Today saw the publication by the IMF of its latest growth forecasts. UK growth prospects are downgraded once again. Growth in 2012 is now forecast to be -0.4% (the most recent quarter’s strong showing is anomalous) and an anaemic 1.1% in 2013. As The Spectator’s Jonathan Jones observes, the only thing new here is that the IMF is falling ‘into line with the consensus’.
On the face of it this is bad news for the Coalition, further evidence that the economic strategy of deficit reduction driven forward by David Cameron and George Osborne, and endorsed by Nick Clegg and Vince Cable, was foolhardy. For the record, I largely accept the argument put forward by Martin Wolf and Jonathan Portes among others that the slashing in 2010 of capital expenditure (as distinct from current revenue spending, which has risen) was a real error, one which at the very least contributed to the UK’s return to recession. Though it is important to note that the Coalition’s plans with regard to capital spending echoed Labour’s plans under Alistair Darling.
Quite simply, investment is the easiest tap to turn off if you’re a politician looking to reduce the flow of spending in a hurry. All parties looked too eagerly for a quick fix to the deficit believing the economy was on the mend anyway. Moreover, both Tories and the Lib Dems in particular took the view — not unreasonably in some cases, including the flawed Building Schools for the Future programme — that too much was being spent on prestige capital projects for too little gain. So capital expenditure was cut and our weak economy, buffeted by global uncertainty, was plunged back into a double-dip.
A gift for Labour to exploit, yes? Well, maybe. But the fundamentals of the election pitch the Coalition parties will make in 2015 are largely unaffected: Labour landed the UK in an economic mess; we’ve begun clearing it up; we deserve some more time to make it come good.
I’m wary of historical analogies, but the next election could easily become another 1992, when mega mid-Parliament Labour poll leads melted away as the economy crawled out of recession and the prospect of a Neil Kinnock-led Labour party winning drove voters back into the arms of the Tories. ‘Hold onto nurse for fear of something worse’ became the unofficial slogan of that Tory campaign, and could easily become so again. It’s safe to vote Labour when the economy’s doing okay (as it was by 1997, and again in 2001 and 2005) but not when it’s teetering (1992, 2010). I’m caricaturing for effect, but I’m sure Labour strategists are aware of the risks that sluggish growth could inflict on their chances in two-and-a-bit years’ time.
Could the Lib Dems also benefit from such a pitch? Perhaps. It’s certainly what the party leadership are counting on, out of necessity apart from anything else. Historically, economic trust has been one of the party’s weakest suits — unsurprisingly since we’ve not been in charge of the economy for a century — with Brand Vince not always rubbing off on Brand Lib Dem.
But the next election does offer the party an alternative narrative to the Tories. Assuming the economy has returned to growth by 2015, albeit weakly, the Lib Dems may well receive some dividend from the electorate for our part in offering stable (albeit misguided) government at a time of crisis. As importantly, the party will be able to point to our economic priorities during that time: helping tens of millions of the lowest-paid by raising the income tax threshold while the Tories focused on tax-cuts for the highest-paid.
That narrative in two words: fairness and responsibility. And that narrative in a sentence: fairer than the Tories, more responsible than Labour.
* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.
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33 Comments
Before the 1992 election the tories had dumped a leader who had become a liability. Might the the tories and the Lib Dems need to do the same before 2015?
“As importantly, the party will be able to point to our economic priorities during that time: helping tens of millions of the lowest-paid by raising the income tax threshold while the Tories focused on tax-cuts for the highest-paid.”
Otherwise known as giving a tax cut to everyone paying the basic rate of income tax, while telling us that spending had to be cut because it was a “time of crisis”. Could you make less sense if you tried?
Let’s hope Labour don’t.
Labour have won elections in really bad economic conditions before – Wilson, in 1974, in the middle of the three-day week.
But I do agree that a recovery – even a sluggish one – will make life tricky for Labour. The argument (much like the one Obama is making) that things are finally starting to get better, and give us a fair chance and we’ll turn it right around is one that will have some real traction.
Of course, that comparison is difficult in reality; Blair and Bush did not adopt similar economic policies, so how can we really layer them with similar levels of blame?
Stephen,
“As importantly, the party will be able to point to our economic priorities during that time: helping tens of millions of the lowest-paid by raising the income tax threshold while the Tories focused on tax-cuts for the highest-paid. ”
Had we been able to increase the personal allowance from £6,475 to £10,000 in the 2010 emergency budget, we would have an immediate and large fiscal stimulus at the outset of the coalition.
What has occurred is that the spreading of the increases over the life of this parliament has allowed high inflation to erode the real benefit of the rises. Compensating increases in VAT, fuel duty and tax credit withdrawals together with large numbers of basic rate taxayers being brought into the higher rate have combined to completly nullify what could have been an important element in an economic recovery.
It was a missed opportunity that has left our championing of tax cuts for the lowest paid a little hollow in the minds of a public that are feeling the squeeze of stagnant take home pay and rapid cost of living increases.
I concur with your assessment that the slashing in 2010 of capital expenditure (as distinct from current revenue spending, which has risen) was a real error, one which at the very least contributed to the UK’s return to recession. We need a sharp reversal of this policy direction if we are not to inflict lasting harm on both the country’s economic potential and our own political future.
Stephen – although I absolutely concur with “fairer than the Tories, more responsible than Labour”, its still a definition which defines us in relation to outside parties.
How about:
Competence and compassion
I think Labour will say that the economy was growing when they. Left office and that if their approach had been followed it would have grown more with less pain. This will be followed by the Tories saying that the recovery would have been further along without the restrictions placed by Lib Dems…..
Whilst we may think a plague on both their houses I just don’t see that working. It would also be good to look at the voting record of different tax bands. If this showed that lower paid workers are less likely to vote those who have benefitted most from Lib Dem involvement may not affect the outcome proportionately …
“Labour have won elections in really bad economic conditions before – Wilson, in 1974, in the middle of the three-day week.”
Well let’s be careful here. Thanks to our electoral system Labour ‘won’ the February 1974 election inasmuch as they won 5 more MPs than the Tories and formed a minority administration. The Tories actually polled more votes however.
I don’t think our party can realistically argue “competence” – that is what has not been shown. The arguments have been rehearsed on here and in the media and the public so many times… And we can’t argue compassion while we are umbilically linked to this version of Toryism. If my understanding of what Cameron is arguing today is correct, ie that we are all in a “race” globally to sell things, we are in a very dangerous position as a party. Many of us believe that the race we are in is one of global sustainability, and that that race can only be won by more cooperation, not more competition.
Stephen you call in aid Samuel Brittan and Jonathan Portes. Interestingly both these commentators are also on record (Mr Portes actually here on LDV!) of favouring a change of the target given by the Quad to the Bank Of England’s Monetary Policy Committee from an inflation target to a target for Nominal Gross Domestic Product.
If this were done and set at the former trend growth rate of NGDP (aggregate demand) of 5% and if it was accompanied by an upbeat communications strategy explaining that the Bank and the Government would co-ordinate fiscal policy (directed towards infrastructure investment) and monetary easing until that target was reached, we could achieve a relatively quick recovery.
Governments who leave monetary policy to Central Banks get the economic growth rate (or lack of it) that those Central Banks want. Our present global economic malaise is an indictment of those Central bankers (who let’s face it first allowed the debt crisis in the first place) and of the profession of economists who also failed to identify the initial cause of the crisis, failed to see it for what it was when it came (delaying cuts in interest rates as the world economy plunged) and remain ignorant of what needs to be done.
Politicians can be blamed for listening to the wrong economists (and not Brittan and Portes for instance) and for being seduced by the moral allure rather than being alive to the economic folly of austerity.
As we see each day, austerity destroys liberty by destroying life chances and opportunities, especially for those most indeed of them – that is those who are most vulnerable to the greed and exploitation of others for whom austerity is an excuse to take more and give less.
Stephen Tall
Historically, economic trust has been one of the party’s weakest suits — unsurprisingly since we’ve not been in charge of the economy for a century
And we’re not now. We have a Tory government with a little LibDem influence. Quite obviously this means the broad thrust of policy, particularly the central economic themes, are going to be Tory.
So why do people like you keep using lines like this which make it seem that we have a predominantly Liberal Democrat government, that the Liberal Democrats are “in charge” or “in power”? Perhaps you didn’t mean the above in that way, but it comes out sounding like that, and a lot of the stuff coming out from the Leader and his defenders is just that, for example this line we keep hearing about us suffering “mid-term blues” which is the line that would be used if this were a purely LibDem government, the gormless “75% of our manifesto implemented” line (which people interpreted as meaning 75% of coalition policy is ours, and of course this year’s Leader’s conference speech with its “We have reached the promised land of government we have been working to get to for decades”.
Can’t you see the way we are being attacked over this, with our attackers believing us when we overplay the influence we really have, and so writing us off as if we are keen supporters of everything this government is doing? Can’t you see how difficult it makes it for someone like me, who actually does want to defend the party, and can see what little it is obtaining from the current situation is of value and that it would be far worse if the Conservatives had a majority? One only has to see the bizarre things coming out form the Tories in Birmingham, this week to realise the reason the Liberal Democrat influence in the coalition is hard to discern is that people just haven’t caught on how the Conservative Party has moved so much further to the right since it last governed, and so they can’t see the extent to which our party has moderated what they would really like to do.
Here is the theme we should be using in the next general election, so please give it to me so that I can proudly go out and campaign on it. Instead, all the leadership is giving us is lines that damage us further because to those we need to win back they sound like we have just given in and become an indistinguishable part of the Conservative Party.
From the “Rose Garden” onwards we have had this – the idea that if we overplay our influence make ourselves seem equal partners in this government, have Liberal Democrat government ministers standing up and making no distinction between themselves and the Conservatives, there’s a big bunch of voters who will be mightily impressed and say “Gosh, I had not considered voting Liberal Democrat before, but now they are in power and in charge, I think I will”. So where are they?
I have myself in Liberal Democrat Voice ever since the coalition was formed continually written to say that while I understand and will defend the reasons the Coalition was formed, the way it is being promoted from our party’s leadership is all wrong and will immensely damage us. I believe I have been shown correct in my assessment, while those who pursued the damaging presentational policy of overplaying our influence have been shown to be wrong, and will just damage our party further if they carry on with it.
Cameron has just taken credit for taking lowest earners out of tax……
“Cameron has just taken credit for taking lowest earners out of tax……”
Crikey, how unsporting of him.
So much then for the theory that the state crowds out the private sector. Now it is the state to the rescue with the capital expenditure!
Is it really any wonder that the recovery is non existent?
instead of the government investing in infrastructure and creating jobs They pay the likes of A4E up to £14k per person that they get into employment. £14k that’s almost 10 times the amount that a claimant receives on JSA in the first place.
And lets not forget that A4E is riddled with corruption.
It makes no sense at all that this government is trying to slash billions from the welfare budget, whilst writing blank cheques to these workfare providers.
If there are not surplus jobs available in the first place, then the scheme is a farce.
This Government reduces taxes for the rich, rubs the tummies of the so called “wealth creators” and “willingly” gives away billions of pounds to these so called “enterprises” whose executives and share holders see a very tidy profit and extortionate management fee’s.
At the same time, the cost of living sky rockets, the low paid and unemployed/disabled have lack of income which has an impact on demand.
And this governments answer to this crisis……. Lets keep going and do more of the same.
Im sorry but I dont think westminster has that much influence on the british economy, our fate will mostly be settled in the eurozone & the USA.
The most important thing the coalition has done economically is maintain market confidence, a disaster averted. Useful but hard to sell politically.
The tragedy is that there really arent any deep economic problems holding back recovery, the big roadblocks are the political deadlocks in Europe & America, 2 things we can do nothing about.
On newnight last night, the economics editor Paul Mason said that: in 2010 the colalition had expected cuts in the public capital investment program to have a multiplier of 0.5% in depressing GDP growth. The IMF analysis indicates that the actual negative multiplier effect on UK demand has been in the order of 1.77% of the investment cuts.
An early £15 billion stimulus, in the form of an immediate increase in the personal allowance to £10k, would have paid for itself within 18 months. This measure together with holding back on VAT increases and maintaining capital expenditure programs would, based on the comonly used multiplier of 1:1, have seen robust domestic growth of 2% to 3% from late 2010/early 2011 onwards. With 18 months of good growth under our belt, we could reasonably expect that confidence would have returned; and large corporates both investing to meet rising demand and distributing as dividends, the huge cash mounds they have been accumulating in recent years.
There is still time for Liberal Democrats in coalition to make the economic arguments we campaigned on in 2010 (differentiating us from Labour on the basis of our costed manifesto proposals). If we leave it to late, the next election may well be a write-off and we will need to start all over again from a much lower base of support than in 2010.
Joe, the BBC report may be misleading. It seems that everyone, led by the IMF, used to think the miltiplier was 0.5, based on data from the 30 years up to 2009. It seems the IMF re-analysed the data recently and discovered they had made a mistake – the multiplier is really somewhere between 0.9 and 1.7.
http://touchstoneblog.org.uk/2012/10/fiscal-multipliers-the-imf-the-obr/
Have I misread, or is the blg wrong?- the IMF report linked to on the blog is 250 unsearchable pages! People do expect the IMF to be correct. The implication is that we can’t blame the coalition or the Chancellor – all of us would likely have had to use the IMF numbers, and so would have made the same mistake in 2010.
@Matt
“At the same time, the cost of living sky rockets”
This at a time when inflation is 3%. How would you describe it if it were, say, 10%?
Joe … but certainly as your post suggests, this is a serious error which ought to prompt the government to look again at the directions of all its investment policies and cuts. It seems feasible that all policies have been doing exactly what was not intended. The OBR may also need to re-assess its own multipliers.
The economics establishment – IMF, OBR, academics, professionals – may need to ask why, with all the statistics and talent at their disposal, they didn’t notice earlier that something was wrong.
Richard,
from the link you reference:
“It is worth noting that the IMF has always been cautious on the size of multipliers. Back in the October 2010 World Economic Outlook it argued that whilst the multiplier might be 0.5, that assumed that interest rates had room to fall and the currency had room to depreciate, boosting exports and cushioning the blow to the economy. The Fund warned, 2 years ago, that if these cushions were not available then the multiplier was closer to 1. The Fund went further and argued that if a country’s trading partners were also committed to austerity and retrenching their spending then the multiplier might actually be closer to 2.”
The multiplier used for capital spending reductions back in 2010, even without taking account of the IMF caveats was always at least 1.
The important thing now is not to keep making the same mistake – that the UK is experiencing a normal cyclical recession that will right itself given a little time and patience.
@statto 10th Oct ’12 – 5:04pm
@Matt
“At the same time, the cost of living sky rockets”
This at a time when inflation is 3%. How would you describe it if it were, say, 10%”
If you have had a pay freeze for the last 2 years and benefits have been cut, the I would say the cost of living has sky rocketed.
petrol prices have soared
Energy Bills have soared
Food prices have soared
Mortgage repayments from the top providers have soared, most raising the SVR by 0.5%
Having you seen the cost of toilet paper these day’s? just to take a dump is painful these day’s
Companies are reducing the size of their food products and raising the prices at the same time.
So in my opinion, the cost of living “has sky rocketed” and if Inflation went to 10% it would be “astronomic”
But I don’t see your point really, those at the lower end of the income scale are suffering by far the most.
Food charities are on the increase, save the children are for the first time having to direct their work towards deprived children in the United Kingdom, a charity which is associated with starving children in Africa. {something that should alarm the Liberal Democrats to no ends} considering their “constitution” on poverty
Joe, Yes, it really does look like people were over-optimistic (no European problem) or blind or both. And yes, it does look like government needs to change policies as a result of this new information.
Maybe the OBR needs to consider dissolving itself too. Another issue, more abstract but highly practical, is that multipliers are partial differentials in algebraic terms, and so are only valid within the context of the specific set of independent variables they apply for. Something for economists to ponder.
Richard – pleased that you are enjoying Duncan Weldon! And what is all this about ‘Boris’?
The IMF are very often wrong. They have their own agenda. They were wrong in ’78.
I suggest that anyone (you?) involved in business in 2007/8 sensed demand slipping and began to hunker down – pull in their horns and all those metaphors for trying not to lose money. That old signal for the end of the good times – an oil price rise – was under way. Any sensible person was getting into cash and deleveraging. The amazing thing is that the Bank of England – despite its team of agents – just didn’t see it coming. That’s why they continued to obsess about inflation and keep rates high as nominal GDP plunged 8% in a year. Don’t forget it took them six months after Lehman’s to cut rates!
Deflation was always going to be the big problem as central banks took the Japanese route (I nearly typed rout) to deflation. A lot of us at the time were making that point because we could see the money supply falling and also the velocity of exchange. P and T had to fall (off a cliff).
And our Leader’s obsession with austerity meant that we actually led the call for accelerated deficit reduction in the negotiations with the Conservatives in May 2010. When aggregate demand was melting like ice in the polar regions we took more demand out of the economy and failed to provide the necessary attendant monetary easing.
Tight fiscal policy and tight monetary policy. Criminal negligence.
Anyone with a year’s experience in local government would have told you that capital would be the first ‘savings’ to be made. And it was. You didn’t need to know the exact measure of the multiplier to know that it would be a disaster and it has been. Yes Europe, yes the US, yes China and India, but you cannot deny that the second dip was caused in the main by our own economic policy and our efforts to ‘talk down’ the state of the economy.
Joe and people like Prateek (in his amendment ‘helpfully’ not selected for debate by the FPC) have listed the fiscal stimulus that would be possible. Even Merv King would be happy to keep the inflation hawks on the MPC at bay whilst it was done. He said so, the day before our conference began.
Yet we keep bashing on about austerity and the need to stick to Plan A. As life chances are destroyed, liberties lost.
Ours is not a Liberal economic policy – a time to unite the advice of Keynes and Friedman to defeat the Great Recession.
It is classical economics at its worst and most fantastic.
I am not sure that a parallel between the 1992 general eletion and the 2015 general election would bode well for the Con-Lib Coalition. In 1992, John Major ended up heading a government with a small majority riven by infighting and trying to get through the aftermath of a recession. Little is said now about that time of stagnation and corruption (Neil Hamilton, anyone? Closing the mines?). Major defeated a Labour leader (Neil Kinnock) who was easily villified by the tabloids and eventually ended up fighting a Labour leader (Tony Blair) who was a master of the media-game. Blair seduced the swing voters (notably Worcester woman) who deliver electoral victories. Apparently, many leading Tories wish they had lost the 1992 election. They haven’t won one since. If the Con-Lib coalition wins again in 2015, they may find themselves having to face some difficult decisions (Trident, the EU, Turkish entry to the EU, the Euro) without being able to fall back on blaming Gordon Brown for everything like they do now.
remembering that the two Eds’ Labour created growth of -6% (that’s minus six percent), our track record is a stunning success compared to them.
“That narrative in two words: fairness and responsibility. And that narrative in a sentence: fairer than the Tories, more responsible than Labour”.
I like the two words but “fairer than Labour, more responsible than the Tories” doesn’t look much more difficult.
A narrative is surely more than two words?
http://www.annualreviews.org/doi/abs/10.1146/annurev.polisci.1.1.315?journalCode=polisci
“the next election could easily become another 1992, when mega mid-Parliament Labour poll leads melted away as the economy crawled out of recession and the prospect of a Neil Kinnock-led Labour party winning drove voters back into the arms of the Tories”
Perhaps, but it’s worth bearing in mind that the 1992 election victory was arguably the worst thing that’s ever happened to the Tory Party. Had Labour won, they’d have take the blame for Black Wednesday, John Major would not have been humiliated by rebels holding his tiny majority hostage, and the Tory Sleaze scandals would have been far less frequent/harmful.
Indeed, I often wonder whether a 1992 victory for Labour – leaving them largely unreformed and responsible for the ERM disaster – would have finally destroyed the last vestiges of their economic credibility, and indeed support, and led to the Labour Party completely disintegrating or being supplanted by (ahem!) the Liberal Democrats as the main opposition.
But then I may be guilty of wishful thinking!
“that narrative in a sentence: fairer than the Tories, more responsible than Labour.”
I’m always vary wary of these kind of slogans. Far too easy for opponents and/in the press to turn it around: “Less fair than Labour; less responsible than the Tories”
@Chris: “giving a tax cut to everyone paying the basic rate of income tax, while telling us that spending had to be cut because it was a “time of crisis”. Could you make less sense if you tried?”
Makes perfect sense to me, as spending was not only resulting in a deficit but also plundering the incomes of fairly poor people. And the economic consensus is that deficit reductions leaning most heavily on spending cuts rather than tax rises create the fastest and strongest recoveries.
Having said that….
@Joe Bourke: “Had we been able to increase the personal allowance from £6,475 to £10,000 in the 2010 emergency budget, we would have an immediate and large fiscal stimulus at the outset of the coalition… It was a missed opportunity”
Never a truer word spoken. Both the tax and the spending cuts should have been front-loaded. The former stimulates the economy; the latter opts for short-sharp-shock followed by quick recovery. It’s worth reminding those who point out that “The cuts aren’t working” that “The cuts haven’t even started yet!”. (Actually, I think they start in FY 2012/3 so they may have finally started).
@Steve Way: “Labour will say that the economy was growing when they. Left office and that if their approach had been followed it would have grown more with less pain.”
Might be worth comparing the size of the economy at the beginning and end of Labour’s last 5 years in office, with the size of the economy at the beginning and end of the coalition’s years in office. Labour haven’t got a leg to stand on.
Hindsight makes everyone wise!
For the second time today I am about to recommend an article by Simon Jenkins. Early this morning I shared with an Education forum his Comment is Free article describing Gove as not so much socialist as Soviet! http://www.guardian.co.uk/commentisfree/2012/oct/11/michael-gove-more-soviet-than-socialist
Now he, like me above, is pointing out that Keynes and Friedman would be in agreement about what to do to stimulate the economy here in another Comment is Free piece: http://www.guardian.co.uk/commentisfree/2012/oct/09/iconoclast-for-bank-of-england
There is now a growing anti-establishment movement for monetary policy a l’outrance which also now includes Adair Turner. What brings people of such varying background together? Pragmatism and a willingness not to defend the indefensible. If only a Liberal Democrat of standing would take part in the leadership of this movement!
@ Peter Davies – now that actually really works for me, why didn’t I see that before? David Cameron wants to spread “privilege”, so yes, increasing division, pretty irresponsible, and Ed Milliband wants Labour to run “one nation”, maybe more like domination than fair.