I’ve been critical these past few weeks of the news media’s obsessional search to put a cigarette paper between Coalition politicians: mostly these have been the product of journalists’ desperation to fill space.
But today’s interview in the Observer with Lib Dem chief secretary to the treasury Danny Alexander is, I think, significant for the future of the Lib/Con partnership.
… Alexander makes clear that total tax revenue will have to remain at least at current levels throughout the parliament to put the nation’s finances back in order.
“I think the tax burden is necessary as a significant contribution to getting the country’s finances in order,” he says. “So it will have to stay at that level for quite some time.”
Asked if a reduction in the overall tax burden would be possible once the nation’s books were back in order, Alexander adds: “You are asking me to take decisions for five years down the line now and I am not going to do that. What I want to see is a rebalanced and fairer tax system. That is what I think is most important.”
With plans already in place to reduce tax on lower earners, his comments appear to dash hopes of tax cuts for the better-off and middle classes until 2015 at the earliest.
Alexander argues that the twin goals of deficit reduction and fairness, as well as plans for a greener economy, are part of the coalition agreement and will drive decisions on tax. “The plan we set out is a plan to rebalance the tax system. We need the tax revenues from the taxes we are putting up in order to help us reduce the deficit.
“But we also want to rebalance the tax system so that particularly people on lower incomes keep more of what they earn of their own money when they go out to work so that they are encouraged to go out to work. In due course [we will be] looking at other ways to rebalance, looking at green taxes. It is about rebalancing.”
The next couple of years will, doubtless, be difficult ones for the Coalition: making cuts is never popular, and with the prospect of these being “deeper and tougher” than under Margaret Thatcher (© Alistair Darling) that has rarely been truer.
Yet reducing the deficit is such a no-brainer that – while there will be arguments at the edges – the fundamental purpose of the Coalition has a fiercesome internal logic, one which is understood by a majority of the public. Labour’s current opportunistic tribalism (let’s see if it survives a new leader) serves only to bind the Coalition closer together.
However, spool forward a three years to an economy which is (fingers crossed) growing healthily, a deficit that is being speedily reined in, and two governing parties preparing to face the electorate, and looking to ensure there is clear yellow/blue water between them… what then?
It’s clear from Danny’s interview what he believes the Lib Dem priority will be: not lower taxes, but fairer taxes – for example, shifting the burden from low-paid workers towards taxes on wealth and energy consumption. Hard to see the Tory right-wing – who have resentfully swallowed much in the past three months – embracing such a prospect.
This is the Coalition battle that will matter. It’s some time off being fought: but fought it will be.
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21 Comments
“Yet reducing the deficit is such a no-brainer that – while there will be arguments at the edges ”
Reducing the deficit may be a no-brainer but the speed of that reduction is not. Clegg, Alexander and co. have smoothly moved from their pre-election position of slower cuts, to a post-election “quicker cuts” position in agreement with the Tories. Greece is used to justify this but don’t buy it. I don’t buy the conversion to VAT either.
I don’t want Lib Dems in the cabinet to be parroting the coaltion line. I would hope that on the cuts, they didn’t want them to be quick, but traded that for something else from the Tories. Likewise VAT – I would hope that we traded higher CGT, closing loopholes and ending pension contribution relief for higher tax payers for Lib Dem policies such as increased tax thresholds and some CGT increases.
But all I hear is that VAT was “necessary” and quicker cuts are “Labour’s fault”. Does that sound like it comes from a Lib Dem or a Tory? Who can tell?
And that is the problem. Lib Dem ministers want to present a united “coalition” line. We should be explaining the compromises that have been made and what the Lib Dems want.
At least Danny Alexander is going some way to putting forward Lib Dem policy. The problem is again that he does not distinguish that it is a Lib Dem position.
Funny isn’t it, how the chief secretary to the treasury can not elaborate on future decisions which may or may not be taken, yet Clegg expects they should be taken into account by the IFS. yo say that there are plans to reduce tax on low earners. By this, I am assuming you mean the higher threshold. This is also a reduction in tax for higher and middle incomes. And if the tax burden is to remain the same, this can only mean higher taxes elsewhere. In essence a give with one hand, and take with the other tax policy.
Just out of interest, what would you consider to be an appropriate budget deficit for a nation, like Britain, to run? What do consider to be an appropriate tax take, in relation to GDP?
Alexander talks of it being a balancing act. Of course it is, and always has been. But as the IFS have shown, it’s not a easy as first thought. Extra re-balancing will be required as a result of the coalition budget, that is an indisputable fact.
You are correct, but the question that needs answering is how easy is it to envisage the LibDems compromising, and just how far are they prepared to compromise.
just one other thing Stephen, do you now accept that the British economy is not in recession, and was not when the coalition came to power?
You can write it anyway you want to ,but what is LibDem about this Goverment .You have become tory,s in disguise where are all these liberal fairness Nick spoke about ,you have allowed the vat rise and Nick dosn,t even blush when he starts blaming labour and Greece.The OAP,S tripple lock that is costing an extra £0.You werer going to take a big amount of ££ from the bankers .How much have you took £0 ,tax evasion is 15-20 more costly than benefit theft but not a word ,the rich have got well off,Trident nothing ,NHS direct getting closed .Youll now phone and get a call centre WHERE THE PERSON YOU TALK TO HAS A LAMINATED CHART IN FRONT OF THEM AND SIXTY DAYS TRAINING with 1 nurse per shift ,if they use the trial PILOT everywhere else.Nick kept quoting the IFS about everthing that suited him now he says is “partial”.Get out now why you have the chance you are going to get wiped out up heere in Scotland as any Lib Dem ive spoke to, not one says they ARE HAPPY WITH THE Lib Dems helping out the torys
andy edinburgh
As I understand it, the coalition intends to raise the personal tax allowance to £10K, and increase the proportion of tax raised by consumption (VAT). I would think that conservatives will be OK with that.
Well written piece by Danny Alexander. Thanks!
Dave B – The Tories wanted their inheritance tax cut and had hoped for the married couple rebate
“no tax cuts for the better-off and middle classes until 2015” – it would be very cynical of me to think they were planning an election bribe.
this is no more than an assertion of the lib dem line from danny which is very welcome.
I have written here before about the difficulty of delaying cuts, the thing is that if you say we wont cut this year but next, then people, in antiicpation of the cuts, cut back anyway, so the effect on aggreghate on demand is exactly the same
@Jayu asked “Just out of interest, what would you consider to be an appropriate budget deficit for a nation, like Britain, to run?”
Thanks for the question.
If we’re in a downturn, and we have a high cyclic deficit that’s fine. But the structural deficit should be nil. In order to make sure that happens, we should run a surplus in the boom years. This is what Keynes recommended. Unfortunately, I don’t think many people understand the difference between a cyclic and a structural deficit, but in the present situation it’s a key issue.
@Ian Ridley asked “Reducing the deficit may be a no-brainer but the speed of that reduction is not”
There was a shift in the position of Clegg and Cable, but as Cable admitted in an interview shortly after the election, there might have been some political hyperbole in the debate about £6 bn of cuts in the first year. With a deficit of £156 bn, £6bn was never likely to make much difference to the recovery. Ray Barrell of NIESR has said a double dip is only likely to happen due to another global crisis, and unlikely simply because of Osborne’s budget. I’m inclined to believe him, though of course no one knows for sure.
I think I might favour slowing the balancing of the structural deficit a little, but it’s a tough decision. There’s a real risk that if we tackle it too slowly, we could move into the next cyclic downturn with a debt of 70% of GDP, and perhaps even with some structural deficit remaining. That would be bad.
@George Kendall: It is indeed a tough decision. Ultimately no one can be sure whether fast or slow deficit reduction would be the least risky option (which is why I get annoyed by both right- and left-wing columnists without any economic knowledge shrieking their lines that the deficit is killing the economy/cuts are killing growth).
Interestingly, Britain was raised as an example of “how not to run your country’s finances” by Sweden’s centre-right coalition government when they launched their election manifesto. Prime Minister Fredrik Reinfeldt pointed out that before the crisis Sweden and the UK had the same national debt as a share of GDP, but now Britain’s had doubled and was rising whereas Sweden’s only rose slightly and is now falling. Because of sound public finances since the early 1990s Sweden could afford the largest stimulus package (counting both automatica stabilisers and discretionary stimulus) in the OECD. Sweden’s budget deficit is now 2% of GDP, compared with 10.4% in the UK.
It’s too early to judge Coalition economic policy but this is certainly a damning judgement on Gordon Brown’s mismanagement of public finances.
For me, an important point was Danny Alexander’s pledge that the Treasury will not bail out the Ministry of Defence with extra funds to pay for the replacement of Trident nuclear weapons.
Whatever path the Treasury takes over the months ahead, the coalition government is committed to big cuts in public spending. These cuts must be focused so as to reduce the pain to the public. With local services in the firing line, and the NHS, schools, and social care all facing cuts, it would be electoral suicide for the coalition to spend billions of pounds on new nuclear weapons that the public emphatically do not want.
@George Kendall
Was hoping for a response from Stephen, but thanks anyway. So, are you saying that we should no structural debt what so ever, and that we should only ever run a cyclical deficit? Do you think this was the mistake Labour made after 2000?
I would also be interested to know what LibDems would consider to be an appropriate level of government spend and debt wrt GDP.
@jayu
“So, are you saying that we should no structural debt what so ever, and that we should only ever run a cyclical deficit?”
In the long term interests of the country, that’s the ideal. And I think most economists would agree. But politicians are more worried about short-term popularity, which is why so few post-war governments have run a budget surplus. Whether a Lib Dem majority government would actually live by these principles, I have no idea. But it’s the ideal.
“Do you think this was the mistake Labour made after 2000?”
Yes. To be fair to Labour, neither they, nor anyone, realised that they were running such a large hidden structural deficit during the boom years. Structural deficits are hard to be sure about. It’s only now that we realise how much of a bubble economy we had before the crash. Some had warned that we were too reliant on consumer debt, but the reality was far worse. A significant amount of government tax revenue came from the a temporary boom in the city, which will probably never be repeated.
Of course, just as the previous estimates of the real economy were wrong, so might the current estimates be. The structural deficit may not be as big as the OBR currently believe, but, of course, it might be bigger. But I think we have to assume their estimate is about right.
The responsbility for this mistake is shared, not just by Labour, but the wider economic and political community. But, as Labour were in government, because they had the responsbility, and access to the best information, they must take the bigger responsbility.
In particular, that this hidden deficit was compounded by substantial deficits run from about 2003, which made a serious situation, somewhat worse.
“I would also be interested to know what LibDems would consider to be an appropriate level of government spend and debt wrt GDP.”
I only speak for myself. But I understand from what I have read that economists generally reckon a deficit of 70% of GDP will be damaging, and a country should aim to bring their deficit down to 30% or less. That’s probably just not achievable for a long time, but it’s a good aspiration.
There’s no correct answer to the debt level, but making your debt as small as you can is a good idea, because you are spending less on interest payments, you are not competing with business for investment money, and you maximise the freedom of movement for future governments to respond to future crises.
@jayu
If you want to read more about this, I could provide a number of links to articles and interviews. A good place to start is to read some of the briefing papers at NEISR http://www.niesr.ac.uk/ .
It’s ironic, but I started reading NIESR’s materials after someone on this site quoted them criticising the coalition’s policy. The more I read, the more I liked their approach.
Here’s a quote from http://www.niesr.ac.uk/pdf/210610_123457.pdf
“Work at the National institute suggests that the national debt has significant long run costs. Our work suggests that in normal times the budget should be in balance or surplus. Lower debt means we borrow less from our children and are more able to cope with the next crisis.”
@George
The UK’s deficit is about 11%, which is absolutely awful, and worse than any of the UK’s major trading partner’s apart from the Republic of Ireland. I think you meant “debt” rather than deficit when you were talking in terms of 70% and 30%. The saving grace for the UK economy is that the debt is merely 60 – 70%, which is moderate in terms of other European and western economies. However it will double over this parliament, even with the deficit being slashed. These figures off course fail to take account of all the British government’s off-sheet liabilities, which off course dwarf the official debt figures. All told quite toxic for future tax payers in our low growth economy.
@Paul McKeown
Sorry guys, serious failure of quality control there. Thanks Paul, I did indeed mean 70% debt and 11% deficit.
However, from the definitions I was using, I stick with the 70% debt figure.
This was based on the BBC article: http://www.bbc.co.uk/news/10375236
“The UK’s total debt, which currently stands at more than 62% of GDP, is forecast to peak at 70% of GDP in 2013-14, before falling to 67% by 2015-16.”
As I’ve been badly burned by relying on such articles before, I’ve just checked the OBR.
http://budgetresponsibility.independent.gov.uk/d/junebudget_annexc.pdf
Page 2, Table C1, confirms what the BBC say. That public sector net debt is 61.9% for this year, and projcted to peak at 70.3% for 2013-14.
But, Paul, I might be referring to a different definition of debt. If you have a different definition, and especially if you could link to an article about it, I’d be interested.
As you say, off-sheet liabilities dwarf these figures.
According to a chart in the Economist, in terms of total debt as a percentage of GDP, we are second only to Japan.
http://www.economist.com/node/16397110?story_id=16397110
This chart indicates UK debt (private and public sector combined) is heading towards 400% of GDP.
However, spool forward a three years to an economy which is (fingers crossed) growing healthily, a deficit that is being speedily reined in, and two governing parties preparing to face the electorate, and looking to ensure there is clear yellow/blue water between them… what then?
Well, that’s the hope.
I hope by “healthily” you mean in a way in which everyone benefits and which is not environmentally harmful. Unfortunately, for too many influential people these days “the British economy” means what serves a few thousand people working in the City. These are those who benefitted most from the growth that occurred before the bust, many people in Britain saw little benefit of that growth, but they’re still being hit hard by the bust.
On the environment, I’ve been a member of the party long enough to remember when it voted as national policy that “sustained economic growth as conventionally measured is neither achievable nor desirable”. It still isn’t unless it really doesn’t gobble up non-renewable resources.
And if it doesn’t look like that in three years’ time? If there’s no sign of recovery?
I thought Danny Alexander did well in the interview ( whisper – better than anything Clegg’s done since becoming DPM) so good on him for making me feel slightly less unhappy about the coalition than I have been. But I think those of us who are finding it hard to swallow will need to see some results from it well before its time is up and a general election has to be called.
George Kendall
“Our work suggests that in normal times the budget should be in balance or surplus. Lower debt means we borrow less from our children and are more able to cope with the next crisis.””
Yes, I find it morally unforgivable for a government to run a deficit when the economy is growing as all they (and those that voted for them) are doing is stealing from our future children and effectively enslaving them to allow us to keep on living how we want.
@George Kendall
You say that in the ideal world a Britain should have no structural deficit, I don’t think there are many who would disagree with that, but when has Britain existed in an ideal world?
You say Labour “were running such a large hidden structural deficit during the boom years.” Can you tell how much this structural deficit was? Were the Libdems, amongst others, wrong to call for additional spending, above and beyond what Labour were spending?
Do you and others realise that Labour did run a budget surplus, and inherited a higher level structural deficit, than it was running prior to the recession, 2.9% as opposed to 2.7%? in 1979 the Conservatives inherited a structural deficit of 4.9%. Labour ran a budget surplus of around 1.9% at the peak, in 2000-2001. The Conservatives ran a budget surplus of around 1.5% at its peak 1988-1989.
Before the last election the Conservatives were running a structural deficit of around 2.6%, 1989-90. Labour were running a structural deficit of around 2.7%, 2007-08. Yes the structural deficit deteriorated more sharply in
the early phase of this downturn than it did under the Conservatives. But that is as a result of the unprecedented nature of the recession.
There was fiscal strengthening in the first three years in office, by both governments. this was then followed by a weakening over the following eight. But, and this is a big but, Labour has used more of its borrowing to finance capital investment rather than current spending than the Conservatives did. Under the Conservatives, the structural budget deficit continued to deteriorate until year 14 (1992–93).
Also, when Labour came to power debt was almost 42% of GDP. In 2007, prior to the recession, debt was at almost 36%.
In 1979 debt was 43.6%. Labour’s average was 34%, the Conservative’s average was 34.6%.
@Jayu
Thanks for the considered response. It’s good to be talking seriously about the meat of this issue, rather than writing soundbites.
“but when has Britain existed in an ideal world.”
Indeed. But if something is an ideal, then should we not aim for it?
‘You say Labour “were running such a large hidden structural deficit during the boom years.” Can you tell how much this structural deficit was?’
This is controversial. Some commentators talk about the recession causing permanent damage to the economy, and thus that the present structural deficit is new. I disagree. I think most of our present structural deficit has been there for years, because too much of our tax revenues came from a temporary boom in housing and the city, and this was never going to be sustained. I would argue the hidden structural deficit in 2007 is not the official deficit, but the deficit, plus all the tax revenues what were only there because of the temporary bubble.
There is a lot of room for debate here. How much of the loss of tax revenue from the city would not have happened if the world had had a soft landing, rather than the calamity of the world financial crisis? In my opinion, the crisis has done some damage, but the worst of the deficit was already there, hidden by the bubble.
“Were the Libdems, amongst others, wrong to call for additional spending, above and beyond what Labour were spending?”
A good question. In the early years of the Labour government, I very much agreed with Lib Dem policy to spend more than Labour. In following the Tory budget for their first two years, Labour were starving public services.
But when Labour switched to massive increases in spending, and from running budget surpluses to budget deficits, Lib Dem policy needed to change. In my opinion, we were too slow to make that change.
I think the Lib Dem record in saying we’d need to raise additional taxes to cover the deficits is reasonably good, but it was only when Ming Campbell became leader, and then Nick Clegg, that the painful process of shifting our policy from spending more than Labour began to change. I think both Nick Clegg and Vince Cable have a reasonable record on calling for more financial restraint. Nick Clegg took some very brave political decisions in that direction.
But, as you imply, and as I already conceded in my previous comment, the whole political community, including the Lib Dems, share responsibility. I do, however, think the Labour government should take the lion’s share of the blame. There are huge political advantages to being in government, but with those advantages comes a much greater obligation to be responsible, to think about the long term interests of the country.
With opposition comes many disadvantages, even more so for the third party. The one big advantage is that you have some justification in not answering all the hard questions. This is partly because you don’t have all the information. But it’s also partly down to the role of an opposition, which is to oppose.
Personally, I think oppositions have a duty to be constructive and realistic, but that obligation is far less than for the government. In my opinion, the most shameful actions of the Labour government were in its final year, when the Prime Minister tried to sack his Chancellor for telling the truth about the economy. By telling some of the hard truth, Darling helped reassure the financial markets, and thus helped protect our AAA rating. He was also preparing the country for the terrible pain to come, something that any responsible government should have done.
That Brown, and others around him, tried to silence Darling was shameful. I have no doubt that, under this pressure, Darling had to compromise, so his pre-election plans to tackle the deficit were toned down.
Brown didn’t just try to silence Darling. A year ago, both Clegg and Cameron began to talk about the need to tackle the deficit. Telling this kind of difficult truth is politically risky, but it is the responsible thing to do. Brown took this as an opportunity to attack the opposition. His attacks were fairly effective, and Clegg and Cameron toned down their speeches on the deficit. In my opinion, Brown’s attacks were an abrogation of the responsibility of government.
“Before the last election the Conservatives were running a structural deficit of around 2.6%, 1989-90. Labour were running a structural deficit of around 2.7%, 2007-08.”
Aren’t you talking about current account, not structural, deficits? If you’ve a link to research indicating what the structural deficit was in 1989, I would be very interested. I’ve been unable to find out that information.
“Do you and others realise that Labour did run a budget surpluss, and inherited a higher level structural deficit, than it was running prior to the recession, 2.9% as opposed to 2.7%?”
I’ve mentioned Labour’s surpluses in other comments in this thread. As for comparing the deficits. That 2.9% deficit was hardly a poisoned legacy. You’ll know the story. ‘On being told that the economy was in very good shape by his civil servants on his first day in office he (Brown) reportedly said: “What do you want me to do send them a ******* thank you note.”‘ The reason Labour was able to run those early years of surplus was partly because Brown was using Clarke’s spending plans, and because the trend of the economy was already in that direction.
In the first years, I took those early surpluses as a good augury for the Labour stewardship of the economy.
It is true that in 2007, Labour had started cutting its deficit, but this was too little too late. And that happy augury has turned bitter.
@Jonathan “all they (and those that voted for them) are doing is stealing from our future children and effectively enslaving them to allow us to keep on living how we want”
I’d go further than that.
In the West, and in Europe in particular, we face an historic challenge. Since the seventeenth century, Europe’s economies have had a vast competitive advantage. Other countries have been mired in inefficient bad governments. Through our empires, and, since, through the legacy of those empires, we’ve had privileged access to most of the world’s resources. The 21st century will see that advantage disappear.
India, China and other countries will be able to compete with us on a level playing field.
This may bring advantages, in the huge new markets that are opened up. But we will have far stiffer competition than in the past.
Added to that, we have ageing populations. It’s estimated that the UK will accrue an addition 1% of structural deficit every ten years due to this. Other European countries will be hit far more severely, which is bad for us, when so much of our trade is with Europe.
Since the seventies, western countries have been happy to build up debt, on the basis that our economies will continue to grow, and so the debt percentage of GDP will stay static. We’ve assumed that things will continue to get better.
I think we’re starting to realise this isn’t necessarily true. Articles are now being written about how lucky the baby-boomers were, and the younger generation will have a much tougher time.
I don’t think all is gloom and despondency. There are still big advantages to living in the UK. Maybe we will continue to thrive, simply because by having a country which is a pleasant place to live, talented people will be drawn to work here, and this will help our economy to thrive.
But we cannot be sure we will thrive.
If there is a risk that the next thirty years will be ones of continual relative decline, and even of absolute decline, we have a responsibility to get our finances in order now, and even to start to pay down the debt. So that future generations can adapt to the huge challenges of the coming century without a millstone around their neck.