pm

    I dislike all this talk about “green growth”. Any industry that relies on constant taxpayer funding or penal legislation against its competitors should be seen as a necessary expense for the good of society, not as a method to redistribute wealth in the form of jobs.

  • Two good responses to the spending review.

    Alisdair McGregor comments “We all know Labour messed up the finances of the country, but the kind of foul-weather Keynesianism proposed here is debt-fueled investment-by-borrowing which will act as a long-term drag on the fundamental health of the UK economy. The route you (and Labour) are proposing to travel is one of ever downward stagnation.”

    Labour’s problem was its insistence on running a significant deficit during a period of relatively high growth, An expansion that was itself sustained not only by government deficit spending but also by a massive expansion in household debt. There was a good case to be made for investment in health, transport and schools infrastructure during the Labour term, but they continued their policies of tax and spend without making the case to the public to raise taxes sufficientlly to meet their spending committments and hold national debt at the stable levels that had been achieved by the early 2000’s.

    We face an entirely different set of circumstances today. The structural deficit must be eliminated over the course of the next parliament. This objective should in no way inhibit sustained investment in needed infrastructure and housing or necessary financing of automatic stabilisers to support demand. The priority is restablishing trend growth. All other goals including deficit reduction and debt to GDP levels are secondary medium term goals. Interest rates on government debt will be determined by the conditions prevailing in global markets and the alternative opportunities available to investors that combime security of capital with real rates of return.

    The experience of Japan in the past two decades and the recent efforts to spur growth there is instructive. It is not enough to rely on a single policy tool such as monetary policy or fiscal policy or even a combination of such economic stimulus. These policy tools are only usefully applied when they are combined and work to support longer term structural reforms in financial sector regulation, education and skills develoment, industrial policy, energy, planning and liberalisation aimed at sustainable inprovement in the UK’s competitive position. All elements of government economic policy need to be focused first and foremost on sustainable long term growth.

  • Simon – it seems you are the one who needs to pay attention to the use of language. Saying something is protected is simply putting a positive gloss on what is a freeze. Or to put it another way if you were writing a Focus which word would you use? The fact that you are not able to pick up on the ways in which slight changes of words change a whole message suggests you have no doubt been taken in by a lot of ‘news’/misinformation.

    Welfare is concerned with well-being – by any definition that covers healthcare. Or are you going by the definition sold to you by what a government department happens to label it? If so you have made the same error as before.

  • Nick – but free healthcare is a handout, under the Liberal Reform’s (your group) logic, surely? How do you decide what is not a handout and what is? Or how about we just stop calling healthcare and the other benefits mentioned ‘handouts’ and LR wouldn’t find itself in such a mess?

  • David Allen 27th Jun '13 - 7:32pm

    “To have the Keynesian Investment you are now calling for, there needed to have been Keynesian Reserves built up between 2001 & 2006”

    Fair point, up to a point. Frail humanity being what it is, Keynesian principles will always tend to be ignored in the good times, and then demanded in the bad times. Clearly we are a Naughty Country for having behaved so badly. We never tidied our bedrooms when the sun shone, and now, here we are demanding sweeties from Mum and Dad!

    Er, hang on a bit. Isn’t the analogy I have just drawn rather a ridiculous one?

    Yes, indeed it is. We should not treat ourselves as naughty children who need now to be disciplined (and nor should we evade the issue by blaming Labour for the naughtiness, as if that helped us to decide what to do now).

    Instead, we should accept that we have to choose between two imperfect choices. One is to be Keynesian now, regardless of the past, and accept that the deficit is admittedly an issue. The other is to refuse to be Keynesian, even though we know that this will also have adverse consequences. We shall stay in a deepening slump, and with cuts leading to declining tax revenues, we may not even make any better headway with the deficit. As Osborne has found.

    If we have the sense to reject the naughty children analogy as unhelpful, perhaps we will recognise that carefully targeted borrowing to invest may be the less bad option!

    Sadly, many politicians do believe in the naughty children approach to economics – although most of them don’t actually articulate it in quite the way I have done!

  • Er, the rich contribute more to the payment of winter fuel allowance through progressive taxation than they receive in payments. That’s the way universal benefits work – they are progressive across the board and simple to administer given everyone receives the same (although it should be noted that the TV licence is the opposite as the payments made during the payer’s working lifetime are regressive).

    To argue that the rich shouldn’t get anything back from the amounts they pay in to fund the winter fuel allowance smacks of the love of bureaucracy and class envy that one associates with the hard left. Either that or the person proposing the argument hasn’t really thought about it very much.

  • Austerity is not for everyone – disappointed it is not Wolverhampton but there you go….perhaps next year

  • “This would have a worse effect than anything austerity could cause.”

    Look, you don’t know that for sure. You don’t know it at all. You are guessing. Everybody in the business of financial prediction is guessing. You may very well be totally wrong.

    If I’m not right to be sceptical about financial “wisdom”, how come the bubble happened? It happened because all the well-paid experts who claim to know what they are doing, don’t know what they are doing.

    Of course there is a risk. However, austerity isn’t working. It might be an idea to try something else which is risky. It might also not work – but then again, it might.

  • John Broggio 28th Jun '13 - 12:47am

    @ Nick Thornsby 27th Jun ’13 – 4:44pm
    “The wealthy need healthcare. They do not need handouts.”

    They may not need handouts but they certainly take them or I must be mistaken that the top rate of income tax has been cut, similarly the increase in unemployment benefit to one of the richest families on Earth and encouraging the need for tax credits to the far too lowly paid employees of the ruling class to prop up executive pay & bonuses.

  • David Allen’s analogy is very good!

    @ Alisdair McGreger

    When Keynesian policies were used after the Second World War there had been no build-up of reserves in fact the National Debt was at an all-time high. The IMF is now saying that deficit reduction is not the way out of the economic crisis. If they are saying it (the people who have always called for deficit reduction no matter what the cost) then how can people believe it should be continued? Especially when we have history to prove that deficit reductions always make an economic problem worse in the short term and for years in the long term too (for some countries in the last 20 years or so).

    While there is now concern about the cost of borrowing going up internationally there is evidence that it would have been possible over the last two years to borrow for investments in infrastructure without increasing the cost of borrowing.

    As the banks are not lending a higher interest rate would not have affected business investment. Higher mortgage interest payments and the likely resultant removal of demand from the economy may not have been as big as the stimulus created by government investment. However there are social costs of having a large number of people unemployed and under employed and these are not a price worth paying for austerity.

  • Bill le Breton 28th Jun '13 - 8:32am

    As so often in this forum, Joe B distils matters for us, “The priority is re-establishing trend growth. All other goals including deficit reduction and debt to GDP levels are secondary medium term goals.

    A number of crude delusions block our ability to promote Liberal Democrat policies that will bring this about. The first is the legacy of the political argument used to undermine people’s confidence in Labour – so ably expressed by Alastair McG, “We all know Labour messed up the finances of the country”.

    As I have posted elsewhere, believing this flies against the facts. Here is Simon Wren-Lewis, Professor of Economics at Oxford and a force for calm thought in difficult times, “before the recession hit the debt to GDP ratio was slightly lower than when (Labour) took office. Of course debt rose subsequently as a result of the recession’.

    Here are the figures he quotes, ‘The current balance (which excludes investment spending) was -0.5% of GDP in 2006/7 and 2007/8, which is hardly a large number. Public sector net borrowing, which does include investment, was around 2.5% of GDP, which seems larger, but here zero is not the appropriate reference point. A sustainable deficit is one that leaves debt to GDP constant: to take some round numbers, if the debt to GDP ratio is to be sustained at 40%, and nominal GDP grows by 5%, we need net borrowing of 2% of GDP. So an actual deficit of 2.5% again does not seem that excessive.’

    The period from 2002/03 to 2007/08 was extraordinary. We should not forget that. Technological developments and the impact of globalisation worked both to depress prices and to provide low interest rates, as surpluses in the BRICCS sort borrowers. But that is not the only reason for low interest rates.

    Central Banks, including the Bank of England, had the example of Japan’s Lost Decade in the forefront of their mind and feared that the falling prices would produce deflation. In order to avoid this prospect and to continue to hit their target of 2% inflation they were ‘forced’ to lower rates in reaction to this perceived threat of deflation.

    We know what followed. But it followed in virtually all first and second world countries – not just in Labour-run Britain. Once the danger was perceived Central Banks began to tighten monetary policy to ‘prick the bubbles’. As in 1929 the mistake was that they collectively over tightened and for too long. At the end of 2007 the Bank’s policy rate was 5.5% at a time when aggregate demand was plunging.

    The Bank did not react with all its potential to loosen monetary policy until 6 months after Lehman’s collapsed. (Even yesterday news was still coming in that the recession was deeper in 2008 than even previously believed.) A potentially normal ‘order restoring’ recession was turned into a Great Recession.

    Labour turned to fiscal demand management. Nor did we and the Tories demur from this at the time. Yet no-one told the Bank that at that stage it was still not providing sufficient monetary stimulus, clearly communicated in a way to change the negative expectations that were entrenching themselves in the public and business minds by the day; bringing deleveraging, the destruction of money, the over reduction in assert values, the elimination of security and the further reduction in lending.

    The political attack weapon seized up by the Conservatives and later ourselves was the Austrian Economics policy of austerity – which fits so well with those whose ideological position is that the State has become too large.

    From May 2010 and the June 2010 budget, this experiment in austerity with its theory that fiscal contraction would lead to spontaneous expansion was given full rein. It has been disastrous. It has prolonged the recession unnecessarily. You cannot practice fiscal retrenchment and overly tight monetary policy at the same time without producing recessionary forces.

    The result of this management of the economy has led to a much larger increase in the national debt than would otherwise have been the case (mirroring what had happened in Japan during the so-called Lost Decade) and, as of this moment, it has reduced the deficit (when factoring out the use of interest from QE and the Postal Pensions) of just 10%.

    2013/14 will see more of the same. The Tories think it is going to be a repeat of 1982/3. We apparently rest all our hopes on their being right. I think it is more like 1937. I hope to be proved wrong, for all our sakes.

  • David Allen 28th Jun '13 - 1:08pm

    A little bit more about Mr Keynes.

    As Amalric points out, Keynesian stimulus policies can work perfectly well even if begun when debt is already high. Nevertheless, Alasdair Mc Gregor is not completely wrong. At some point, government will do best to bring its debts back down again and/or build up its capital assets. If government was “naughty” during the last boom period, then psychology suggests that maybe it will be “naughty” again in the next boom, quite possibly irrespective of which party is actually running it. So, Keynesianism does have something of an issue to deal with here. (Incidentally, Bill le Breton shows that Labour pre 2008 weren’t so terribly naughty as to run a huge deficit during the boom times. However, they also didn’t run a surplus, and it would have been better if they had.)

    Something Keynes didn’t (as far as I am aware) pay much attention to was the question of whether what government is doing in the now, when it is running an expansionary stimulus, is prudent or “naughty”. I think that is worth exploring.

    Famously, Keynes talked about paying people to dig holes and fill them in again. That is a capital-asset-neutral policy. I refilled hole is worth no more and no less than the ground was worth before the job was done. In this artificial example, therefore, the government borrowed simply to pay the workers, and when considering repayment of the loan, attention was shifted to the time axis. Keynes assumed that the loan would get repaid in the future, when the government could run a surplus in boom times.

    However, stimulus does not have to be capital-asset neutral. We could employ people to go around trashing capital assets, in which case the stimulus would be capital-asset negative. In fact, that is broadly what we do when we use tax cuts to achieve a stimulus, thereby letting private individuals use their purchasing power to decide what work is done. Frequently, this purchasing power commands that oil be pumped into planes and burnt, in order to hold stag parties in Budapest. A stimulus happens, because workers get paid for work, but there is also a double whammy in terms of the government’s balance sheet. Not only have government debts increased, their assets in the form (here) of oil in the ground have also reduced.

    More sensibly, we could seek a stimulus which is capital-asset-positive. Thus, government could borrow to build a widget factory, and then look forward to years of profitable future operation. The markets will be relatively relaxed about the increased borrowing, as they can see that it is likely to pay off in the long run. In terms of the immediate stimulus, the effect of paying workers to do work is not very different from the hole-dig-refill approach or the trash-assets approach. But in the longer term the policy is more prudent, because you are balancing higher debts with higher capital asset values.

    Governments do, dimly, tend to grasp this. But they are not very good at determining what is really a worthwhile capital asset to build. So they tend to throw money at roads, which are reasonably easy to commission, and which might or might not be of any great real use. They also get sweet-talked into crazy schemes such as car scrappage, which under the wholly inappropriate label of “green” promote the trashing of still-usable assets and hence the increased consumption of capital resources. They probably don’t even think about rebuilding the housing stock with “passive” houses, which would become a huge boon when the cost of heating fuels goes through the roof, and the new houses can cope on passive solar heating alone. However, at least governments tend to do better than private individuals, whose reaction to tax cuts commonly tends to be to go on a bender and consume resources.

    Keynesian policies can be an excuse for live now pay later. Or they can be organised in a prudent way. The difference matters.

  • Alisdair,

    it is important to take account of the International economic climate from the turn of the Century. Germany’s debt to GDP ratio increased from 59.1% in 2001 to 66.8% by 2008 and 81.9% by 2012 Germany National Debt. Japan has maintained debt levels of over 200% of GDP for some years now. In contrast to countries like Greece, almost all Japanese debt is held domestically.

    In the years leading up to the financial crisis, household debt soared in most rich countries. There were a couple of notable exceptions: Germany and Japan, neither of which experienced a housing boom that caused private debt to accumulate. Both of these countries have been able to continue state borrowing at negative real rates of interest.

    The mistake we made in the UK was in maintaining an overly loose monetary policy up to 2008 focused on CPI targets that ignored runaway asset price inflation and allowed growth in consumer purchasing power to be maintained by an explosion in consumer credit, even as real wages were stagnating.

    We need to avoud making the same mistake in the opposite direction now. We need sustainable growth fuelled by initiatives to increase employment and wage demand and avoidance of policy measures that rely on again stoking unsustainable levels of household debt.

  • If Bill le Breton and Simon Wren-Lewis are correct and in 2006/07 and 2007/08 the deficit excluding investment spending was only 0.5% of GDP we have been sold a lie there was no structural deficit to fix!

    Alisdair McGregor states that if the National Debt was not reduced during the good times then Keynesian policies should not be used in the bad times. This does not follow. He is also mistaken when he states, “UK Debt as a % of GDP rose every year from 2001”. The UK Debt as a % of GDP was 41.93 in 1997 and was reduced to 29.34 by 2002 (being 30.58 in 2001). In 2010 it was 52.08 back above the 1993 level of 49.48 for the first time and was only 35.57 in 2007 lower than the last year of the last Conservative government (41.93) [] so the Labour government had by 2007 reduced the % of Debt to GDP by 2007 from the 1997 level.

  • David Wilkinson 30th Jun '13 - 3:24pm

    How the House of Lords shares in the cuts.

    Given that there are now very few public toilets due to government cuts in funding local government

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