Britain back in recession, embarrassing emails about government links to Murdoch. These are gifts to the opposition. The most open of open goals at this week’s Prime Minister’s Questions.
I liked Miliband’s opening question:
Today we had the catastrophic news that Britain is back in recession. I am sure that the Prime Minister has spent the past 24 hours thinking of an excuse as to why it is nothing to do with him, so what is his excuse this time?
Interestingly, indeed unusually, David Cameron then managed to get through a fairly hefty paragraph without giving a single excuse. Indeed, he didn’t try to blame anyone else, either – so it was curious that Ed Miliband then said, in a presumably pre-scripted riposte:
Typical of this arrogant Prime Minister—he tries to blame everyone else.
Angela Smith (Lab) later referred to what she called “The Prime Minister’s dismissive response to the fact that the UK is now back in recession”. But the Prime Minister hadn’t been the slightest bit dismissive of that news.
Thus, rather tediously, Prime Minister’s Questions can amount to little more than an exchange of pre-scripted salvoes. Skilful off-the-cuff remarks are few and far between.
Talking of scripts, Jeremy Hunt
spent most of the session going through his career-saving speech, which he delivered shortly afterwards. Ed Miliband went to town on Hunt. I find it difficult to believe that a Secretary of State can survive when they have given the leader of the opposition the opportunity to say things such as:
It beggars belief that the Prime Minister can defend the Culture Secretary, because he was not judging this bid—he was helping the bid by News Corporation. Two days before the statement to the House on 25 January, the Culture Secretary’s office was not only colluding with News Corp to provide it with information in advance, it was hatching a plan to ensure that it would be
“game over for the opposition”
to the bid. Does the Prime Minister really believe that is how a judge and his advisers are supposed to act?
Labour phrase of the week
Arrogance and complacency
Coalition phrase of the week
Tough and difficult
Liberal Democrat question
Stephen Lloyd asked if the PM thinks that the motives of people who donate to charity only to reduce their taxpayer are “honourable, kind and selfless”.
Fascinating political trivia fact of the week
The mother of David Amess (Con) is 100 years old next Thursday. She is called Maud. Both the Prime Minister and the Speaker of the House of Commons have written to her.
* Paul Walter is a Liberal Democrat activist and member of the Liberal Democrat Voice team. He blogs at Liberal Burblings.
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31 Comments
Mr Miligram is the best thing the coalition has going for it!! 😉
They underestimated Atlee, too, Jim.
I thought Ed M played a near perfect game and was spot on about Hunt and our stagnating economy. The rosy cheeked etonian mess has turned out to be an embarrassing one tricked pony.
Cameron; “The debt crisis has been long in making; the failure to regulate our banks has been long in making; the Government overspending has been long in making” “We will not let anyone forget who got us into this mess in the first place. More spending, more borrowing, more debt—that is what caused these problems; it cannot be the solution to these problems”
Cameron *did* retreat to his normal shtick of blaming the previous government, inevitably. It’s all the more insidious for the mentions of bank deregulation (because Tories were against that, apparently, who knew?) and the “long in the making” spending levels that the Osbourne was promising to match up until 2008. Cutting without going too far and too fast, while paying attention to growth and not just crossing their fingers in hope of private sector expansion was an option. It simply wasn’t taken.
Elliott, since the election public spending has risen from to £669.7 billion in 2009-10 to £687.6 billion in 2010-11 and then £696.4 billion in 2011-12.
Allowing for inflation, the real-terms figures are £669.7 billion in 2009-10, held virtually flat at £669.5 billion in 2010-11 and then trimmed to £663.5 billion in 2011-12.
So there has been a real-terms cut of £6.2 billion, or 0.9%, in total over the two years, in an economy with an annual output of approximately £1.5 trillion.
What level of cuts would have met your criterion of “cutting without going too far or too fast”? This is a slogan without a policy.
I see I mis-spelt your name, Eliot – my apologies.
Third time lucky – Elliot. That time I blame a stuck key on my laptop!
Alex,
Interesting numbers. If a 0.9% cut has the effect it has had, we’re in for disaster when the real cuts start biting in the coming years. What can be done to mitigate the effects?
@Alex
I’m confused now.
So our defence against Labour accusations that we have cut too far too fast is to say that, actually, we ‘re spending almost as much as they did? But we also think that they ruined the economy with their reckless level of spending?
Ed Balls was interviewed by Andrew Neil yesterday and he acknowledged that there had not as yet been a material cut in overall public spending. There have been increases in health spending and social security costs with offsetting reductions in other departments, but overall the cuts have not been ‘too far or too fast’. The current deficit reduction plan is closer to the Alistair Darling plan than the plan outlined by the coalition after the election.
Faced with these basic facts, Ed Balls reverted to the concept of Ricardian equivalence. He claims that the announcement of the governments plans for cuts in the future have the same effect on the economy as if the cuts had already happened, because the public will change their economic behavior in anticipation of the cuts. It is not an argument that I buy.
More importantly and political sideswipes aside it is important that we recognize ‘It was Labour wot dunnit.’
It is inconceivable that Brown and Balls did not understand the risks they were taking with the public finances in ramping up public spending to way beyond sustainable levels on the back of tax receipts generated by a credit fuelled housing bubble and financial services boom
The financial journalists, Larry Ellott and Dan Atkinson published ‘Fantasy Island’ in February 2007 warning of the Debt Timebomb that was set to explode and the fallacies of the cloud-cuckoo land created by Nu-labour. Northern Rock was only six months away.
In the final pages they quote John Maynard Keynes:
“Speculators may do no harm as bubbles on a steady stream of enterprise, but the position becomes serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
If it is so easy to see that Labour made a mistake, why is it so hard to simply ramp the spending back down to sustainable levels?
Richard,
consider where the big increases in costs have appeared – Public sector salaries and pensions, child and working tax credits, housing and incapacity benefit, nurses, doctors, teachers and police numbers, It’s not possible to take an axe to these expenditures without tanking the economy, unleashing widespread industrial unrest and disrupting essential public services. It will take several years of cost restraint to bring public spending back in line with current tax receipts – to a more sustainable 40% of the economy.
Joe: Saw that Ed Balls interview and I too noticed his sudden discovery of Ricardian equivalence! As I posted on another site:
If consumers and businesses are as focused on future policy and as susceptible to political rhetoric as Balls seems to think, then his own apocalyptic warnings are as likely to depress the economy as anything the coalition is doing or plans to do.
An even nicer irony is that Balls has suddenly discovered a taste for Ricardian equivalence theory.
This holds that rational consumers ‘internalise’ the government’s budget constraint: so, for example, in response to a deficit-financed tax cut they recognise that borrowing now will lead to higher taxes later, and save rather than spend, thus cancelling out any benefit to demand.
This, of course, would mean that Balls’s proposal for a deficit-financed VAT cut would fail to boost the economy while creating a £12 billion hole in the public finances.
Yet somehow Ricardian equivalence (and its assumption of highly rational, calculating economic actors) loses its attraction for Balls when it implies that government borrowing might be ineffective.
It turns out that – as with Keynesianism, which implies a support for budget surpluses during periods of strong economic growth – Balls is only interested in the theory when it serves his political and ideological ends.
Funny, that… but because of his techniques of bluster and obfuscation in interviews, pinning him down on these things is like nailing the proverbial jelly to the wall.
Richard wrote: “Interesting numbers. If a 0.9% cut has the effect it has had, we’re in for disaster when the real cuts start biting in the coming years.”
Isn’t it more plausible that the ongoing economic malaise might not be attributable to the cuts enacted so far? That a reduction of £6 billion or 0.9% in public spending – equivalent to 0.4% of GDP – cannot have made more than a trivial difference, and that the explanation therefore lies elsewhere?
For starters, try the eurozone crisis hitting export markets, companies hoarding cash rather than investing and hiring, consumers’ real incomes being squeezed by tax rises and inflation (this caused by high commodity prices and the depreciation of sterling), the fact that the banks are still in the aftershock of the financial crisis and are busy strengthening their balance sheets rather than lending to the real economy.
Others have objected, ah, but there’s growth in the US and they have had a stimulus. Well in fact, as I showed in another thread, their stimulus ended in 2010 and they have begun to nibble away at government spending at a similar rate to us. The difference is their tax revenues, which took a much bigger hit than ours in 2008-09 and are still depleted, and this has helped to cushion demand. (They also haven’t raised taxes unlike the British government.) Even so, their overall fiscal stance is not dissimilar to ours.
Having entered recession a year earlier than most European economies, the US does seem to be recovering better, although weak jobs numbers published today sparked talk of a “spring slowdown” like the one that happened at the same time last year. This just emphasises the long shadow that the financial crisis and recession has cast in all affected economies.
While our current situation cannot be blamed on cuts, you are undoubtedly right that the austerity programme will increase the economic headwinds over the next few years.
We do need to keep a sense of perspective, however. The planned cuts continue to proceed at the rate of around 0.9% per year, and in future they will be more balanced between capital and current spending (the big cuts in capital investment have already happened, but were largely offset by growing current spending). Most of the net tax increases have already happened.
It could be worse. We could be facing 6% interest rates and spiralling debt service costs, like a number of major economies in Europe with much smaller deficits than us. We could be in the euro (as so many Lib Dems wanted), which would have dragged squarely us into the market turbulence and prevented the depreciation in sterling that has at least given our exporters a competitiveness boost.
And while I don’t believe our low gilt yields are entirely a reflection of market confidence – there are other factors at play – the UK is undoubtedly seen as a relative ‘safe haven’ because of a credible deficit reduction plan, political stability and a clear Parliamentary majority backing that plan, and an independent currency and central bank. As Gillian Tett said on Newsnight tonight, that is an enviable position to be in and we mustn’t risk losing it.
All that said, I think you put the challenge well when you ask what can be done to mitigate the effect of the cuts. That is indeed the best the government can realistically aim to achieve. You don’t mitigate the effect of the cuts by scrapping or reversing them. You have to look at a range of other policy options that don’t involve spending money but could nonetheless make a material difference both in terms of boosting weak demand in the short term (eg by sorting out the banks) and laying the foundations for a strong and sustained recovery once demand picks up.
The latter involves supply-side measures such as deregulation of the labour market and planning systems, structural reform to the banking system to deal with ‘moral hazard’, radical tax reform and energy market reform. In all these areas the government has an agenda that is underway, but in many of them it is either insufficiently radical or incoherent.
Pace Liam Fox, such measures are not a passport out of our current situation because they do not address the immediate problem (weak demand). However they are well worth pursuing because together they should raise the trend rate of GDP growth, which is estimated at a worryingly low 1-2% per annum following the crisis. I do not deny that such reforms would take several years to bear fruit, as was the case in the 1980s when the trade union and employment law reform ultimately delivered a much more flexible labour market and lower sustainable unemployment rate.
However, as the Economist and others have argued, the implementation of a bold and convincing pro-growth reform agenda might deliver some early benefits by boosting business confidence in the economy’s medium-term prospects, which is one of the keys to getting the corporate investment we need to power the recovery.
Joe, Alex,
Thanks very much for your detailed expositons. Where do you get the numbers from?
I wonder whether, as per Ricardian equivalence, the “widespread industrial unrest and disrupting essential public services” will happen anyway?
Blaming the Eurozone crisis suggests the solution should be European not domestic. Companies hoarding cash looks Ricardian, and so something we can control. Consumers’ real incomes being squeezed by tax rises is again something we can control, simply by reducing tax. And surely there is somethig creative we can do about banks’ strengthening their balance sheets? I am unconvinced that pain is necessary – are we masochists, or perhaps being too timid?
I thought Miliband did OK , not startling, no appalling either..
IMO the main problem with Osbourne’s austerity regime is that it seemed very reliant on making a lot of harsh noises and the blind faith that private sector would spring to life once the proposed cots dug in. It hasn’t worked., because it see things like unemployment as the result of the welfare state rather than welfare state being the result of unemployment. The reality is that if you look at the areas with highest welfare dependency they have been in localised depressions since at least the 1980s. Part of the problem is that we see the Nation’s wealth as GDP and balance sheets rather than has living standards,. If we ever had the drive to improve people’s lives it seems to have been lost.
Maybe the money injected into the economy through “quantitative easing” could be better employed. Cuts in the form that all the major Parties view them could simply be the wrong strategy. The wealth of a country is actually tied to the wealth of its people.
It is no longer enough for us to keep blaming the previous labour administration.
We have gone into government and implemented economic policies which we previously opposed and campaigned against.
We have spent two years saying there will be no double-dip recession, that we are not cutting too far too fast, and that we now have the best policies to repair the economy (albeit not the policies we presented to the electorate).
In that two years, government forecasts have continuously been optimistic and revised, spending has apparently not changed significantly, whatever growth we inherited has disappeared, as a coalition we use the same excuses as those we slated Labour for (it’s an international problem now) and do some of the things we slated them for (quantitative easing), as a party we implement VAT rises and higher-rate tax cuts we previously opposed.
And the result is .. a double-dip recession.
How do we persuade voters to trust us going forward?
Perhaps we should say, “Look, we told you before May 2010 that the tories were wrong and their policies would screw up the economy, and now we’ve let them prove it. Vote for us.” Perhaps not.
It’s not just Labour that has screwed up. Today’s problems have been thirty years in the making. We had two once in a century windfalls – North Sea Oil and an unprecedented boom in financial services as big new markets emerged in Asia. Both windfalls have been squandered. Both the Thatcher/Major and Blair/Brown administrations have allowed our economic infrastructure and manufacturing base to wither on the vine, while pursuing a strategy of trying to earn our way by selling houses to each other and shopping till you drop.
The Blair/Brown government tried to deal with unemployment by creating large numbers of public service jobs in depressed areas and work subsidies in the form of housing benefits and tax credits. This strategy is no substitute for real jobs of economic value paying decent wages.
Austerity is not of itself an economic policy, it is an end to a means – getting the public finances back in order, while working to develop lasting industries in which people can develop careers.
Benefits are no substitute for paid work. I favour the introduction of job guarantees at minimum wage to replace unemployment benefit as a stepping stone to employment in the private sector. I think we also need to invest in economic infrastructure, both as a temporary means of creating demand in the economy and as a necessary element of re-balancing of the economy.
Ultimately, I think the message to voters should be – it’s going to be a long hard slog, but there is no pain free path to getting back to a position where , as a country, we can pay our way in the world.
@Peter Watson
People aren’t just still saying Labour haven’t yet taken responsibility for their role in causing the crisis, they are saying Labour’s ramshackle economic incoherency would take us back into crisis.
This is actually worse news for Labour than the coalition as it returns the focus to the deficit reduction timescale, which is where Labour lost the argument the second time round – their ship hit the iceberg, sank, and now their pilot is still saying ‘this way to the North Pole!’
Anyway, I’ll be happy to stop complaining about Labour’s failures under Blair and Brown, just as soon as Labour stop complaining about Thatcher as the cause of today’s problems.
Furthermore I’m prepared to argue that while this ‘double-dip’ recession is unwelcome, it is far less of a negative than commentators are making out, as it is indicative of the lessening dependency on unsustainable levels of unproductivity and the called-for shift in the balance of the economy.
I think it is ridiculous to try and ring another alarm bell to chime in with all those going off around us. We know the difficulties of the situation, and we know the lifetime of neglect shown to the real economy by successive governments will not be turned around by a few tenths of a percentage either way.
At some point old-style Labour and Conservative voices must say ‘stop bailing, and abandon ship’.
Richard,
For the UK statistics I use publications by the OBR and the Treasury’s Red Book which is published at Budget time. Additional data can be found via the Office for National Statistics. For the US, the White House’s Office of Management and Budget has an extremely comprehensive set of tables.
http://www.hm-treasury.gov.uk/
http://budgetresponsibility.independent.gov.uk/
http://www.ons.gov.uk/ons/index.html
http://www.whitehouse.gov/omb
You say: “Blaming the Eurozone crisis suggests the solution should be European not domestic.
Indeed, we cannot sort out the eurozone crisis through UK domestic policy. Whether the EU institutions or the member states can do so is also questionable, at least while they rely on short-term expedients to prop up a fundamentally flawed currency.
The problem is that a disorderly break-up of that currency (and it’s hard to imagine it being orderly!) would also be highly damaging. It is debatable which scenario would be more damaging, but some countries (or rather their electorates) might decide that the price of membership has become too high. It is no longer inconceivable to imagine this.
In any event the situation is highly volatile with the prospect of new governments looking to rip up the fiscal pact that was recently stitched together to persuade the markets that the crisis was being dealt with and give the ECB cover to inject liquidity into European banks, which are holding toxic amounts of government debt.
Companies hoarding cash looks Ricardian, and so something we can control.
Yes to the first proposition, no to the second. We can’t stop companies hoarding cash, except by making that cash worthless, which is not a recipe for sustainable recovery. There are things that could be done in the corporate tax system to incentivise investment, although in general it isn’t a great idea to mess around with the tax system for short-term macroeconomic objectives. My suggestion was that a bold supply-side growth agenda, by boosting business confidence, could be a bridge between short- and long-term objectives.
Consumers’ real incomes being squeezed by tax rises is again something we can control, simply by reducing tax.
Well we can’t do much about high world commodity prices, although hopefully these might be abating a little. The Bank of England could try to engineer a rise in the exchange rate to cut the cost of imported raw materials – but this would substitute one problem with another, by making our exports less price-competitive in overseas markets at a time when demand for those exports is weaker than we would like. Net exports add directly to GDP while imports subtract from it.
Clearly you are right that the government could ease the household income squeeze by cutting taxes (or reversing some of its net tax rises such as the VAT rise). However this obviously has a direct fiscal cost, even if some of that cost is recouped through higher consumer spending.
I think the hope is more that the net tax rises are now out of the way, and the majority of households might even see a net gain from now on through the phased rises in the income tax personal allowance. However a lot of this could be wiped out by higher petrol prices. If the government is to prioritise household incomes, it will probably have to make deeper cuts to public service spending than it considers politically feasible.
And surely there is something creative we can do about banks’ strengthening their balance sheets?
Well, the government is currently asking the banks to do two things that pull in opposite directions: sharply increasing their capital buffers while lending more to the real economy.
If lending is the priority – and the supply as well as the demand for credit does seem to be a problem, at least for SMEs – then the government could ease off on the higher capital requirements. On the other hand there is a good argument that, with the financial system still so fragile and the eurozone crisis bubbling away, there is no time to be lost in strengthening banks’ balance sheets. This seems to be Vince Cable’s position (as far as I understand it), which is interesting because – drawing an analogy with approaches to fiscal policy – you could characterise this as the more ‘Austrian’ and less ‘Keynesian’ position. Urging banks to build up their capital ratios now is a pro-cyclical rather than counter-cyclical response, and you have people like John Redwood calling for counter-cyclical action here.
I am unconvinced that pain is necessary – are we masochists, or perhaps being too timid?”
I am not a masochist. I do believe there is an inevitable reckoning for a decade and more of folly (and some of these problems pre-date that, as Joe argues), but I want us to get through this without a market crisis and the much harsher austerity that would entail. Everyone agrees that the best and fastest way to reduce a deficit is with a growing economy, but we need a recovery that is built on secure foundations.
In some respects the government is being too timid in my view, and in others incoherent. To take one example where I think the Tories are the obstacle to a bolder growth agenda, changes in immigration policy have been unhelpful. The Lib Dems aren’t sufficiently hard-headed on labour market reform and the cumulative cost of regulations, which most businesses cite as a big concern and don’t believe has got much better under the coalition. Both parties have a mixture of helpful and unhelpful instincts on tax reform, and the overall result has been disappointing so far. Energy policy is (still) a mess. The transport strategy (especially aviation) is incoherent. Et cetera. There is a lot of activity but an awful lot of it reminds me of the Brown-era tinkering rather than something more game-changing.
The coalition needs to get its act together on these fronts. It has had a couple of shots at it, but thus far the delivery has not matched the rhetoric, and time is running out.
@Alex. Many thanks , Hours of fascinating reading. I wonder if we should start the battle against Ricardianism by getting rid of the OBR? Their forecasts are preventing growth.
I am a businessman. If I forecast more growth than the OBR, I’ll revise my investments down to match their forecast, since they know more than me. If I forecast less, I’ll stick with mine because the difference won’t be enough to let competitors into my market, and if their forecast is right I might even be able to increase my prices.
If many businesspeople are like me, we will collectively always invest on the basis of less growth that the OBR forecast, which will mean we will get less too! And if the OBR take this into account and revise down, we will too.
Better not to have OBR forecasts at all!
We have been in a difficult situation in recent history with the collapse of sterling and subsequent IMF bailout in 1976. The Lib-Lab pact was formed in 1977 with Liberals supporting a minority Labour government.
Devaluation of sterling can only carry us so far;eventually dollar based food and commodity prices become so expensive we would run out of foreign currency reserves. If the IMF were to get involved in managing the UK public finances again, the deficit reduction measures would likely be much harsher (another 50bn of cuts)and last for much longer IMF 50 bn cuts .
As in the 1970’s, it is important to be honest and realistic with the public about the economy, to have a credible vision of the way forward and to be seen to have a firm grip on events. The Callaghan government, having been supported by the Lib-Lab pact for 15 months, looked set to be re-elected in the Autumn of 1978. Unemployment and inflation were starting to come down, taxes were still high but days lost to strikes had come down dramatically from the Heath years. What did for him was losing control of events in the 1978/79 winter of discontent – a period of mass strikes and industrial disruption- handing the 1979 election to Margaret Thatcher.
I am very impressed by the rigour and thought in some of the analyses above.
However, like me, most people don’t understand the macroeconomics and we have to believe our politicians and experts.
The promises and forecasts of the coalition government over the past two years have been poor. The only evidence we have is that after two years of denying Balls’ predictions of stagnation and double-dip recession, this is exactly what has happened. It makes Balls look like he knows what he is talking about. It makes us look incompetent.
@ Richard: Better not to have OBR forecasts at all!
There might be something in that! It reminds me of Sir John Cowperthwaite, the laissez-faire former financial secretary of Hong Kong in the 1960s.
Having presided over the then-colony’s remarkable economic transformation from poor trading post with few natural advantages to major regional hub and manufacturing centre*, he was asked what he thought was the key thing poor countries should do and responded: “They should abolish the office of national statistics.”
He refused to collect all but the most basic statistics, believing they simply tempted the state to fiddle about remedying perceived ills, thus hindering the workings of the market. This caused some consternation in the UK: a Whitehall delegation was sent to find out why employment statistics were not being collected, whereupon Cowperthwaite literally sent them back on the next plane!
* In 1961, when Cowperthwaite became financial secretary, the average Hong Kong resident earned about a quarter of someone living in Britain. By the early 1990s, average incomes in HK were higher.
Tempting though his example is, I’m afraid we do need some official statistics, not least to provide some basis for planning public spending and taxation, and it’s also a good idea to have an independent body auditing the government’s numbers. Indeed the establishment of the OBR might even have been nearly as important as the coalition’s actual deficit reduction plan in building market credibility, more for its independence than its forecasting ability.
I fear you’re right to infer that this economic forecasting is a mug’s game. As JK Galbraith quipped in one of his wiser observations, its only function is to make astrology look respectable.
Unfortunately the Treasury, OBR and independent forecasters alike have all been too optimistic about the British economy for many years now, and recent forecasts have come with the rather large proviso ‘unless the eurozone goes into meltdown’. Presumably that scenario, as well as being hard to model, is simply too awful to contemplate…
Joe: I’m not sure there is a direct parallel with the 1973-76 crisis period (but then, as Mark Twain said, history never repeats itself but it often rhymes). I certainly agree that we must retain control of our own destiny rather than surrender it to the IMF, the bond markets or the currency markets.
As it happens, though, I’ve been to several IMF briefings over the past couple of years and the impression I get is that they think the British government has got its deficit reduction profile about right. I doubt they would urge a sharper tightening in the next year or two.
The IMF’s recent warning related to the longer term, namely that a second round of austerity will be needed through the end of this decade and the 2020s owing to escalating pension and healthcare costs and the fact that government debt will settle at alarmingly high levels by recent standards once the current effort on deficit reduction is completed.
This strikes me as common sense. We cannot regard net debt of 70-80% of GDP (gross debt around 100%) with equanimity, particularly given the demographic time bomb. Even once the deficit is eliminated, there will need to be stringency in public spending for a long time to come, which is why efforts to improve the quality and productivity of that spending are vital.
We should really aim to run structural year-on-year surpluses from around 2017 or 2018 onwards assuming the economy is growing at a reasonable clip, so as to get debt back down towards 40% of GDP or below and create the space to absorb future economic shocks.
Indeed, as I have noted before, advocates of Keynesian fiscal activism should be especially keen to create this headroom in order to enable an aggressive stimulus if and when the economy turns down. That implies that in the good times the debt-to-GDP ratio should be kept so low that it will remain at reasonable levels even after several years of large deficits.
(The economist Roger Bootle, who takes a broadly Keynesian view of fiscal policy, reckons we should ultimately aim to get debt down to about 20% of GDP, half the UK level going into the recession. As he writes in his recent book “The Trouble with Markets”, the UK’s record of fiscal laxity during the good times “amounts to a gross dereliction of duty. It is the equivalent of a government leaving a country undefended against its enemies; in this case undefended against itself. It is all very well racing up huge debts as the result of a war for survival, as Britain did three times in the last 200 years…but the amassing of huge debt as the result of peacetime fiscal incontinence, especially to finance burgeoning welfare spending, is unforgivable.”)
Given present levels of debt a 20% target would be a very demanding goal. Clearly there are too many unknowns to specify an exact policy trajectory so far in advance – and for now, we have more pressing problems to worry about.
But the idea that there would be a brief period of austerity and then we could return to anything like our old borrow-and-spend ways always struck me as fanciful. As a guess I’d say a long period of public spending being frozen in real terms will be necessary, and the tax burden will also have to remain higher than we would like (although the tax system can certainly be reformed in growth-friendly ways).
Joe, your argument that Callaghan missed his opportunity in 1978 tempts me to start a whole new debate… But I’m conscious that I’ve gone on at great length already (and we’ve been diverted a long way from the subject of this post!), so I’ll confine myself to a couple of thoughts.
Even though the economy had improved markedly in late 1977 and 1978 under the IMF’s supervision (and despite much bigger spending cuts in the single financial year of 1977-78 than those implemented by Thatcher, or those being attempted in any single year by the present coalition), I think the fact that Britain had once again been humiliated internationally on a Labour government’s watch proved hard to shake off.
The winter of discontent, and with it the collapse of the government’s pay policy (which it had hailed as central to its success in reducing inflation), put the final nails in the coffin. This was a personal humiliation for the avuncular ‘Sunny Jim’, given his closeness to ‘the brothers’, and reinforced Thatcher’s advantage on the two key questions of inflation and the unions.
But in any case I tend to agree with Callaghan’s candid assessment shortly before leaving office that the postwar settlement was by then a busted flush: “You know there are times, perhaps once every 30 years, when there is a sea-change in politics. It then does not matter what you say or what you do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea change and it is for Mrs Thatcher.”
Just to clarify, I agree with the IMF that additional ‘cuts’ are necessary in the longer term, but as I read it they are talking about cuts relative to GDP rather than to an unchanged spending baseline. Holding spending flat while the economy grows would accomplish this. One key uncertainty is what the sustainable growth rate of the economy will be once the dust has settled in the coming years (I’m assuming a cautious 1.5% or so).
Very interesting comments,
I think ultimately there is not a great substantive difference between the economic prescriptions of the three main parties, despite the bluster of PMQ’s highligted in Paul Walter’s article above. Alistair Darling’s article in the FT this weekend How to pull Britain back from the Brink,although it includes the mandatory coalition bashing and highlights his reasonable concerns about a return to 3% growth, makes proposals that (with the exception of Heathrow) are not far out of line with the thinking of our own ministers.
“The first is investment in infrastructure. Ageing power stations need to be replaced. Investment is needed in rail and in airports. We must look urgently at constraints on growth in the south-east, including Heathrow. New housing is vital and easier to get going. This all needs government help in planning and resources. Better to borrow to invest in assets we will need than to end up borrowing more as growth falters.
Second, more quantitative easing is needed, but this time ensuring that the money gets out of the bank vaults and on to the high street. We are already borrowing more because of the lack of growth. Better to spend money on infrastructure and businesses that will ensure the recovery is soundly based.
We do need a long term strategy, for rebalancing of the economy, that is continued over several parliaments; and regognizes the challenges to be faced in funding pension costs and age related care while bringing the national debt back down to safer levels.
The US is beginning to report some positive news on the return of manufacturing jobs from Asia to the States. If we can engineer a significant reversal of overseas outsourcing here in the UK and Europe , while building a 30 year cross-party political economic consensus, maybe we could begin to think about taking Roger Bootle’s advice and aim to get debt down to about 20% of GDP over the long term.
You are right about the Callaghan debate going off topic. Let’s leave that long discussion for another day.
It does not seem realistic to assume that governments will “create … space to absorb future economic shocks”. Even in the best of times, there will always be temptations to use any space available, and if one government won’t use it the electorate will vote someone else in next time. I think it’s more realistic to assume we will always be on the edge of ruin.
As one of the greatest liberals, Adam Smith, observed: “There is a great deal of ruin in a nation.”
Richard, you may well be right that we are condemned to a perpetual high-wire act with our economy and public finances, and even that we can proceed on that basis for quite a while without an existential crisis.
Personally I continue to hope that our political discourse isn’t so debased, that we can convince people of the merits of a more far-sighted approach: of controlling our own destiny rather than being a prisoner of events. Either way, we are free to choose.
@Alex. We are not “condemned” – what a terribly biassed view that seems to be! Why be imprisoned by a desire to control of our “destiny”? Why not experience the excitement of events? Life need not be nasty or brutish, even with unreliability finance, though it is certainly too short!
I agree that life need not be like the Hobbesian dystopia (nasty and brutish); it is the purpose of what Adam Smith called ‘civil government’ to ensure it is not.
But the experience of repeatedly taking our economy to the brink of disaster over the past 70-odd years is not an uplifting one; it is the poor and powerless who invariably suffer most when it has to be pulled back from the precipice.
I am merely saying that it is within our power to choose a different, more enlightened, course. Where fiscal policy is concerned, excitement is rarely enjoyed by the population, though it may thrill the summit-goers of Washington and Davos.
This is not to deny that sometimes nations will face an unavoidable crisis that calls upon the full reserves of the human spirit, as with World War II. And as Churchill said: “The destiny of man is not measured by material computation. When great forces are at move in the world, we learn we are spirits, not animals.”