Vince: Only Lib Dems offer strategy for growth and prosperity

Earlier, we brought you a flavour of Vince’s big pre-Budget speech.  Here is the speech in full:

As Leader of the Liberal Democrats, it is one of my responsibilities to give a serious Lib Dem analysis of the economics around the Budget, and to present an alternative.

I have recently been returned to Parliament from exile.

One of my regrets, however, is that the previous competition between the parties on economic competence no longer exists.

The likes of Gordon Brown, George Osborne, Ed Balls and Oliver Letwin were all serious players and thinkers even if I often disagreed with them.

Now, the economy – pivotal still to people’s lives – has been relegated to the margins of political debate.

The June election produced minimal discussion of economic policy.

The Conservatives didn’t produce any economic numbers in their manifesto.

Labour did, but as the IFS caustically pointed out at the time, there was a strong element of fantasy.

My Party did much better than our rivals at the hands of the IFS and serious commentators at the FT and The Economist but few noticed. And, now, economic debate is drowned out by the politics of Brexit and an unstable government.

Yet this is an unusually important and difficult budget.

The Chancellor has foresworn the use of a second budget, traditionally used to correct the mistakes in the first.

And the potential for a massive, if unquantifiable, economic shock from an unsatisfactory deal – or, even, ‘no deal’ is palpable.

Brexit hangs over the forecasts.

The environment of radical uncertainty is already spooking business investment and depressing growth, including the growth in government revenue.

I want, then, to set out some analysis of where we are and some ideas for where the Liberal Democrats think Britain could and should go.

Our focus is on freeing up capital spending to build the homes and infrastructure the country needs, on reviving the NHS with a targeted injection of cash, and on giving a leg up to young people with a learning account as they begin their working lives.

To do all this, we need a Government which prioritises economic competence over political dogma.

Neither the ‘no deal’ Brexit extremism of the Conservative Party nor the ‘socialism in one country’ dreamed of by Labour will deliver a successful economy.

Fiscal Rules
I have long held the view that governments must subject themselves to the discipline of fiscal rules which have first, sufficient independent, non-political, oversight to prevent arbitrary and populist tax and spending policies and, secondly, which dovetail with independently managed monetary policy. 
In the last two decades, however, good intentions and consistency have been undermined by the massive shock and dislocation caused by the 2008 banking crisis and by the temptation of successive governments to redefine and politicise the fiscal targets while paying lip service to them.

Gordon Brown introduced two rules which were broadly accepted as sensible: to balance the current – ie non capital – budget over the economic cycle; and to permit borrowing for investment subject to meeting a rule that government net debt to GDP should be under 40%.

To complicate matters the Government also shadowed the Maastricht target of an overall deficit (current and capital) of 3% GDP subject to a (gross) debt ratio of 60%.

After almost a decade of sustained growth the Labour Government claimed that it was still meeting the fiscal rules, though it was widely believed that this was achieved by defining the cycle in a statistically convenient but economically dubious manner.

The collapse of the banking system destroyed the fiscal framework.

Enormous temporary deficits (with overall government borrowing of 10% in 2009) made the current deficit and overall debt rules meaningless.

There was a massive structural rather than cyclical deficit.

I wrote about these issues in both my book The Storm and its sequel, After The Storm.

The Coalition set the fiscal objective of eliminating the structural current deficit ratio over the first four years of the 2010-2015 Parliament.

The Office of Budget Responsibility was set up to provide independent monitoring.

But the four year objective was allowed to slide to five, then seven, years and attempts to separate the structural and cyclical became increasingly difficult.

Gradually, Osborne’s objective became one of simply eliminating government borrowing – current and capital – over a specified time period.

The present objective is to balance the overall budget by the end of the decade (followed by surpluses).

In practice, this means running a surplus on current spending by the end of the decade.

The justification for doing so is to build in resilience in the event of a future shock.

What it does not acknowledge is how challenging reaching a surplus position may be, and the other risks it poses to economy – particularly if capital spending continues to be constrained.

The current position as set out in scenarios proposed by the IFS, is that the Government may come close to achieving the OBR estimate of ‘structural’ borrowing of under 1% of GDP in 2019/20 in a “moderate” benign environment,  falling further in subsequent years (from 3% in 2017/18).

But it is also possible that in a “very poor” environment the ‘structural’ deficit could fall to only 2% in 2019/20 and then rise again to over 3% in 2021/22.

In the latter case, government net debt could rise to over 90% in 2021/22 as opposed to falling below 80% in the benign environment.

The IFS concludes that a firm commitment to running a budget surplus from the mid 2020s (for resilience reasons) “is no longer sensible”.  I agree.

What should be done?  The public is tiring of “austerity” though the Government is some way short of realising its targets, which may well have to be allowed to slide to accommodate the clamour for spending on health, schools, welfare reform, policy, defence and prisons; lifting the public sector pay cap; and accommodating Brexit contingencies.

The IMF (like the IFS) recommends a “gradual” approach to reducing the deficit.

Our priority now must be to prioritise capital spending.

One damaging practical consequence of the Government’s existing, unachievable targets is that productive investment is being squeezed, choking off the prospect of the long-term economic benefits it brings.

Despite this month’s rate rise, government borrowing can be financed very cheaply at present, with continuing very low interest rates available to us on long term debt.

My preferred model would be to return to the Golden Rule which will be more credible now there is an independent OBR.

There also needs to be an independent check on the economic impact of government financed capital projects.  I discuss how this can be done in a recent paper for the LSE.

In parallel with a reform of fiscal targeting I would want to see a reform of the monetary policy framework.

I was a strong supporter of the MPC set up and continue to defend its independence.

But post-crisis economics has made its role in setting interest rates of secondary importance and also deeply confusing not least to itself: a ship with defective radar, damaged steering and ancient maps.

It would make more sense to give the MPC the role of targeting (nominal) GDP, which is what it has appeared to do in any event and also to have some agreed rules around QE including variants which merge into fiscal policy since this is likely to be the main policy mechanism in future recessions.

Economic Fundamentals
Underlying the more pessimistic forecasts for economic growth and the budget are negative assessments of UK productivity performance.

UK productivity in terms of output per man hour and total factor productivity lag well behind other Western economies such as Germany and France.

Moreover, productivity has stagnated since the financial crisis: the flip side of a positive story of rising employment and falling unemployment.

The two sides of this phenomenon come together in the form of stagnating real wages.

The budget cannot solve the productivity problem but it can address it properly and point to the steps needed to counter it.

The first is the need for increased business investment which incorporates innovative technology and better work practices.

However, a long-standing dearth of investment is now compounded by the radical uncertainty surrounding Brexit.

Long term studies by the LSE have shown that the two main determinants of poor UK performance on productivity are lack of innovation (R&D as opposed to basic science where the UK is strong) and low levels of skills.

The former problem is being addressed by R&D tax credits and by the work of Innovate UK, in particular the Catapult network, which Liberal Democrats launched in government as part of the Industrial Strategy.

The latter is a far less tractable problem and despite the progress we made in the Coalition in raising the number and quality of apprenticeships, especially Higher Apprenticeships, the programme is now slipping backwards largely because of clumsy implementation of the apprenticeship levy and the neglect of careers advice and guidance.

There is an immediate need to ensure that the apprenticeship levy rebates reach the supply chains of larger companies.

The industrial strategy is the right framework.  After I introduced it in 2011, as a way of cementing long term decision making, there was a revival of confidence in industries as varied as cars, aerospace, creative industries, and railway supply chains.

With the current uncertainty over Brexit and doubts about the durability of the government, that confidence has begun to evaporate.

Yet a budget built around the industrial strategy, prioritising education and skills, R&D and infrastructure would, at the very least, send the right signals.

Lib Dem priorities

Given the constraints surrounding the budget I would advocate the following:

  1. A freeing up of government capital spending, separate from decisions around the day-to-day budget.Two main areas suggest themselves. One is greater operational freedom for Network Rail and devolved transport authorities like Transport for London to finance their investment programmes, where they can raise capital cheaply.

    That would mean faster decisions to press ahead with projects like Crossrail 2, and the potential to move on bringing about a rail revolution in the North with HS3.

    The second is to use the Government’s balance sheet to finance large scale housebuilding by a government agency operating on the Development Agency model, used in different ways in the Docklands and Liverpool and for the New Towns.

    The Communities Secretary has partially backed a plan originally put forward by Respublica for a £100bn programme over ten years, to build homes for sale or rent.

    Such a programme could be complemented by greater freedom for councils to borrow to build, and by assisting smaller private builders by boosting the small builders’ credit scheme operated by the British Business Bank.

    One way of improving the overall economic effectiveness of public investment would be to channel it through our independently managed institutions on the lines of the Green Investment Bank (now, regrettably, privatised).

    If Brexit happens, Britain will need to replace the admirable European Investment Bank, based loosely on the model of the German kFW.

    A British Investment Bank would have responsibility for selecting and, then, overseeing public investment.

  2. There is an urgent need for additional funding for key public services but this must be financed on a tax neutral basis.
  3. My party’s policy is to raise 1p in the pound on each rate of income tax, to provide an extra £6.5bn for the NHS and social care.This proposal has the dual merit that it addresses the immediate gap identified by NHS professionals and the NHS Chief Executive (though not the longer term issue of funding sustainability) and acknowledges explicitly that revenue has to be identified to pay for spending commitments.

    There are other current spending priorities and, in particular, to relieve the harshness of welfare changes notably arising from the freezing of benefit levels, especially housing benefit, and the introduction of the universal credit.

    The June Lib Dem manifesto explains how those could be funded:essentially by cancelling several tax cuts since 2015, notably to Capital Gains Tax and Inheritance Tax.

  4. By common consent, young people have been left behind for too long.  There now has to be some form of redistribution between generations to restore the implicit contract in every society between young and old.In ours, the spiralling price of property has radically shifted the balance making home ownership unaffordable for large numbers of younger people.

    Taken together with diminished job security, pension availability and the costs of post-school education, an issue of intergenerational equity has arisen.

    A better proposal than populist gestures like cuts in tuition fees and freezing rents is to create an endowment or learning account for young people on their 16th or 18th birthday which they can draw down at any time in life all to pay for further and higher education (a post graduate course, for example), reskilling and adult learning, as they choose.

    The Director of the IFS has written favourably of this approach.  The principle of intergenerational transfer would be sustained by the imposition of a modest tax on personal wealth.

    Let us consider, notionally, a generous and ambitious learning account of, say, £18,000.

    This would cost just over £14bn per annum for each new age cohort.  This is worth roughly 1/3 of 1% of net household financial and property assets.

    It is not difficult to see how a modest tax on personal net wealth, above a certain threshold, could generate substantial sums.  We shall investigate how best to do this.

Wider Tax Reform
My party, in coalition, promoted one of the more far reaching tax changes in modern times by radically lifting the threshold for basic rate income tax, lifting four million people out of income tax altogether.  We also promoted an aggressive approach to tax avoidance, leading to the introduction of the General Anti Avoidance Rule.Now I want us to apply that same radicalism to land values, to business taxation and to tax avoidance.
First, led by the entrepreneur, Andrew Dixon, we have a group investigating the feasibility of Land Value Taxation.

Authoritative analysis of the British tax system, notably the Mirlees Report, makes it clear that the taxation of land is the most economically efficient and rational form of taxation, the least open to evasion and avoidance and the most relevant to contemporary needs such as better utilisation of land for housing.

The Lib Dems are committed as a first step to replacing business rates with site value taxation.

Secondly, a group of tax specialists, on our Corporation Tax Panel, has been reviewing business tax.  Its interim conclusions are that the system is over complicated and full of unintended incentives.  They suggest:

  • A stable and predictable corporation tax reform with a competitive rate of around 20%.  Britain should not be aiming to be a corporate tax haven.
  • All companies bidding for government contracts must be clearly seen to be subject to tax in the UK and preclude the use of offshore tax havens.
  • Rapid progress on limiting tax deductibility of corporate interest
  • Recognising the special problems presented by digital companies which currently find it easy to shift profits to low tax jurisdictions.  One argument for “exit from Brexit” is that the European Commission is currently an effective enforcer.
  • The complex capital allowances regime must be reformed to incentivise and not penalise capital investment.

Thirdly, The ‘Paradise Papers’ scandal underlines the scale of systematic tax avoidance.

In fact, the introduction by the Coalition of the General Anti-Avoidance Rules and an open register of beneficial ownership put the UK among the tighter jurisdictions and the estimated ‘tax gap’ between actual and potential receipts is now one of the lowest – 6% of revenues.  This still, though, amounts to a large sum.

One necessary step is firm action against dependent territories and crown colonies which encourage aggressive tax avoidance. This should include the blacklisting of firms which utilise abusive schemes operating from those territories and the reserve power of direct rule.

There are precedents for such action. The Turks and Caicos Islands were subject to direct rule because of corruption in 2009.

Getting this Budget right is more important than the Chancellor realises.

Disillusionment with our current economic performance, and the model which underpins it is acute.  Any Brexit would make the problem worse, and a ‘no deal’ Brexit would cause severe destabilisation .
The danger is that this provokes a further growing appetite both for populist fiscal policy – sometimes described as the magic money tree – and for retreating to a much more state controlled and inward looking model.

Both could be catastrophic for our country.

So what is needed is a serious strategy for growth and prosperity, and in today’s politics only the Liberal Democrats are offering it

* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings

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  • You quote Vince as saying, “Labour did (produce figures), but as the IFS caustically pointed out at the time, there was a strong element of fantasy.” The IFS did not use the word “fantasy”; what they stated was that long term changes in behaviour might reduce the Labour forecasts of income generated from some (Note only some) of their predictions for revenue production. If Vince can’t even get this fact right why would anyone take seriously a word he says?

    You quote him as saying, “My Party did much better than our rivals at the hands of the IFS”. This ignores the fact that they didn’t scrutinise our figures as much as they did the Conservative and Labour ones.

    Vince is wrong to support “fiscal rules” and an independent monetary policy. He is wrong to even consider supporting Ordoliberal economics” to set arbitrary targets for the deficit and the national debt. He is wrong that the correct policy for the coalition government was reducing the deficit. It is good to see him recognise that achieving a budget surplus is too challenging. Perhaps he recognises that achieving a balance budget in non-capital expenditure is too harmful to try to achieve. But no – “My preferred model would be to return to the Golden Rule” (“to balance the current – ie non capital – budget over the economic cycle; and to permit borrowing for investment subject to meeting a rule that government net debt to GDP should be under 40%”).

    It is good to see that Vince supports that the Bank of England’s monetary policy should include an aim for economic growth.

    It is not clear he supports massive council house building by local government. As he wants to set up a quango to manage the government investment in new housing for both buying and rent!

    It is good to see he supports the idea of a government run National Investment Bank.

    I wonder if a £18,000 learning account will counter some of the problems of student debts of at least £27,750 on graduation. It is a shame he doesn’t read LDV and taken on board the suggestion to call it a Training and Education Account. He is vague about how this would be financed. He rules out a flat 0.33% property tax, but without stating out what level it should be set for higher valued property.

    I wish it was true that we had a policy of replacing business rates with a land value tax in our 2017 manifesto. Maybe we will for 2022.

  • David Becket 10th Nov '17 - 1:59pm

    This is a good speech by a financially literate serious politician, unlike the lightweights in the other two parties.
    You might query some of it, and Michael BG has, but the general thrust is in the right direction and it shows a mature approach to government.

    Trouble is, as far as the media is concerned, it will not get past first post, the general public will not get a sniff of this.

    So lets do something.

    Copy the speech onto every My Councillor and local party site (I have copied it onto my “My Councillor”)

    Send out a central Press Release covering the main points, and send that Press Release to every local party asking them to forward it to their local paper

    A Focus article from ALDC

  • Peter Martin 10th Nov '17 - 2:39pm

    The present objective is to balance the overall budget by the end of the decade (followed by surpluses). In practice, this means running a surplus on current spending by the end of the decade. The justification for doing so is to build in resilience in the event of a future shock.

    I’m sorry – but this is all neoliberal nonsense!

    You can choose to work for “growth and prosperity” or you can choose to work for having Vince Cable in charge of the economy but, if we take him at his word with these kinds of silly comments, you can’t have both.

    A Government surplus is just not possible unless somehow the trade deficit can be turned into a trade surplus. That’s quite unlikely as time soon!

    Because if we run an external deficit, the money which is lost to the economy, has to be replenished from somewhere to prevent the economy falling into recession or even depression. The private sector is borrowed up to the hilt as it is. That money has to come from Government deficit spending.

  • Hope he doesn’t get to sell off any more services. Look at the hash he made of selling off Royal Mail. Financially literate, don’t make me laugh.

  • At least Vince is thinking on the right lines but is well short of the level of national reconstruction required. He defaults to the usual skills and infrastructure piffle but at least he recognises the danger of eternally running a deficit which can only leave our grandchildren in poverty and destitution.
    Why would a British Investment Bank back the right ideas? When did the state become cleverer than all private investors?

  • Palehorse 10th Nov ’17 – 4:43pm……… When did the state become cleverer than all private investors?….

    Building council homes (WITHOUT Thatcher’s right to buy) for starters…

  • Peter Martin 10th Nov '17 - 5:45pm

    @ Palehorse,

    “…….the danger of eternally running a deficit which can only leave our grandchildren in poverty and destitution.”

    Yet more neo-liberal nonsense!!

    The postwar generation – the babyboomers – have, by general agreement, done well. So, how was that all possible when high wartime deficits created a Debt to GDP ratio of in excess of 250%?

    Each generation has a standard of living defined by what it can produce for itself. It can’t send anything back in time to repay the debts of any previous generation.

  • Richard Underhill 10th Nov '17 - 7:12pm

    jay 10th Nov ’17 – 4:43pm Blame George Osborne.

  • Expats,
    De Lorean, British Leyland and any number of money black holes. And the late Bob Crow (salary £145k) certainly would have thought council houses were a good idea He lived in one (rest his soul).

  • Palehorse 10th Nov ’17 – 7:29pm……………Expats, De Lorean, British Leyland and any number of money black holes. And the late Bob Crow (salary £145k) certainly would have thought council houses were a good idea He lived in one (rest his soul)…..

    Of course there are examples of failures, but on both sides…When the Private Sector fails (East Coast Rail, Care Homes, etc. to say nothing of the 2008 financial meltdown) the public sector is there to pick up the pieces…
    BTW, Thatcher’s sell off of energy, rail, water, etc. seemed to require subsidies and/or no consideration of public funded investment…

  • Britain elects on the 9th October said

    Over the course of the last few weeks and months we have had a boon of by-elections. Of the 79 council by-elections held since the general election, 30 have changed hands. Of that 30, thirteen have been gains made by Labour, six by the Tories, two by the Greens, three by the Liberal Democrats and the remaining six by independents and local parties…..At present, the Labour and Tory gains we are seeing are simply a reflection of the general election result. …

    No mention of Lib Dems, since then according to

    So with the all 8 of this week’s by-election results in, here is the final tally: Lab 5 (-) Lib Dem 1 (+1) Ashfield Ind 1 (+1) Con 1 (-2) 12th October

    Lab 5 (-) Con 2 (-) Putting Hartlepool 1st 1 (+1) Ind 0 (-1) 19th October

    Lab 4 (-) Con 3 (+1) It’s Our County 0 (-1) 26th October

    Lib Dem 3 (+3) Labour 1 (-) Con 0 (-3) 2nd November

    Lab 2 (-) Con 2 (-) LD 1 (+1) UKIP 0 (-1) 9th November

    So over the recent weeks Labour have gained none and lost none, The Tories have gained one but lost five, Independents have gained two and lost one, UKIP lost one and won none and finally the Lib Dems have gained five. One swallow spring does not make, but there has been a change over the last few weeks, we will have to see if it continues.

  • expats,
    I think we would find agreement on Mrs T. I voted for her because I revised for my engineering finals by candlelight because the power workers, or the miners or both were on strike. I went to Liverpool Uni and daily passed the Triumph TR7 factory in Speke, It was always on strike. The 70’s TU had moved from representing the workers to trying to generate some slow burn version of the October Revolution.
    But much of what she did was disastrous. I’m not sure about the council house sales. Many of the estates were in an awful state because no one had a stake in their houses and didn’t care. I particularly deplored her demand that GCHQ should be non unionised. No one had the courage to point out that no British traitor had been a member of a trade union but all the big ones (Philby, Burgess, Blunt, MacLean) had been public schoolboys so that should be the category to be excluded from sensitive government roles. The “loadsamoney” culture in the city reforms turned an investment hub into a casino and we still endure the industrial consequences of that.
    As to privatisation I agree the costs have sky rocketed as a result and we have some nonsense decisions especially in energy supply. I felt that after smashing the unions so emphatically she should have extended to hand of friendship, toned down the anti union legislation and built an infrastructure and industrial partnership with the workers themselves as they (IMHO) had had enough of Red Robbo et al and would have responded to courtesy, respect and magnanimity. Churchill would have but she had a humourless, vindictive streak.

  • @Peter Martin – What a curious thing you say. My generation did pay back the debts from the war years, plus interest. We didn’t need to send it back through time: just pay up on the due dates.

  • It is good technical speech by Vince building on his paper for the LSE last year

    Good to see recognition of the important work undertaken by the Mirrlees review of UK taxation system – “Authoritative analysis of the British tax system, notably the Mirlees Report, makes it clear that the taxation of land is the most economically efficient and rational form of taxation, the least open to evasion and avoidance and the most relevant to contemporary needs such as better utilisation of land for housing.
    The Lib Dems are committed as a first step to replacing business rates with site value taxation.”

  • Peter Martin 11th Nov '17 - 8:52am

    @ David Evans,

    But who did you pay them to? Anyone buying a war bond had them redeemed later. I think that was sometime in the 60s. So the money they received from Govt remained in the economy to be spent and keep it buoyant. Other gilts were redeemed in the normal course of events as they matured.

    In that way the war debts added to the wealth of post-war generation rather than reducing it.

  • Arnold Kiel 11th Nov '17 - 8:53am

    A growing, and therefore almost insurmountable group of voters are completely insulated from all of this by the triple lock on pensions. That makes them largely disinterested in wage (=productivity)-growth, investment, and inflation. Drop two locks (inflation and the 2.5%) to put them back into the same boat with the working-age (i.e. younger) population.

  • Peter Martin 11th Nov '17 - 9:16am

    I’m sorry to see Vince again use the phrase “Magic Money Tree”

    “The danger is that this provokes a further growing appetite both for populist fiscal policy – sometimes described as the magic money tree – and for retreating to a much more state controlled and inward looking model.”

    Fiscal policy is no more populist than monetary policy. Every Chancellor adjusts fiscal policy every time he adjusts levels of taxation. Every time Govt announces what it intends to spend it is adjusting fiscal policy. If Government wants to slow the economy it raises, or should, taxes and reduces spending. If it wants to give it a boost it does the opposite. This is true regardless of the size of the state.

    We all have to appreciate that money is an IOU of Government. It doesn’t originally come from the taxpayer. We don’t have a system of ‘tax and spend’. It is the other way around: ie ‘spend and tax’.

    Furthermore we can’t consider that the Govt’s income is independent of it spending. If it spends more, it’s income increases. If it cuts spending, or raises taxation, the economy slows and its income decreases.

    Any attempt to balance the budget this way will likely be counterproductive. Just like it was when George Osborne tried it.

  • Arnold, I was disappointed to see your identical comment on the ‘fair deal for young people’ thread. I’m not going to post the same answer here, beyond the fact that if you scrap the triple lock now, then it won’t be there to protect us when we grow old.
    The working-age population may not have many options. The elderly – after a lifetime of work, and perhaps hardship – have nothing ahead but infirmity and death.

  • @Peter Martin 239pm
    Your quote from Vince’s speech is utterly out of context and you have misunderstood it; in that quote he is stating the current thinking but goes on to indicate he does not agree with it. He follows it with “What it does not acknowledge is how challenging reaching a surplus may be and the other risks it poses to the economy”. So your comment that it is neoliberal nonsense, while using language he would probably not like, is something he would agree with.
    His speech is a welcome analysis of the current problems and a welcome alternative to both the other parties approaches.

  • Sean Hyland 11th Nov '17 - 2:33pm

    I worry that for all his knowledge and experience Vince Cable remains locked in an Orthodox view of economics. Even Adam Smith wrote of the need for the guiding hand of government to prevent the rise of trusts and monopolies as well as alleviate poverty, a fact that is often forgotten by those who propose totally free market approaches.
    We remain an unbalanced economy dependant and enthralled in worship of the financial sector. It is important and contributes much but can also be a curse. We lack a clear strategy for growth in other sectors of the economy and successive government policies have been ad hoc and piecemeal.
    All the tax system needs reform from how it is set and on what. It also needs an adequate resourcing of how it is collected. A simple solution to avoidance/evasion may be to make the architect of the scheme legally liable if found later to be illegal. Might improve business accounting if we make auditors liable also as I think they used to be.

  • Peter Martin 11th Nov '17 - 6:17pm

    @ Nigel Jones,

    Yes I take your point. I possibly have given VC less credit than I could have. It’s a long posting and contains quite a few contradictory arguments. Michael BG ( fiscal and Golden rules) and I picked on a couple of the more neoliberal points we didn’t like.

    So maybe VC is in state of flux. He’s still got his neoliberal beliefs as with “I have long held the view that governments must subject themselves to the discipline of fiscal rules….” and “My preferred model would be to return to the Golden Rule …” but, as you say, he’s conceding they are not going to work. And rightly too.

    The EU has got itself into a bad situation with unnecessary fiscal rules and there’s no reason for us to copy their poor example.

    So maybe we should give him a bit more time and he could well jettison those beliefs and arrive at the conclusion that there’s really only two main fiscal rules. If fiscal policy is too loose we’ll end up with too much inflation. If its too tight we end up with too much recession.

    If I could add a third it would be a geographical element. So what could be an appropriate fiscal policy for a prosperous region, like Germany, is likely to be quite inappropriate for a poorer region like Spain (particularly Andalusia) or Portugal.

  • Old Vince is looking more like Steptoe every day.

  • Yeovil Yokel 11th Nov '17 - 10:52pm

    jay 8:12pm – “Old Vince is looking more like Steptoe every day” – you should’ve gone to Specsavers.

  • David Evans 12th Nov '17 - 4:32am

    @Peter Martin I think you have misunderstood the War Debt situation. UK citizens individually did not borrow to finance WW2, the UK government did. The UK was lent money by the US and Canada, and it paid them back. We, the British, as the ultimate owners and main financiers of UK plc paid the taxes to enable it to be paid back.

    As far as your comment re the repayment of war bonds, it depends who bought them. Repayments to overseas entities would take money out of the UK economy.

  • Peter Martin 12th Nov '17 - 9:53am

    @David Evans,

    I partly agree with you. The UK Govt did borrow some money from the USA in US dollars to finance the war effort. Some of it was written off by the Americans as part of post war aid to Europe. But most debt was simply the creation of new pounds. New Bonds. New Govt IOUs.

    So we have to distinguish between creating debt in our own currency and borrowing in gold, or someone else’s currency. Argentina got into big trouble doing that with US dollars around the turn of the millenium. The euro using countries are still getting into trouble as the euro is essentially someone else’s currency which they can’t control.

    A relaxation in the fiscal rules shouldn’t involve borrowing in anything other than pounds sterling. Borrowing excessive amounts of US dollars would be a huge mistake. It is much better to just let the pound, and all deficits, float, and use fiscal policy to steer a sensible middle course between having too much inflation and too much unemployment.

  • @ David Evans and Ian Sanderson

    You misunderstand the nature of the National Debt. When a particular government bond is redeemed by the government this is not necessary paying off the debt, because the payment is most likely financed by a new bond. The only time any of the National Debt is paid off is when there is a budget surplus as there was in 2001. The National Debt increased from £0.63bn in 1913 to £7.41bn in 1919, it was only below this figure once since; in 1931 when it was £7.4bn. It increased from £8.01bn in 1938 to £23.64bn in 1946 and has never got to below £23.64bn since.

    Vince states that his learning account will cost £14bn per year, but he doesn’t address the consequences of removing some of this amount from the economy every year. Even if we assume it is paid in three instalments there is still a lot of money going out of the economy. In year one say £4.67bn was given to 18 year olds of which 60% was spent on university education and other training. This means that 1.87bn will not be spent. In the second year £9.34bn will be given out and again about 40% will not be spent – £3.74bn. In the third year when £14bn is given out this 40% not spent has increased to £5.6bn. This seems s great way of returning the UK economy to recession!

    An alternative would be to get the Bank of England to finance the amount expected not to be spent and give it to the National Investment Bank to invest (£5.6bn is only 0.29% of the UK economy).

  • Peter Martin 13th Nov '17 - 9:25am

    @ Michael BG,

    Sorry to do this to you, 🙂 , but I’d just say the point you make above is correct. The point is not so much the amount of new money which may be created, it’s the amount that’s likely to be spent that is important.

    The Govt has the same problem when it comes to paying out pensions. If the life expectancy of a pensioner is N years then the Govt has a liability for future N years too. Some people would argue that it should be added to the National Debt but it isn’t under current accounting rules. It’s just a future liability.

    So each person could be given an £18k (or whatever) account and the only money that needs to be included in the National accounts is the money that is withdrawn, and therefore likely to be spent, in any one particular year. The rest can be ‘ignored’. Just as future pension liabilities are ‘ignored’ now.

    ‘Ignored’ means for accounting purposes in any one particular year. In a wider sense, neither future pension liabilities nor the liabilities of any education scheme can be totally ignored. They do represent a future spending commitment.

  • @ Peter Martin

    I think you might have misunderstood me. My point was that Vince is proposing funding the whole £14bn a year from a new property tax. As about 40% is unlikely to be spent this means he is proposing the deflation of the economy by £5.6bn a year. It can’t be just ignored. Some of it would have been spent or invested. To avoid this I am suggesting not funding this from taxation but from increased money supply and instead of letting the banks decide where to lend the whole annual money supply increase as normal I am allocating this part of it to the new National Investment Bank to decide where to lend the money.

    Your suggestion to fund the whole amount from borrowing would mean increasing the economy by £11.2bn each year. At 0.58% of the economy this would not be a problem and then the 40% would only enter the economy when spent. I suppose that the 40% could not be borrowed until called upon when spent by those not going to university. I don’t think Vince would support funding it from borrowing, hence my suggestion and making it more appealing to him by linking it to his idea of a National Investment Bank.

  • Laurence Cox 13th Nov '17 - 4:15pm

    @Peter Martin,
    You say: So maybe VC is in state of flux. He’s still got his neoliberal beliefs as with “I have long held the view that governments must subject themselves to the discipline of fiscal rules….”

    But I think you have not fully understood why he says this.

    I think we would both agree that the UK will be running a deficit on its balance of payments into the indefinite future and that as a result either foreign investors will have to buy up more and more of the UK (such as houses and companies) or they will accept our Government’s IOUs (Gilts). Now the discipline of fiscal rules is not related to the real economy but instead to what foreign owners of Gilts believe will happen in the future. If they think that the value of Sterling will continue to decline then they will demand a higher interest rate on their Gilts to compensate. Higher interest rates on Gilts (which are zero-risk for UK holders) will push up interest rates in general as, if they do not increase, Gilts will suck out capital that would otherwise be used for investment in business.

    So, as long as the vast majority of the world economies think in neo-liberal terms, to go against this risks pushing up interest rates and throttling our economy. Gordon Brown understood this; he made a great play about his “Golden Rule” but when it came to the point where he should have been raising taxes to achieve a budget surplus under it, he simply extended the length of the business cycle. So what Vince is doing is saying the words that he knows will not frighten the overseas holders of Gilts on whom we depend for our continuing deficit.

  • Peter Martin 13th Nov '17 - 10:30pm

    @Laurence Cox. You say:

    ” If they [Overseas holders -PM] think that the value of Sterling will continue to decline then they will demand a higher interest rate on their Gilts to compensate.”

    Of course every holder of gilts would like a higher rate. But are they in a position to demand it? The news is full of doom and gloom about Brexit but the interest rate on 5 year gilts is less than 1%. If the economy is going to tank after Brexit, and if, as many predict, the exchange rate is going to crash with it, why would anyone buy 5 year gilts at such low yields? Even if there was just a possibility of this, which even I would have to agree there was, why aren’t yields higher than they are?

    I’ve seriously been thinking of converting my savings, such as they are, into something like Danish Krone. There’s only one way that currency can go in the longer term and it isn’t down!

    But let’s look at it from the Danish government’s POV. They like running a trade surplus with the UK. That means that they end up with more pounds than they want to spend buying goods and services from the UK. So what are they going to do with them? They can dump them on the forex markets but that would depress the pound’s value. That would mean we wouldn’t be able to afford to buy so much of their bacon and that’s not what they want.

    So, like it or not, they have to buy up UK gilts even though they probably aren’t a good buy. It’s either that or say goodbye to their trade surplus.

    So they are caught in trap of their own making. They’d be better off balancing their trade IMO. But they don’t see it that way.

  • Peter Martin 13th Nov '17 - 10:51pm

    @ Michael BG,

    I did think I’d understood what you were saying. You were making the point that we need to consider how much of what is “handed out” is likely to be spent. Which is fair enough.

    Maybe you also need to consider how much of what is raised from the property tax actually affects the spending of those who are affected by it. If we take money from very rich people it is probably unlikely to affect it very much at all.

    So, if we do that and “hand the money over”, or even some of the money, to those who are likely to spend it the net result will be reflationary – not deflationary as you were arguing. In which case you are right and I hadn’t fully understood what you were saying.

    I was possibly remiss in not pulling you up on that!

  • @ Peter Martin

    I did recognise that some people who would be subject to Vince’s new property tax, might not have spent the money that the government receives if they kept it, hence my “Some of it would have been spent or invested”. However Vince has not stated at what value of property it will raised from, so we can’t say it will be only from “very rich people”. If we were only talking about very rich people even if they saved it, by putting it in a bank it could still be stimulating the UK economy once it has been lent out by the bank it could be spent on “investment”, for example factory equipment make in the UK, rather than purchasing a home or buying factory equipment made in a foreign country.

  • Peter Martin 14th Nov '17 - 8:26am

    @ Michael BG,

    The lending model you describe is known as the “loanable funds theory”. It all sounds superficially plausible enough but it doesn’t work like that according to modern economic thinking. Saved money doesn’t stimulate the economy in the way you might think. Banks aren’t constrained by the supply of deposit money when they create loans. If a customer is creditworthy a loan can always be made.

  • @ Peter Martin

    The paper by Zoltan Jakab and Michael Kumhof states that banks are limited by solvency. In theory a bank is limited by the limits set by the central bank and ensuring they have enough bank notes for the demand. (I wonder if cash machines reduce this limitation and people accept that sometimes the cash machine runs out of money, where in the past they would not have accepted that the bank run out of banknotes at the counter.) They seem to imply that central banks are not controlling the growth in money supply and we know this is their main function and method to control inflation.

    However their example of Bank A receiving £4 and then leading it back to Bank B and so there being no increase in money does make sense. They even attack the money multiplier which made sense to me. It seems that if they are correct and banks are Financing through Money Creation (FMC) bodies then the system seems to be unstable and is susceptible to rapid fluctuations.

  • Peter Martin 15th Nov '17 - 8:24pm

    @ Michael BG,

    If there is a correct understanding of how banks work there is no need for the system to be unstable. As Jakab and Michael Kumhof argue, incorrect models can’t be expected to give the right answer. Steve Keen is another UK based economist who’s been sounding the same warning.

    “Money creation” doesn’t mean the banks are creating BoE IOUS. They are creating their own which, providing the bank is stable and solvent can be considered to be functionally equivalent. So, for example, a UK bank, providing it is solvent, can create IOUs in Thai Baht if it wants to without having a single Thai Baht in its reserves. It just need to be able to acquire them if needed.

    So a pound or dollar is like an inch or a metre. Its a unit of measure which can be used to reference IOUs issued by anyone else.

  • Richard Underhill 23rd Nov '17 - 2:56pm

    “My party, in coalition, promoted one of the more far reaching tax changes in modern times by radically lifting the threshold for basic rate income tax, lifting four million people out of income tax altogether.” David Cameron opposed this in the TV debates with Nick Clegg (and George Brown). Cameron was supported by former Chancellor Ken Clarke.” We also promoted an aggressive approach to tax avoidance, leading to the introduction of the General Anti Avoidance Rule” for which the Tories are now claiming credit.

  • Richard Underhill 23rd Nov '17 - 3:37pm

    Sorry, Gordon Brown. George Brown changed his name to George George-Brown before taking his peerage as Lord George-Brown, not to be confused with Lord Brown.

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