When the histories of the coalition government come to be written, those chapters focussing on the role of Vince Cable will be some of the most fascinating. Vince’s fierce intelligence combined with a (perhaps deliberate) flair for the enigmatic meant he was involved in some of the most interesting of the coalition’s key moments.
One area of particular significance is likely to be the analysis of his views on austerity. Throughout the coalition Vince was often portrayed in the media — and by some Liberal Democrats — as a brave warrior fighting an axe-wielding Tory-Lib-Dem cabal of ideological austerians. Yet this seems to me to be precisely wrong.
In 2009 Vince wrote a pamphlet for the Reform think tank called ‘Tackling the fiscal crisis: a recovery plan for the UK’. In it he termed the UK’s fiscal deficit and accumulated debt the “central issue” in politics, and predicted the need for fiscal tightening of around 8% of GDP over a 5-year period (compared to the “optimistic” plans of the Labour government for a correction of 6.4% over 8 years). Moreover, deficit reduction should be achieved largely through cuts rather than tax rises:
Fiscal consolidation could come from curbs on spending or increased taxation. In practice there will almost certainly be elements of both and no Chancellor would sensibly rule out tax increases. But the emphasis certainly should be on public spending.
In the paper, Vince also identified some specific areas of spending where savings could be achieved, including:
- “Curbing industrial policy” including scrapping Regional Development Agencies
- Scrapping Strategic Health Authorities and other savings from the NHS budget
- Significant cuts to defence programmes
- Freezing public sector pay overall and cutting higher salaries
- Sales of public assets
In the event, of course, many of Vince’s specific proposals were implemented by the coalition.
So how did the coalition’s record on deficit reduction match Vince’s predictions?
Originally, of course, the coalition sought to eliminate the structural deficit entirely within its 5-year term. The period in which this would take place was then extended in 2011 in response to two things: an upward revision by the Office for Budget Responsibility in the estimated size of the structural deficit, and the eurozone crisis.
In the end, then, deficit reduction over the course of the coalition was rather more modest than predicted by Vince Cable: about 5% of GDP (rather than the 8% predicted – see chart), but of course austerity continues.
Inevitably, there seems to have been rather more politics than hard-headed analysis in the portrayal as Vince as the coalition’s deficit dove. It suited those seeking to undermine Clegg and the coalition to paint Vince as his antithesis to whatever extent possible.
I note with interest that Vince is due to summate this (evidentially problematic) motion on economic policy at conference, so it will be good to hear his analysis of the current state of the economy – though for a preview you can listen to his interesting comments on last night’s PM programme (at about 6 minutes in).
* Nick Thornsby is a day editor at Lib Dem Voice.
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20 Comments
A very interesting and informative article
I would add that Vince’s new book ‘After the Storm’ is very insightful in explaining his economic positions in coalition and analysing the current UK economy.
Vince Cable (and let’s not forget his adviser Giles Wilkes) were right to be doves on fiscal policy – it seems madness to worry about financing debt (yes I know the deference between the deficit and debt) given present interest rates at which a Government can borrow.
But they were also right – and far ahead of the thinking of their colleagues Clegg, Alexander and Laws, on monetary policy. They saw monetary policy as tight and advocated loosening. They advocated NGDT level targeting. They were worried when the exchange rate began to strengthen (thereby tightening already) overly tight money.
Following the decision to appoint Mark Carney monetary policy loosened and the economy responded. But the recovery is stuttering to a halt. The nomimal size of the economy – its value in pounds and pence hardly rose at all in the last quarter.
So, the real issue is what to do now – what should be Lib Dem economic policy?
Clearly communication is key in reversing the plunge in confidence about the economy and about investment, about spending.
So a concerted fiscal and monetary programme communicated loudly and clearly must be the basis (and some international co-ordination). And it should be led on our behalf by Vince Cable along side Tim Farron.
We should be financing a huge housing building programme combining building for rent and building for sale. That needs to be done with borrowing.
There’s a fiscal boost.
But we can also use that increase in the deficit to inject a monetary boost. Part (and I’d say a large part) of that borrowing should be financed by monetary financing to increase the supply of money. It would also be a huge signal of intent.
At the same time we should be advocating that the Bank of England adopts a nominal GDP target and we should ‘invite’ the MPC to set the growth target at 7% for two years.
It is madness to have a central bank with operational independence which is for the third time in 15 years failing to manage the nominal economy effectively – too loose in the mid Noughties, too tight from 2007/08 and now obviously too tight again.
If this does not happen – the UK faces very soon negative interest rates of 2.5% or thereabouts, declining productivity (as people fail to invest and update) and shambolic public services.
My only problem with the mystical Delphic Oracle of York is that he could have had the leadership on a plate – but apparently didn’t want it…… as opposed to, say, J.Corbyn who didn’t really want it but got it. Sometimes, dear Vince, I wonder if you regret that ?
Agree with Bill le Breton…….. far ahead of the thinking of colleagues Clegg, Alexander and Laws, on monetary policy
I’m not sure how long it will take for politicians to realise that they can’t reduce a budget deficit by cutting spending and raising taxes, but I suppose if we give them long enough they’ll get the idea in the end. The promise was that the budget would be “fixed” in the period 2010 -2015. When that didn’t happen the new promise is that it will take a little longer, but the budget will be in surplus by 2020.
There’s not a chance of this happening unless the Govt take deliberate and concerted action to reduce the value of the pound and bring international trade not only into balance but well into surplus.
That’s how Germany “achieves” its budget surplus, without creating private debt induced asset bubbles in it economy, and that is the only way the UK can do it too.
The question we should be asking is why we need a reduced deficit anyway?
The impression given in the article is that the deficit in the period 2010-2015 was reduced by government action. But it is a matter of historical record that govt deficits rise sharply at the start of the recession and fall as the economy gradually recovers. So would the coalition wishing to be seeking credit for what always happens naturally anyway? Surely not!
If anyone is interested to really understand all this they might like to start by taking a look at Neil Wilson’s very good sectoral balance records:
http://www.3spoken.co.uk/2016/01/uk-sectoral-balances-q3-2015.html
Notice how government borrowing is entirely counterbalanced by the trade deficit?
There’s plenty I don’t agree with on that motion. Individually, the policies are not so bad, but where’s the policies to help businesses and the self-employed keep their costs and regulatory burdens down? Near non-existent. Of course, I don’t see regulation as always a burden, but that is another point.
Whether he was proved right on austerity or not, I struggle to look past that I think if he was on his own he would prioritise social policies over “pro business” ones.
Besides the point that you mention on income inequality, there are other things that can be challenged on that motion, for instance:
1. Are low government borrowing costs a sign of low global growth prospects and potential dangers ahead with borrowing too much?
2. If a social enterprise receives extra tax breaks, then is it not just an enterprise rather than a social one?
3. Land Value Taxation? Not starting that debate here, but there are some reasonable concerns.
I’ll leave it as that for now, but whilst Vince supports businesses when they are struggling, there are questions whether he could do more to stop them getting into that situation.
I certainly think the right of the Party would be generally enjoying greater standing now had Vince led us into 2015. Instead we got to test out an unmasked Orange Book agenda – look left, look right and then get run over.
“I do not understand what I do. For what I want to do I do not do, but what I hate I do.”
Romans 7:15
What is clear is that the Austerity and other economic policies since 2010 have been a disaster and the disaster is now getting worse by the month. And it’s in the public sector where the disaster is looming worst (for the time being anyway). The public sector cuts set out before 2010 by Cable were pretty small beer compared with what is now happening.
Tony Greaves
Petermartin.I pretty much agree. The immediate effect of the coalition was to choke off recovery until austerity was relaxed somewhat in 2013 and even then keeping interests at a historic low. I actually think the Major government handled the 90s crisis far better than either the coalition or the present government because it allowed sectors like the housing market to correct themselves and cushioned the blow with things like increased mortgage relief. To me the recent policies seem to be aimed at simply making personal debt cheaper to the point of stagnation so that the ideological war on the state by the economic right can be sustained and the, in truth very weak, recovery is mostly down to a natural cycle.
@Tony Greaves:
“What is clear is that the Austerity and other economic policies since 2010 have been a disaster”
This is what the IMF say:
“The UK’s recent economic performance has been strong, and considerable progress has been achieved in addressing underlying vulnerabilities. Growth has exceeded that of the other major advanced economies, the unemployment rate has fallen substantially, employment has reached an historic high, the fiscal deficit has been reduced, and financial sector resilience has increased.”
@ Tony Greaves “And it’s in the public sector where the disaster is looming worst (for the time being anyway).”
Spot on, Tony. The vehicle for services, local government, is reeling from year on year cuts and the imposition of additional responsibilities without appropriate funding. This has been worsened by the blatant settlement in favour of Tory authorities by Osborne.
The obvious crisis is in adult social care for the elderly. Increasing demographic demand is met with reduced (and sometimes no) services. Osborne’s “big hearted” increase of the minimum wage is not matched by additional funding to enable local government and private out sourced providers to finance this increasing demand.
Those of us fortunate to have private savings might just get by – but the majority will not.
Simon McGrath
and here’s what the soviet block used to say.
Tractor production is up, we have never mined more beetroot, the glorious five year plan is working etc.
The point is this our growth is based on debt, our trade deficit is abysmal, our productivity down. our interests interests rates at permanent low etc. .
Ah! the nostalgia I felt reading those advocating reducing the value of the pound. I could see again on my black and white TV, Harold Wilson talking some gibberish about the pound in my purse and my pocket being still fine and his trashing of our currency being the master stroke that would power our exporters to glory.
It was nonsense and a failure then and like all ‘simple and magic’ solutions it’s a destructive and vain imagining now.
Anyone who has actually been inside a factory will know that our exports are made from imported raw materials, components and energy. As our productivity is rubbish and our politicians have only been in our factories to have their photos taken wearing hi-vis jackets and hard hats, they are unlikely to have a solution in their heads, either.
Sorry Mr Sheldon, but Harold Wilson was being punish for not supporting the USA in Vietnam.
@ Barry Snelson,
The raw materials cost is just a small fraction of the sale cost.
Austerity, at least as I understand the term, is an attempt to make us live within our means. If we accept that than it must mean we don’t import more than we export and so pay our way in the world through the exchange of goods and services rather than by selling gilts which forces the pound up.
It’s a much fairer form of austerity. It is shared out for all to bear. The present austerity only affects the poor who can’t find decent jobs. It is no austerity at all for those wishing to sell up in the UK and, for example, retire to Tuscany.
Vince was wrong about austerity and deficit reduction. See http://www.centreforwelfarereform.org/library/by-date/the-economic-necessity-of-basic-income.html
Peter,
Have you thought of mortgaging your house and setting up a factory to make some high tech product and exporting it? It would be a better lesson in economics than one can find in books. What materials and components do we have in the UK? I suppose we could weave willow baskets while they make flat screen TVs and smartphones.
Whilst Wilson was devaluing to boost our exports the German Wirtschaftswunder was full speed ahead despite (I think because of) the incredible strength of the Deutsche Mark.
The truth abides, and no amount of sterile economic theory can make it go away.
We are a nation with far too large a population for the land it occupies. We need to export high value products and that means top quality, leading edge engineering, well made in highly productive factories and market leading products.
Financial jiggery-pokery such as printing money, devaluing the currency are just the last resort of the desperate who watch our productive capacity shrink day by day but don’t know how to reverse it.
As to austerity, this generation can spend as much as it likes. As it’s all borrowed not earned, our grandchildren will be carrying the can for this generation’s extravagance.
@ Barry Snelson,
You’re quite mistaken about the DM. When Germany had its own currency it did everything possible to hold down its value on the FX markets. Germany now uses the economic weakness of other euro using countries to the same effect – but that is for another discussion.
Any country, and this is without exception, wanting to run an export surplus has to have a policy on its exchange rate which keeps its currency weaker than it would otherwise be. Denmark, Switzerland, China, Singapore etc. You might want to look up the data.
I must admit I laughed out loud at the phrase “those seeking to undermine Clegg”. If we’ve learnt anything from the Gurling review, it’s that Clegg and those around him consistently undermined the party. If only those who opposed him had been more successful in 2014.