Vince Cable: No to Tory plans for further spending cuts

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  • Bill le Breton 21st Sep '12 - 8:35am

    This is good news and I hope that Messers Clegg and Laws are in agreement with this line.

    The GOvernor of the Bank of England’s U Turn yesterday saying that an easing off of the pace of deficit reduction is now necessary gives us the headroom.

    I could say that those who advocated the disasterous strategy of accelerated deficit reduction should apologize but one apology a week is enough, don’t you think?

  • ROB SHEFFIELD 21st Sep '12 - 8:58am

    Just collapse the coalition and support them on confidence motions- and let them struggle on as the authors of austerity till they inevitably call an early election. Whilst in the meantime getting your policy house in order. If the Tory right force the collapse first then they will get the benefit from the general public. We are now in a race to see who gets the ‘advantage of leaving first’ (sometimes called differentiation).

  • toryboysnevergrowup 21st Sep '12 - 9:46am

    Is that a pledge or a LibDem pledge? Where is the similar statement from Alexander, Clegg and Laws?

  • The current spending review period ends in 2014. The Lib Dems are committed to reducing and eventually wiping out the deficit, if they are not proposing to do this through spending cuts what the Lib Dems have just been announced are massive tax hikes.

  • Dean is right.

    Both sides of the coalition are committed to eliminating the structural deficit on the government’s ‘current’ budget and to getting the debt:GDP ratio back onto a declining path. As we know, the timescale for both of these has slipped and was significantly revised at the 2011 Autumn Statement.

    At the time George Osborne announced that, instead of sticking rigidly to the original schedule, he would allow the ‘automatic fiscal stabilisers’ (lower tax revenues and higher benefit spending) to operate in order to sustain demand in the short term. This meant a higher cyclical – and overall – deficit in the short term without changing existing policy measures such as tax levels or the departmental spending ‘envelope’, and a higher – and later – peak in the debt:GDP ratio.

    But what forced the coalition to prolong the timetable for hitting its primary fiscal rule of wiping out the structural deficit – and to announce that additional spending cuts would be needed in 2015-16 and 2016-17 in order to do so – was the fact that the OBR has become significantly more pessimistic about the UK’s ‘trend’ or underlying level of GDP and sustainable rate of economic growth.

    Basically the OBR concluded that a greater part of the UK’s deficit was structural (or impervious to short-term demand factors) than it had previously assumed: that the productive potential of UK plc had taken a bigger permanent hit following the financial crisis than it originally thought, and that therefore the ‘output gap’ (the gap between actual and potential GDP, or aggregate supply and aggregate demand) was correspondingly smaller.

    The basis for this judgement, among other factors, was the surprising robustness of the jobs market, with firms holding on to staff and indeed creating new jobs rather than shedding labour to recover pre-recession levels of productivity.

    This apparently technical judgement of the OBR’s had huge political significance, because assuming a smaller output gap and lower trend GDP results in a higher structural deficit on the public finances. Under the coalition’s fiscal rubric – which targets the cyclically-adjusted or structural position rather than the actual deficit – this automatically necessitates further tightening measures. This – rather than the weaker cyclical position of the public finances due to the economy flat-lining – was the key reason why the coalition had to commit to further policy tightening beyond the next election.

    Inevitably, this judgement about the economy’s productive potential – whether from the Treasury, the OBR or independent forecasters – must be highly provisional and tentative. The dust still hasn’t settled after the financial crisis, and we probably won’t know what the ‘new’ trend growth rate is for some years. But the government has entrusted the OBR to make a determination of this, and to a large extent this will drive its policy response over the medium term.

    Given this degree of uncertainty some economists are uncomfortable with relying on cyclically adjusted numbers, and suggest the yardsticks of fiscal health should simply be the actual borrowing and debt figures, especially in the current climate. That is certainly a perfectly valid position (one I am moving towards), but the downside is that policy might end up being more pro-cyclical as a result, particularly in a situation where the economy is growing above trend and the public finances are misleadingly strong. Arguably we can worry about that happy situation if and when we get to it, but there is little point in having a fiscal framework if you keep changing its foundations.

  • Anyway… getting back to the original point, no senior Lib Dem has expressed concern about the policy framework that the government and OBR are operating within. Therefore we can take it that targeting the structural current balance is not regarded as a controversial. In which case it follows that further fiscal tightening is required in 2015-16 and 2016-17.

    Of course, that still leaves scope for debate over the composition of those measures, as between tax rises, departmental spending cuts and cuts in transfer payments. But there is an inescapable trade-off between these elements. If, for example, Lib Dems reject the mooted extra £10bn of welfare savings, they will instead have to come up with proposals for additional tax rises and departmental spending cuts. Framing the debate in terms of niceness versus nastiness, or indeed a rejection of further austerity versus a relish for it, is simply puerile and dishonest.

    As it happens, Lib Dems at the top of government – notably Nick Clegg and Danny Alexander – said at the time of the 2011 Autumn Statement that they backed the overall spending plans set out by the Treasury for the first two years of the next Parliament, which envisaged overall cuts of a similar scale to those in the 2010 Spending Review period and no further net tax rises.

    Moreover, Alexander suggested in a Newsnight interview that a full spending review covering 2015-16 and 2016-17 would be agreed and announced before the next general election, implying that this was important to cement market confidence in the UK’s resolve to repair its finances. Subsequent statements from other senior Lib Dems tried to row back from this a bit, and it now seems that there may be just a single-year spending round to tide departments over for 2015-16.

    This gives both coalition parties the flexibility to set out their own means to achieving the shared end of additional savings in 2016-17, but it does not mean the Lib Dems have ‘rejected further cuts’ – at least, not unless Vince Cable is announcing another U-turn. It also sits oddly with his and Clegg’s previous insistence that clearing up the British government’s red ink through tax rises, rather than through controlling its own ever-rising costs and re-examining the scope of its activities, is a lazy option.

  • Thanks Alex Sabine, you have explained this point in a lot more detail than I had available.

    Having had a look at the math of this, and assuming Vince has indeed announced a U turn on the need for spending cuts to reduce the deficit, this would require an increase of 8p (eight pence) on the basic rate income tax until the end of the financial year 2016-2017.

    “Just collapse the coalition and support them on confidence motions- and let them struggle on as the authors of austerity till they inevitably call an early election.”

    So basically you’re assuming that the Liberal Democrats exist solely to usher Labour straight back into government.
    “I don’t think so…..”

    But thanks for the advice

  • Richard Dean 21st Sep '12 - 2:21pm

    Does “No” really mean “No”?

  • A good analysis as always Alex.

    The extent of the output gap is particularly important as this will ultimately determine both the extent and effective limit of monetary and fiscal stimulus measures.

    I would note a couple of points. The cuts that have been implemented to date have been disproprtionally focused, not on the structural deficit, but rather on discretionary capital spending. In the absence of sustained growth the structural deficit appears largely unchanged and with continuing cost pressures and weakness in tax collections is in danger of widening.

    We will likely overshoot the £120 bilion public sector borrowing target this year and that is with the benefit of a £28 billion credit from the transfer of post office pension fund assets.

    I feel that that the cuts are falling in the wrong areas. Public investment is required to maintain demand and engender confidence in the private sector. We have a national infrastructure plan that requires in the order of £450 billion to implement over the next ten years and burgeoning demand for housing shortage crying out for financing.

    There is no doubt that current expenditures and tax revenues need to be brought into balance over the mediun to long term. There is also no doubt that this cannot be realistically achieved, within a reasonable timeframe, without a return to robust growth.

    Stagflation is the danger we face, monetary and fiscal stimulus are necessary but temporary confidence measures. Only long-term structural realignment of the economy that includes targeted investment in our economic infastructure, skills base and international competitiveness can deliver sustainable increases in prosperity.

    Vince Cable and colleagues need to be able to set out in some detail the compelling vision he wrote of earlier this year, as an alternative to the five more years of economic stagnation, that a dearth of public investment in a future Tory led parliament promises to deliver.

  • Bill le Breton 21st Sep '12 - 4:33pm

    The present expenditure plans are a formulation based on expansionary deficit reduction. There was never any evidence for this. It has proved extremely harmful and has predictably increased our deficit difficulties.

    The August figures show the deficit has widened 22% so far this year – compared with target of 4.6% reduction.

    The situation was compounded by inappropriately tight monetary policy – a sign of which has been the continuing weak NGDP figures and of course the low and falling interest rates themselves (as Friedman identified back in 1963 )

    This game is over.

    Even Mervyn King last night admitted on Channel 4 that the Chancellor has head room for easing the pace of deficit consolidation.

    He naturally wishes to deflect the blame for this situation from his own incompetence, but that doesn’t count for anything. The situation is such that even he now is giving the Chancellor the green light.

    We are in great danger of sending a message from our Conference that further cuts are required only to find three weeks later the Chancellor announcing his spending package taking advantage of the Governor’s U Turn.

    There is also mounting evidence of support for an NGDP target – one of the advantages of which is that it doesn’t need us to know the size of the output gap.

    With an NGDP level target we can just begin the task of rebuilding the economy and finding out as we go what these last two years have done to the capacity of the British economy, using this to guide the necessary supply side initiatives referred to by Joe.

    The likelihood is that we are left holding the austerity card, while the top politicians move on to the next game.

  • Bill le Breton 22nd Sep '12 - 8:11am

    No to Extra Tax Cuts! Governor of Bank of England says we can reduce pace of deficit consolidation and so what do Clegg and Alexander negotiate? £2 billion extra from Mansion Tax in return for £10 billion increase in cuts to welfare. Some deal making !!!

  • Ed Shepherd 23rd Sep '12 - 7:57am

    If he doesn’t keep that pledge, he can always release a short video in two years time in which he states that he regrets ever making that pledge. Somone might even do an autotune remix of it.

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