We Lib Dems need to oppose austerity

The Liberal Democrats are the party of David Lloyd George, John Maynard Keynes and William Beveridge. We are the party that laid the foundations of the welfare state and pioneered support for Keynesian economics, which strived to create an economy of public investment in infrastructure, growth and full employment. Our party’s history is one which is staunchly against ‘slash and burn’ austerity.

Of course, during the Coalition Government, the party’s leadership supported the austerity programme of David Cameron and George Osborne. This continues to be used against us by supporters of other progressive parties, not least Labour, despite the fact that Labour also supported austerity. I hope no-one joined the Liberal Democrats to introduce the ‘bedroom tax’, support the benefits cap, cut legal aid, cut housing benefit to young people, introduce assessments for disability benefits or to support benefit sanctions. It is not a nice thought, but whether you think Coalition austerity was right or not, it has ruined people’s lives and led to thousands of preventable deaths.

Coalition austerity was not compatible with the liberalism of Lloyd George, Keynes or Beveridge and many Lib Dems opposed austerity during the Coalition Government. Since the Coalition, the party has clearly begun to move away from austerity. This began in 2015, when the Liberal Democrats opposed the Conservatives’ Welfare Bill, while Labour abstained. In the general election of 2017, our party was committed to reversing more welfare cuts than even Jeremy Corbyn’s Labour Party. 

At our Autumn Conference last year, the ‘Demand Better’ policy motion committed the party to ‘a better society, in which everyone is supported in times of need, with an end to austerity’. Those three words, ‘end to austerity’, are absolutely essential if we are to win over more Remain voters, most of which vote for progressive parties. They are as important as the other two words for which our party is known for, ‘Stop Brexit’. Indeed, austerity has helped to fuel the rise of Brexit populism and therefore if we want to stop Brexit, we must end austerity.

It is already Liberal Democrat policy to end benefit sanctions, we must do more as a party to include the abolition of benefit sanctions in our campaigns. The party is already doing good work in opposing the Vagrancy Act and (in Manchester) opposing Labour’s ‘homeless tax’. The party already has a clear platform for social justice, not to mention that we now oppose Tory welfare reforms, such as the ‘bedroom tax’. 

One area the party should look more closely at is local government. Local government spending has been slashed back in recent years. We are the party of local government; just this year we have gained over 700 new councillors. We must pledge ourselves to increasing spending on local government and on council budgets across our country.

The Liberal Democrats have a dual political tradition of radical liberalism and social democracy. Both of these traditions give us a strong foundation for opposing austerity. We must revive the radical liberal tradition of Jo Grimond and David Lloyd George. But we must also revive the social democratic tradition of Roy Jenkins and Charles Kennedy. We are a party that believes in individual liberty, the environment and reforming politics, as well as supporting social justice, public services and workers’ rights.

We Liberal Democrats must be vocal in our opposition to austerity at every opportunity. At our heart we are an anti-austerity, Keynesian party. The party has already begun to win over high-profile progressive defections, such as Chuka Umunna and Ian Kearns. We need to recognise the mistakes we made during the Coalition. We must be absolutely clear to all voters, vote Liberal Democrat to ‘Stop Brexit’ and ‘End Austerity’.

* Paul Hindley is the Northern Vice-Chair of the Social Liberal Forum and the former Chair of Blackpool and Cleveleys Liberal Democrats.

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38 Comments

  • David Evershed 26th Jul '19 - 12:04pm

    I thought Keynes and Beveridge were economists who favoured governments keeping a lid on government deficits during times of economic growth – in order to have the headroom to increase government spending to boost growth in recessions.

  • nigel hunter 26th Jul '19 - 12:43pm

    Yes,the coalition did not do us any favors whatever the rights and wrongs of it. However their has been yearnings for the time 2010 15 when we had STABLE govnt NOT the wreckage /chaos. that has happened since 2015 We are in a new era and austerity must end for the country to grow. Austerity only benefits those who can afford it (and get richer) a small number not the majority.

  • Sue Sutherland 26th Jul '19 - 12:51pm

    Of course we must end austerity especially now Boris is promising to throw money around with no way to show how he can afford to do so. Boris is the magic money tree. He and Farage are both promising investment in the poorer areas who voted Leave.
    I am hoping that we will have an economic policy to vote on at the September conference which will show how we can afford to improve services and benefits because austerity, like the trickle down theory, just hasn’t worked. The Joseph Rowntree Trust is about to publish a paper on what those who live in declining areas actually want to happen in their communities. Maybe we could use this as a basis for consultation in these places? We have to marry our determination to stay in the EU with how we will make sure the economic gains from membership are distributed much more fairly.

  • Peter Martin 26th Jul '19 - 1:01pm

    @ Paul Hindley,

    “therefore if we want to stop Brexit, we must end austerity.”

    Would have been a good argument several years ago. A bit late now though.

    @ David Evershed,

    “I thought Keynes and Beveridge were economists who favoured governments keeping a lid on government deficits during times of economic growth!”

    What does a “lid” mean? I’d put that during the good time when everyone is spending freely the Govt should err on the side of being rather tight on their spending to prevent inflation.

    “– in order to have the headroom to increase government spending to boost growth in recessions.”

    What does “headroom” mean? I’d put it that when everyone else isn’t spending much, which reduces the inflation risk, then the Govt can safely spend more (and/or tax less) to keep the economy moving along.

  • Completely agree, and not just because opposing austerity and the penalisation of the poor is absolutely the right thing to do. It’s also a matter of practical politics. The impact of the clear stance taken by the LibDems on Brexit has shown the potential of clear, unequivocal messages in terms of gaining public support – and getting away from the old stereotype that the Lib Dems are always a bit vague and non-committal. But if we’re going to really respond to the current crisis – with the Tories taken over by a far-right cult, Labour floundering, polls all over the place – we need (and have a responsibility to) reach much broader sections of people. And putting forward clear and ambitious policies in the here and now to deal with the appalling poverty crisis that now exists in the UK, and giving them maximum prominence, as much as anything else, is one of the best ways to do that.
    It’ll also be the best way to get beyond the endless raking over of the record of the Coalition, for good or bad (not to mention tuition fees…). Without this kind of ambition, we’ll easily just get pigeon-holed yet again as protest votes, flash in the pan, Tories-light, yes-but-no-but, etc….

  • Michael Cole 26th Jul '19 - 1:47pm

    Hi Paul,

    Good article but why do you say “… other progressive parties, not least Labour,” ?

    Far from being a progressive party, Labour is an obstacle to progressive politics.

  • Austerity, reducing the gap between how much is spent and how much is collected in taxation. Not sure Paul gets this. If Paul’s plan is to increase spending with no corresponding increase in taxation during periods of economic growth what does he think will happen when a recession hits? I don’t think it s fair to claim rely on the positions of Keynes or Beverage when advocating for this type of policy.
    In the 90s then Charles Kennedy advocated for spending on education he matched it with a tax rise to meet it.
    Just remember there will come another recession and if you commit to ballooning deficit in the good times you will have to remember that balloon can be come an issue in the bad times.

  • Michael Sammon 26th Jul '19 - 2:01pm

    Well said David. Keynes did not advocate creating structural deficits which Labour left us with. If they weren’t so naive they would’ve been paying down the debt during periods of strong economic growth. A structural deficit is a deficit when we have full employment which is basically what we have now but we have lost productivity as well giving us the output gap. Keynes perfectly sensible proposal was to deficit spend to get back to full employment then cut the stimulus when the economy picks up. Unemployment was far greater during the great depression. Different methods for different times.

  • John Marriott 26th Jul '19 - 2:32pm

    How quickly we forget how things were in 2010. Remember Liam Byrne’s note to David Laws? Not unlike what Reggie Maudling was supposed to have said to an incoming Jim Callaghan as the former left No 11. As in 1964 the country was in a mess financially. We were paying ourselves too much, and borrowing a good proportion of that. I don’t blame Labour for this predicament except to the point where they sucked up too closely to the money shufflers in the City. As the Germans often say; “Die Briten leben auf Pump” (the British live on tick).

    So, we bailed out the banks, as someone said, we nationalised debt and and yet continued to privatise profit, as usual. Did we ever get payback? So we had to sort things out. There were some, myself included, who would have favoured a Roosevelt style public works programme; but that was not to be. With Labour more than happy to go away and lick their wounds – goodness me, how they blew that goodwill of 1997, when some of us naively thought that, given a parliamentary majority to die for, they could really have shaken things up constitutionally, whereas in the end they more or less did a Ramsay McDonald – Cameron’s ‘generous offer’ and, as David Raw might have said, the lure of the ministerial limo proved irresistible, made a coalition possible and austerity a reality. As a County Councillor during that fateful period I experience at first hand how Central Government used local government as a kind of human shield, how virtually all English first and second tier councils accepted the Council Tax Freeze Grant in order not to raise local taxation, while at the same time, being forced to reduce services and many of the specialist staff to deliver them. The new buzz word became ‘commissioning’.

    Yes, mistakes were made; but given the circumstances and having been in a very small way part of the process, there is no way that I am going to disown what happened. After all, you can’t make an omelette without breaking a few eggs. It’s typical for our country that the omelette didn’t quite turn out the way we might have hoped.

  • At the risk of being repetitive, ‘I agree with John Marriott’.

    Yes, “the lure of the ministerial limo proved irresistible” – though it comes with the job and I don’t begrudge that. What I do begrudge are the peerages, knighthoods and gongs celebrating a long gone Empire. I also begrudge the cuts in local government services which disproportionately affected the most vulnerable…. who might have had a lino but not a limo… or even a bus…. and I can’t recall many gongs going their way.

    I wasn’t a fan of the Blair/Brown Governments… (far too right wing) especially the PFIs, the outsourcing, the punitive Ofsteds, the Academy Schools, and of course the Iraq War. But the root of the 2008-10 economic crisis was the Bush free for all neo-liberal economics. It involved Fannie Mae and. Freddie Mac who hailed from the good ol’ U.S. of A.. Denial of that is party prejudice sandpapering the truth. Brown did get child poverty down.

    Few politicians impress me these days. Now I do what I can with the local foodbank (opened, yes, in 2013 !!). A phrase from Ecclesiastes 1 (echo from a Methodist Liberal childhood) comes to mind :” Vanity of vanities, sayeth the Preacher, all is vanity”.

  • 1) Government spending was higher post 2010 than pre 2008, so the term “austerity” is meaningless
    2) Keynes 101 – run a surplus during periods of high growth and use that surplus to reduce debt.

  • “during the Coalition Government, the party’s leadership supported the austerity programme of David Cameron and George Osborne”

    Er, no it didn’t. It cut a compromise between the Liberal and Tory programmes that lay to the left of Labour’s plan for 2010-2015.

  • Katharine Pindar 26th Jul '19 - 6:59pm

    Delighted to see your article, Paul. Yes, opposing austerity and relative poverty now should I believe be our first objective, more urgent even to ordinary people than environmental protection. And, Sue, we have already costed the proposals we had in our 2017 Manifesto, and we will hopefully develop our policies further in the September Conference. With sufficient growth in the economy -provided it is not stopped by Brexit – I understand we can afford to wipe out relative poverty within a very few years. We can also because of low borrowing rates afford to invest in useful infrastructure, such as northern train-line development and much more house-building, and essential research and development to update our industry. The revival of local government services, and more government help to the regions outside the south-east, are all part of the Liberal Democrat programme to reduce inequality as well as stopping austerity.

  • Christopher Haigh 26th Jul '19 - 10:26pm

    When out of government the Tories will attempt to create false crises. That’s what they did with government spending prior to the 2010 election initiating the rash austerity cuts.thay have so destabilised the country since then.

  • The Lib Dem’s should take a firm stand now against austerity as we in part succeeded in cutting the deficit.

    But we should link ending Austerity to ending Brexit. Vote Brexit, vote Austerity might be a good slogan.

  • Fspeople,

    Austerity is not reducing the gap between government spending and expenditure. It is a policy which tries to reduce the deficit by deflating the economy. It only should be done if economic growth is strong enough to cope and even then it would be better to control government expenditure increases and allow economic growth which increases government revenue to reduce the deficit.

    Keynesian economics is about unemployment and the time to reduce the deficit is once there is full employment not when there is some economic growth.

    It is possible for the government to increase spending while at the same time reducing the deficit if economic growth is strong enough. If economic growth isn’t strong enough then the government should be increasing its spending to increase economic growth.

    Michael Sammon,

    We haven’t had full employment since 1974. Unemployment in the UK was above 5% for 2001, 2002 and the start of 2003 and fell at the end of 2003 reaching 4.7% at the end of 2004 and beginning of 2005 and I don’t consider this full employment and the time to reduce government spending. It rose to 5.1% in the last quarter of 2005 rising to a high of 5.5% for most of 2006 and the beginning of 2007.

    We are not having a boom now either with economic growth forecast for the year of 1.6% and over the last three month it fell to 0.3%.

    TCO

    Keynes 101 – run a surplus during periods of high growth and use that surplus to reduce debt”.

    No, it is run a surplus if there is full employment, and reduce the deficit as full employment approaches.

    I would say that the government should control the deficit / surplus to achieve 3% economic growth each and every year.

  • Peter Martin 27th Jul '19 - 8:15am

    @ fspeople,

    “Austerity, reducing the gap between how much is spent and how much is collected in taxation. Not sure Paul gets this…..”

    I have to agree with Michael BG ( Sorry Michael!) but it largely isn’t.

    Those putting forward this argument don’t usually “get” that the Government’s income is highly dependent on its spending. The money it receives back in taxation is simply what it created by spending it into the economy in the first place.

    @TCO,

    “Keynes 101 – run a surplus during periods of high growth and use that surplus to reduce debt”.

    This would only, possibly, apply to a country with balanced trade. The UK usually runs a trade deficit which requires a net outflow of ££ to pay for. To keep the economy functioning requires that these ££ be topped up from somewhere. That’s why the Govt tends to run a deficit even in relatively buoyant economic times.

  • Michael Sammon 27th Jul '19 - 11:41am

    Keynes advocated counter cyclical demand management. If you increase government spending as a % of GDP then you have to reduce this percentage when the economy grows to get back to the same size of government. He may have wanted an overall increase in size of government but that was not what his theory was about. We have basically hit full employment but we have lost productivity and this should be our focus if we are to prosper.

  • Peter Martin 27th Jul '19 - 12:29pm

    ” If you increase government spending as a % of GDP then you have to reduce this percentage when the economy grows to get back to the same size of government.”

    OK but Keynesian demand management is just as much about levels of taxation as Govt spending. So, in that sense it doesn’t have to be solely a leftish economic philosophy. The political right would do well to understand that if they do want a smaller Govt then needlessly depressing the economy with imposed austerity isn’t the right way to go about it. This just creates an increased demand for Govt support and services.

    “We have basically hit full employment but we have lost productivity and this should be our focus if we are to prosper”

    All we’ve really done is to massage the figures downwards and to create a new class of underemployed to replace many of those who were previously classed as unemployed. The purpose of depressing wages is unchanged.

    Mainstream thinking is that higher productivity creates the conditions for higher wages. It’s actually the other way around. If you’re growing apples, for example, and wages are low then it doesn’t make sense to buy expensive robots to do the picking. You can see marvellous examples of what is available on tube. But the technology isn’t cheap and it only makes sense to invest in that if wages are high.

  • Jen,

    Our 2010 manifesto stated we would have an economic stimulus for the first year of a Lib Dem government and we would only start addressing the deficit once economic growth was strong enough. In 2010 we adopted the Conservative economic policy of cutting not only day to day expenditure but also government investment. Remember VAT was increased from January 2011 and this was deflationary. This is why at the end of 2011 and beginning of 2012 it was being reported we had a double dip recession (this was caused by the Conservative economic policies). It was after this that deficit reduction was targeted for longer and you might say a compromise was reached between the parties on economic policy. It was never a policy to the left of Labour. This was a wasted opportunity because we said that the economic policy had not changed and so got no credit for the change.

  • Michael Sammon 27th Jul '19 - 4:18pm

    It isn’t that simple Peter. Unemployment has decreased and full time jobs have increased too. We haven’t just massaged the figures. It is a lot more complicated than that. According to Full Fact’s article titled “Is work being spread more thinly” Published just last month “In summary, since 2010 the proportion of the labour force in employment has increased, and so has the proportion of people satisfied with their working hours. At the same time the average number of hours worked per person has remained fairly flat. Record employment isn’t coming at the expense of more people working fewer hours, or hours they don’t want.”

  • Michael Sammon,

    You have not addressed by earlier comment that Keynes was targeting unemployment and it is the level of unemployment which determines when a government should reduce the deficit and turn it into a surplus. I have stated we have not had full employment since 1974 and stated some levels of unemployment which I do not consider as full employment.

    The latest figure for unemployment is 3.8%. I do not consider this full employment.

    I have stated that the forecast growth rate of 1.6% is too low and you haven’t addressed this either.

    I agree with Keynes that when we have full employment if there is little spare capacity for economic growth then the government should remove demand from the economy by having a policy of deflation. This can be achieved by just reducing the deficit rather than turning it into a surplus. The other issue with Keynesian economics is to watch out for inflation and to deflate the economy when inflation is too high.

    Peter Martin,

    I don’t mind you agreeing with me. 🙂

  • Michael Sammon 27th Jul '19 - 9:55pm

    There is a natural rate of unemployment determined by supply side factors. We do not have mass unemployment now and we do still have a structural deficit. Inflation was above target. It was not the great depression all over again. I don’t believe that Keynes recommended just carrying on spending until we hit an all time record low of unemployment. It was far more nuanced than that. We have lost productivity and it isn’t simple for us to increase.

  • Michael Sammon,

    After the Second World War before neo-liberal economics became the consensus, the consensus was that full employment meant having unemployment at 3% or less. What you seem to be talking about is the neo-liberal idea of Non-Accelerating Inflation Rate of Unemployment (NAIRU) which is not a liberal idea as it sees unemployment as a legitimate way to control inflation.

    It seems that you think it is fine that over 1 million people in the UK are unemployed. I do not.

    There is no way of knowing if we have a structural deficit.

    In the recent past the myth of structural deficits was widely accepted but now they are not considered something to consider seriously. How can you consider structural deficits seriously when in 2008 the IMF stated Spain had a structural surplus of 0.5% of GDP between 2000 and 2007 and then in 2012 stated that it had a structural deficit of 1.2% of GDP over the same period? It is clear talking about structural deficits is not helpful for economic planning.

    “Chris Dillow has questioned the distinction between cyclical and structural deficits, and this has received support from other leading economists. He contends that there are too many variables involved to allow a clear distinction to be made, especially when dealing with current circumstances rather than retrospectively, and suggests that the concept of structural deficits may be used more for political purposes than analytical purposes.”

    “Martin Wolf, in his book “The Shifts and the Shocks”, argues that nobody knows what the ‘structural’ or cyclically adjusted balance is and that it is least knowable precisely when such knowledge is most essential, namely, when the economy is experiencing a boom.” We are not experiencing a boom now, so the deficit is still cyclical. If we achieved full employment for some time and achieved economic growth of 3% each and every year without the government needing to stimulate the economy it is unlikely we would have a deficit at all.

  • Peter Martin 28th Jul '19 - 7:10am

    @ Michael Sammon,

    ” we do still have a structural deficit”

    The so-called “structural” part of the deficit , and I’m not sure why the neolibs call it that, is supposedly the excess part. The amount over and above which is necessary to keep the economy ticking along regardless of the phase of the business cycle.

    However they are forgetting, probably deliberately, about the nature of financial flows.

    So what about the ££ that are lost to the economy to finance the trade deficit? Why don’t the neolibs make some allowance? What about the ££ that we might want to save so we can accumulate some assets? Saving is supposed to be a good thing right? So why no allowance for that?

    If we look around the world at countries, ie the USA, Australia, NZ, the UK, who genuinely let their currencies float we see pretty much the same situation everywhere. They run trade deficits. Their neoliberal residents are always fretting about “structural deficits” and advocating austerity economics as the cure!

  • Matthew Huntbach 28th Jul '19 - 7:26am

    What does “austerity” mean? It seems to be a made up word for political reasons, I don’t recall it being used to mean what it is now used for until fairly recently.

    It is used supposedly to mean a government which does not borrow money. However, if it was really used to mean that, it would be used to mean a government which supports high tax in order to pay for all government services. It does not seem to be used for that at all, it seems only to be used for a government that supports low tax and hence cuts government spending.

    It used to be the case that the classic government of austerity was considered to be the 1945-51 Labour government. That shows how the word has been changed to mean something different from what it used to mean. That was a government that supported high tax in order to pay for government services. There was a book called Austerity Britain, 1945-51 written by David Kynaston, see here. That book was only written 12 years ago, yet now “austerity” is used to mean the opposite of what it was used to mean when this book was written.

    The real meaning of austerity is being against luxury. So it very much did mean a government that would charge high taxes on rich people in order to provide government services. The point would be that once income reaches a high level, it is no longer being used for necessary things, it is being used to provide luxury things, and so that’s what it is best to tax in order to provide the necessary things from the government for other people.

    It seems to me that the twisting of the word “austerity” to mean the opposite of what it used to mean was one for political reasons. Done first to mean a government that raises all the money it needs to spend, and then twisted further to mean a government that cuts spending on services in order to allow rich people to keep their money. Calling that “austerity” was used to make that sound more acceptable to ordinary people. It sounded good, because it gave the impression we were sharing in the suffering needed to pay for government services, and that it was only unnecessary luxury that was being cut. Of course, it has now been pushed so far to mean the opposite of what it used to mean that most people don’t even think of it in terms of what it used to mean.

  • Johnson is abolishing austerity ‘at a stroke’; another £3.6 billion promised from his magic money tree on Friday.
    ‘Honest’ Boris will, I’m sure, be keeping all his pledges even whilst cutting taxes; won’t he?

  • It is good point Matthew Huntbach makes in how the meaning of austerity has changed. It did indeed mean depressing consumer spending and the maintenance of rationing in the immediate aftermath of WW2.
    The Blair/Brown government did the opposite and ran a structural deficit. Much of the increased spending on public services and welfare was supported by an unsustainable credit boom that inflated tax receipts from house sales and financial services in particular. When that bubble burst (as it had to under the weight of private sector debt), consumer spending returned to more sustainable levels based on the cyclical level of national production.
    Government spending on essential public services needs to be maintained throughout the economic cycle. Stimulus spending or tax cuts are temporary macroeconomic interventions only and mostly delivered via automatic stabilisers in conjuction with monetary stimulus..
    During the coalition spending was protected in health services, schools (but not per capita) foreign aid and pensions (with a triple lock). All other departments saw real spending cuts. This has seen significant changes in the composition of government spending over the past decade.
    Despite welfare reforms and low unemployment, spending on social services continues to increase as a % of gdp(particularly on pensions) as does spending on health and social care. While structural changes in spending can be deferred by measures such as extending the retirement age they cannot be eliminated indefinetly. The increased spending ultimately needs to be financed via taxation.
    Neither LibDem policy or Labour has advocated the maintenance of spending constraint in public services to reduce the budget deficit (inclusive of capital spending) and it appears that the Conservative party are now abandoning their prior policy in this respect https://inews.co.uk/news/politics/conservative-leadership-contest-boris-johnson-ready-to-borrow/. There is therefore no austerity to oppose.

    The political argument going forward will be around the nature and composition of government spending and how that will be financed.

    LibDems are on firm ground in advocating increased taxation to finance current day to day spending and making good use of the current low costs of borrowing to rapidly step up productivity enhancing investments in infrastructure, skills development and R&D as well as restoring the stock of public housing to address the housing crisis.

  • The IPPR issued a press release this month UK needs to shift to ‘tax and spend’ economy to end austerity and fix ‘killer’ social injustices
    IPPR argues that “to truly tackle the injustices afflicting society, the UK government should commit to matching European levels of social spending. This requires raising public spending as a percentage of GDP to rise to 48 per cent by 2025.”

    “These measures would imply over £100bn for additional spending, enabling a potential extra £285 per head on education, £450 per head on health and £930 per person on social protection than under the status quo.”
    “To make these universal services possible, the report makes the case for fundamental changes in tax policy. To achieve equal spending with comparable European countries, an additional £56 billion per year in taxation is needed by the end of this parliament, rising to £102 billion by 2025 at the point of convergence.”

    “The report argues that in the long run only broad-based tax increases will make these changes possible. However, it recommends that policy makers begin by prioritising tax increases on the wealthy – to ensure they pay a fairer share before others are also asked to contribute more. This is both fair and required in order to win support for higher taxation among those on middle incomes, it says.”

    “The report draws on previous tax reforms suggested in the IPPR Commission on Economic Justice that could raise up to £57bn billion per year. These measures include more progressive taxation on income; taxing income from wealth, such as assets, the same as income from work; introducing a lifetime gift tax; replacing council tax and stamp duty with an annual property tax and increasing corporation tax to 24 per cent.”

  • Katharine Pindar 28th Jul '19 - 7:29pm

    Interesting as the academic discussion here of the changing meaning of ‘austerity’ has been, there are many people in our society who feel they are suffering from it, and author Paul Hindley is surely right therefore to address the popular meaning of it and oppose it. We have to fight the rise of poverty and deprivation so well documented by the UN Rapporteur Philip Alston in his November Statement and May Report, and usefully further his Recommendations.

    His findings were not only the result of his eleven-day personal on-the-ground country-wide investigation, but of much reading of the reports from charities such as the Joseph Rowntree Foundation, think-tanks and government bodies including the Institute for Fiscal Studies, and of further research and study. The appending notes are comprehensive. Yet the power of his statement arises because he saw for himself the poverty and deprivation, hardship and despair being felt by so many in our country, which is ignored by the Government to this day. To these fellow citizens, austerity means something real. Paul is right, aiming to help them should be our top priority.

  • Peter Martin 28th Jul '19 - 8:23pm

    @ JoeB,

    “The Blair/Brown government did the opposite and ran a structural deficit.”

    That word “structural” again! It gets bandied about a lot. As explained in my previous post all credit worthy countries which let their currencies freely float nearly always run a govt deficit, higher than you neoliberals would like, to support the inevitable trade imbalance.

    Much of the increased spending on public services and welfare was supported by an unsustainable credit boom that inflated tax receipts from house sales and financial services in particular

    OK you are saying the domestic private sector should have been borrowing less? ie Less in deficit? Fair enough. but if the DPS had been less in deficit the Govt would have had to be more in deficit to maintain the same level of aggregate demand and therefore the same rate of growth.

    It’s just simple arithmetic.

    The sectoral balances have to balance. That’s why they are called , er, balances !

  • Michael Sammon 28th Jul '19 - 9:14pm

    Michael BG no I was not talking about NAIRU. Just the natural rate of unemployment. I don’t see how structural deficits are a myth. Nobody knows what the nominal figure is exactly but they are possible as long as full employment is. I do believe we need to increase our competitiveness for an improved balance of trade. The planet comes first but we need to be sensible economically so we can afford the green technology and more money for public services.

  • Joseph Bourke,

    The Blair/Brown government did the opposite and ran a structural deficit”.

    It is generally accepted today that “structural deficits” are not useful in any way when discussing economics. Please see my posts of 28th July 2.40am.

    Michael Sammon,

    The natural rate of unemployment is a level higher than full employment. So what level of unemployment is your “natural rate of unemployment”?

    ‘The major criticism of a “natural rate” is that there is no credible evidence for it, as Milton Friedman himself said we “cannot know what the “natural” rate is”.’ (https://en.wikipedia.org/wiki/Natural_rate_of_unemployment)

    As we cannot know what it is, how can it be useful in any discussion on economics and the policies a government should pursue?

    As I have stated there is no way of knowing if there is a structural deficit because there are too many variables which never get to full capacity. The economy never reaches full capacity, because this can only happen when there is full employment and economic growth is zero. Once economic growth reaches less than 1% unemployment increases and so spare capacity is produced.

    I believe that our productivity will increase as real wages increase and we get closer to full employment. As Peter Martin so often tells us the best way for our products and services to be more competitive internationally is to reduce the value of the pound (of course they are already competitive to non-EU countries as I think we still have a trade surplus with these countries).

  • Joseph Bourke 29th Jul '19 - 3:09am

    Peter Martin,

    this article makes the point https://tribunemag.co.uk/2019/06/against-modern-monetary-theory “If more economists [as Vince Cable did] had paid attention to the potential consequences of rampant private sector borrowing in the run-up to 2007–8, fewer would have had so much egg on their faces when the debacle finally arrived.”

    The author goes on to note: “Countries running a deficit on their current account (meaning, broadly, that they import more than they export, counting goods, services, and flows of income) like the UK — which has a deficit funded from abroad — will always be vulnerable to demands for foreign currency that they cannot immediately meet. This is a significant impediment to sovereignty.”

    “Adam Tooze’s exceptional history of the last decade, Crashed, describes the situation when, in the depths of the financial crisis, British banks faced huge demand for dollars — the result of their massive dollar liabilities — that not only could they not meet, the Bank of England itself could not meet. Instead, ‘swap lines’ were opened from the Federal Reserve in the US to supply dollars at rock-bottom (but still notably profitable) rates to financial systems in countries like the UK that were suddenly grossly overstretched. This is a critical moment in the economic history of the previous ten years, since it reveals in dramatic fashion the real lines of power and command in the world economy today — as Tooze notes, the decision to provide that support was political and taken at the highest possible level in the US. Our huge, internationalised financial system is dependent, ultimately, on political support from elsewhere precisely because it is huge and internationalised.”

    The UK has been selling off assets o finance trade deficits for a long period of time. Since 2012 there has been a deterioration in Britain’s primary income balance. This is a measure of the difference between what foreign investors earn in Britain and what UK investors earn abroad. UK investors now earned less on their foreign direct investments than overseas investors do on their British assets, despite a fall in the pound, which would normally raise the value of the UK’s overseas earnings in sterling terms. This differential is now the main contributor to the current account deficit.
    So you see there is more to economic analysis than stating “It’s just simple arithmetic.”

  • Peter Martin 29th Jul '19 - 4:32am

    @ JoeB

    “Countries running a deficit on their current account ….. will always be vulnerable to demands for foreign currency that they cannot immediately meet…. ”

    This only applies to countries running a fixed exchange rate. Particularly a fixed exchange rate which is too high. We’ve seen the British Govt do exactly this in the 60s and 70s and inevitably run into balance of payments problems.

    ‘ So you see there is more to economic analysis than stating “It’s just simple arithmetic.” ‘

    Maybe there is, but being able to count and use a calculator is a good start! And if you float your currency or peg it on the low side that’s all you need to be able to do to convert £ into dollars.

    “British banks faced huge demand for dollars — the result of their massive dollar liabilities — that not only could they not meet, the Bank of England itself could not meet.”

    Of course not. The dollar is an IOU of the US Federal Govt. They can create as many as they like. Dollar liabilities aren’t a problem for the US Govt. They are for everyone else though! That’s why accumulating debts in a foreign currency is best avoided.

    “If more economists [as Vince Cable did] had paid attention to the potential consequences of rampant private sector borrowing in the run-up to 2007–8, fewer would have had so much egg on their faces when the debacle finally arrived.”

    Yes, “rampant private sector borrowing” was the problem. But VC, like many on the political right, was arguing that private sector borrowing was too high and public sector borrowing was also too high. He can’t have it both ways. You can’t say the sectoral balances shouldn’t balance! This is where simple arithmetic comes in handy!

    Of course they always do find a way to balance. If both private and public sector borrowing had been forcibly constrained by the imposition of a fiscal squeeze and tighter monetary policies then the economy would have crashed much sooner. That would probably have crashed the £ too. A reduced the demand for imports, from a crashed economy and a fallen pound, would then reduce the external deficit bringing everything back into balance.

    Obviously not back into balance in a good way.

  • Peter Martin 29th Jul '19 - 4:41am

    @ Michael Sammon,

    “I do believe we need to increase our competitiveness for an improved balance of trade”

    Productivity increase steadily up until the 2008 crash but it didn’t do anything for the balance of trade. The current account deficit actually increased.

    The way it works is that when we earn more we spend more too. And we spend more on imports and foreign holidays.

    There’s really nothing wrong with that. If Germany wants to send us more real goods and services than it takes back from us in return why not just let them get on with it? It’s only a problem if we think it’s a problem.

  • Peter Martin 29th Jul '19 - 10:13am

    @ Joe B

    “Countries running a deficit on their current account (meaning, broadly, that they import more than they export…..will always be vulnerable to demands for foreign currency that they cannot immediately meet. This is a significant impediment to sovereignty.”

    This only applies in a fixed exchange rate regime and even then, it only applied to countries which try to keep their currency artificially high.

    “If more economists [as Vince Cable did] had paid attention to the potential consequences of rampant private sector borrowing in the run-up to 2007–8, fewer would have had so much egg on their faces when the debacle finally arrived.”

    OK. But VC and other were saying, or least giving the impression that private borrowing was too high and public borrowing was too high. Sure any government could have reduced both with tighter fiscal and also tighter monetary policies. They’d have crashed the economy. If one had been tightened the other would have had to be loosened.

    ‘ So you see there is more to economic analysis than stating “It’s just simple arithmetic.” ‘

    Maybe there is. But being able to count and use a calculator is a good start. When mainstream economists can do that maybe we can add in the algebra of the sectoral balances. 🙂

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