The Lib Dems are bumbling along at the lower end of the polls at about 12% of the vote. Reform UK and the Greens are lapping at their heels, and if the Libs Dems are not careful, they will be eclipsed by one or both of them. Both Tories and Labour are in disarray, but in spite of this, the Lib Dems are making no headway. All they are doing is just scooping up the protest vote. Why is this? It is because they have no imaginative policies.
I have studied the policy paper, For a Fair Deal. It is fine as far as it goes, but a bit limp. It is full of targets, without any explanation on how they are to be achieved. In its core is a contradiction. As large an elephant in the room as anyone might find. On page ten we state that, with the exception of emergencies, we will balance the budget, but on twenty-one other occasions we commit ourselves to investments, without showing how they will be funded. It would be fine if we are applying Keynesian economics, the jewel in the crown of the Liberal armoury, but we do not.
We have fertile territory in front of us and if we are to make a break-through we need policies that are radical, avant-garde, and ones that will catch the imagination of the electorate.
Here are some suggestions –
• Free Public Transport
• Rebuild Closed Police Stations
• Keynesian Economics
• Distinguish between Asylum Seekers and Economic Migrants
• Establish a Sovereign Wealth Fund
• Take on bureaucracy. A Liberal society cannot be built by bureaucrats. It must be cultural.
Also, we should champion two other policies which should be bi-partisan –
• 15 Minute Cities
• Levelling Up.
The goal is unmanned. Come on Liberal Democrats. Kick the ball straight into the centre.
* Patrick Streeter is a Chartered Accountant. He has been a Parliamentary Candidate three times and a Councillor for 13 years. He is a Trustee of the Spitalfields Historic Buildings Trust.
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
John Stoa Original Art exhibition #dundeewestend
The Muesli Assassins
Nick Cook: England's forgotten spinner of the Eighties
Richard
Tristan Ward
Cllr Gordon Lishman
52 Comments
I completely disagree with the proposition in the title of this article.
Quite apart from some of the policies listed above being either bad policies or not explained with enough words to allow them to be evaluated, there is a more fundamental point.
While political activists, such as members of our Party or the readers of this website, are attracted to radical ideas, the electorate is not. That is why the Conservative Party has governed for about 75% of the last century.
What we need, and have, are good policies that appeal to voters rather than frightening them.
Too many on the progressive left Patrick cannot & will not distinguish between the two ….The Danish social democrat pm gets it & she’ll be 5 years in power next year…
“It is clear that the price of unregulated globalisation, mass immigration and the free movement of labour is paid for by the lower classes.” Mette Fredrickson…
“Establish a Sovereign Wealth Fund” ???
Why would you want to do this?
The reason for having them is to export capital which in turn keeps the value of the currency lower than it would otherwise have been. So for example, Norway has more oil money than it knows what to do with so it exports it via a SWF to stop its Krone becoming even more expensive than it is.
Another example is Australia. Some ten years ago the value of the A$ surged due to an insatiable demand for its primary mineral products. This was having an adverse effect on the rest of the economy. Car manufacture just about ceased. The solution: Set up a SWF to reduce the currency value.
So unless Lib Dems have decided they want a much lower value for the £ ………..
@MohammedAmin. Strange then that our sister party in Luxembourg campaigned and won on radical policies like legalising cannabis, free public transport and legalising same sex marriage. They delivered and got re-elected. Aping the miserable ambition of Labour and Conservative will not gain seats. Why would people vote for more of the same? No! Patrick is right. We need a radical change from the current staid status quo. We need to offer new hope and new ideas and the timid Fair Deal offering just won’t cut it. We have done best when we challenge concensus and offer a clear alternative.
What does “balance the budget” mean in practical reality?
Sovereign wealth funds have been mooted by both Labour Labour will spend £8bn on UK sovereign wealth fund if it forms government and Liberal Democrats Cable announces proposals for UK’s first sovereign wealth fund,
The fund is based on reinvesting the proceeds of sales of public assets sales such as a the shares held in banks and public land and in capturing part of the return on investment in British green energy production.
In practical terms, balancing the budget means financing day to day expenditure with tax receipts over the course of a parliamentary term and utilising state borrowing for capital expenditure that is consumed over longer time periods than a single tax year.
Labour is doing well in the polls in large part because they have in recent years begun espousing credible economic policies based on realistic economic circumstances and explaining (at least in part) how and when they intend to begin delivering them.
@ Joe,
Although £8 billion sounds a lot, its only 0.3% of annual GDP so is neither here nor there in the total scheme of things. It’s nothing more than a political gimmick especially as the money will be spent over a far longer period than one year. This is if we ever do have £8 billion to “put aside” which is unlikely – to say the least.
The money to save the banks didn’t come from a SWF in the first place so there’s no reason to put the proceeds back into one if shares are sold. But why sell the shares anyway? It really doesn’t affect the Govt’s balance sheet in the slightest if they swap £1 billion worth of banks shares for £1billion in cash. The government isn’t dependent on getting hold of cash in this way if it want to invest in green technology.
I know you say that you are aware that the government isn’t like a household but some of the arguments you come out with do make me wonder at times!
@ Steve and Joe,
Balancing the budget means what it says. The Government’s spending is exactly equal to its taxation revenue. It sounds good to most people because this is what the rest of us have to do. Otherwise we might end up in the bankruptcy courts. However we should try to imagine that we aren’t currency users but currency issuers.
By definition that means actually issuing something. If we get it all back in tax then we haven’t issued anything at all. So instead of balancing the budget, the Govt really should be concentrating on balancing the economy which usually involves running just the right deficit, which in turn depends on how much of the government’s issued currency the rest of us want to save.
We’ve heard this “balanced budget” nonsense before and we’ll probably hear it again. We’re much less likely to ever hear that the Govt has actually managed to do it though. The only occasions when it has, in recent times, is with an overheating economy and a runaway private credit boom.
“Labour is doing well in the polls in large part because they have in recent years begun espousing credible economic policies ”
Maybe it’s “in large part” because the Tories are a shambles? It’s not just me who thinks Starmer is economically illiterate. Prof Kelton thinks so too!
https://twitter.com/StephanieKelton/status/1731318519998910830
Peter Martin,
during the 2008 financial crisis, the late Alistair Darling “came to the conclusion that the only way to restore confidence was to spend tens of billions of pounds of taxpayers money on recapitalising them” How underrated chancellor Alistair Darling helped weather financial crisis
The borrowing that was undertaken to recapitalise the banks is a public liability and it certainly did affect the Govt’s balance sheet as all public borrowing does.
Prudent and effective management of the public finances does require economic literacy. That involves balancing tax, spending and borrowing in a sustainable manner that maintains confidence in financial markets and lays the foundation for economic growth. The UK economy is a market based economy not a command and control economy. The principal role of government in steering a market economy is maintaining the confidence of consumers, producers, savers and investors by keeping inflation in check , managing downturns (principally through allowing automatic stabilisers to do their work) and consistent value based investment in necessary public infrastructure financed via borrowing.
For the Liberal Democrat approach to financing of day to day spending from taxation and borrowing to invest see Ed Davey’s 2019 speech on the economy Ed Davey’s 2019 speech on the economy
@ Joe,
“….. it certainly did affect the Govt’s balance sheet as all public borrowing does.”
It depends on how well the money is spent or invested. In this case it’s really no different from our own personal balance sheets. For example, if we buy a £1000 of shares on the stock market we are neither better nor worse off immediately afterwards. The balance sheet is still the same as it was. However, in the longer term the outcome will depend on how well we’ve chosen.
Alastair Darling had wider concerns than just the profitability of his govt’s immediate investment. For all the previous talk by bankers of the need for Government to keep out of their business, this turned to a shout to bail them out when they were in need of rescue. The Government had little choice but to prevent the entire system from collapsing.
“Prudent and effective management of the public finances does require economic literacy”
Agreed. However, and as Stephanie Kelton has said, Keir Starmer doesn’t have it. At least if we take what he’s spouting at face value. Whether he’s being entirely truthful in what he’s saying, though, is doubtful. I would say he’s simply made a calculation to say what he thinks will get him the most votes.
Unusually, I find myself agreeing with Peter Martin (and Professor Stephanie Kelton). So spending PRECEDES taxation, and not the other way round. Since the so-called deficit is nothing more than an entry in the government’s account at the Bank of England, it can be repaid or not according to the needs of the economy. The important proviso being that measures have to be in place to prevent inflation. [And, by the way, that isn’t just an interest rate policy]. Government have been hamstrung for decades by the illusion of a balanced budget. Lib Dems should be more upfront about the nonsense that passes for economic orthodoxy. As Kelton says in her book, few if any politicians have the courage to identify modern monetary economics as the way forward, precisely because it challenges economic orthodoxy. But if we are a Liberal and Radical Party isn’t that just the sort of thing we should be doing? Isn’t there something about conformity is our constitution and doesn’t that apply to us as a party as well as to individuals?
Spending doesn’t precede taxation or vice versa.
i don’t know any serious economist who thinks “balancing the budget” at national level is the same as balancing the budget at household level. Exponents and believers in MME are attacking a straw man. “Balancing the budget” is only a metaphor!!
The fact that governments can “print” currency at will doesn’t mean that running deficits or large amounts of public debt are without cost or a negative impact.
There’s plenty of evidence to suggest large amounts of public debt relative to GNP reduces economic growth, for example.
(Obviously, I imagine everybody agrees that expanding money supply too rapidly can, on occasion, be highly inflationary.)
I expressed the third paragraph badly: I meant running deficits can SOMETIMES have negative impacts.
@ Mick Taylor
“Government have been hamstrung for decades by the illusion of a balanced budget.”
This is not the conclusion that suggests itself if one looks at the actual record of the British public finances over the past 5 decades or so.
The last time a British government balanced its budget was 23 years ago. That was when the Blair/Brown government ran a surplus for two consecutive years (1999-2000 and 2000-01), having raised taxes and all but frozen real public spending in their first two years of office. The budget then swung sharply back into its more familiar deficit towards the end of Labour’s first term, through discretionary increases in public spending that outstripped the growth in tax receipts.
The previous period when the budget was balanced (also for 2 years in a row) was at the end of the 1980s “Lawson boom” (before it went bust) – and this was flattered by privatisation proceeds, which were then treated as reducing the headline borrowing figure.
The time before that was in 1969-70 and 1970-71, after Roy Jenkins introduced a tax-raising “austerity” budget designed to move the current account of the balance of payments from deficit to surplus (which it succeeded in doing, albeit only briefly).
No doubt British governments have been “hamstrung” by a variety of afflictions for decades. But an undue obsession with balanced budgets has not been one of them.
@ Chris Moore,
“Spending doesn’t precede taxation or vice versa.”
So where does the money come from in the first place before it is available to be collected in taxation? The sequence of events has to be:
1) Government imposes a tax obligation in its currency of issue.
2) Govt creates its now valuable currency and spends into economy.
3) Taxpayers, and others, hand some of it back to government, keep some of the rest and lend their surplus back to govt.
Japan runs a large national debt of some 250% of GDP. It doesn’t necessarily follow that it’s in worse economic shape than, say Argentina, which only had a ND of 85% of GDP in 2022.
An “an undue obsession with balanced budgets” was certainly a feature of the 2010-15 govt.
“I don’t know any serious economist who thinks “balancing the budget” at national level is the same as balancing the budget at household level.”
Maybe the EU’s Stability and Growth Pact, and even worse Fiscal Compact was written by the less than serious?
https://en.wikipedia.org/wiki/European_Fiscal_Compact
@ Peter Martin
An “an undue obsession with balanced budgets” was certainly a feature of the 2010-15 govt.
Even if that’s true, this episode was the exception to the rule of postwar economic management in Britain.
Seventy-five years of the dead hand of so-called “Treasury orthodoxy” has proved perfectly compatible with substantial budget deficits in most of those years…
It’s also not true that budget surpluses have arisen only when accompanied by an overheating economy and a private sector credit boom. That was certainly the case in the late 1980s, but not in either the late 1960s or in the 1998-2000 period.
Peter, I do understand you’re a believer in MME, but merely boiler plating the usual MME just so story of the creation of money doesn’t count as evidence. What COULD count as evidence?
I’m also a bit a shocked at your conventional take on the Coalition. The Coalition had/ran – please choose your favourite verb – significant budget deficits every year from 2010-15. More indeed than Labour claimed they would run.
Finally, Japan: please be serious. As you well know, Japan has had miserly economic growth for several decades.
There is pretty convincing evidence that shows that high levels of public debt have a negative impact on economic growth.
It is more accurate to say that tax obligations are created contemporaneously with current public spending commitments by way of annual finance acts and in terms of cash flow, daily/weekly surpluses and deficits arising between tax receipts and spending are managed with short-term borrowing and repayments by the UK debt management office.
That is simply management of the public borrowing requirement ay any given time. Economic fundamentals are driven by technological innovation and private sector investment supported by a stable public sector. That is what has generated improved living standards since the industrial revolution and what will generate improved living standards in the future.
@ Alex Sabine,
The overheating economy / credit boom of the late 90s was known as the “dot-com” bubble.
The budget surpluses of the late 60’s occurred in an era of fixed exchange rates when it was possible to run both a current account and budget surplus by holding down the exchange rate and using tariff barriers. So not really applicable to the current UK macroeconomic environment.
@ Chris Moore,
Japan isn’t the only country to have had low economic growth. The EU has been flat for the last 15 years. A tight fiscal policy hasn’t helped at all. So there’s really no evidence that EU style austerity is any solution at all to the low growth problem. If anything it’s to the contrary. The USA has done far better since the 2008 crash even though it’s policies caused it in the first place.
Ironically a tight fiscal policy, in itself, doesn’t actually do much for the Govt’s deficit in any case. As the Govt cuts its spending it cuts it taxation revenue. So rather like a dog chasing its tail, it doesn’t achieve the desired result.
It only encourages the central bank to run an ultra lax fiscal policy which in turn leads to a build up of private debt. This can have a downward effect on the government’s deficit. If the private sector borrows more the government can borrow less according to the principle of sectoral balances.
Correction: Should be “encourages the central bank to run an ultra lax monetary policy”
@Mick Taylor…As regards legalising Cannabis ..We support the proposed smoking ban – that would lead to overtime someone in there 30s breaking the law if they lit up a fag and smoked it – but they would be able to roll and smoke a joint ?
@ Peter Martin
Agreed that the context was different in the late 1960s, as we were still in the Bretton Woods system. However it remains the case that the budget surplus was not correlated with buoyant aggregate demand, but was brought about by specific policy measures introduced by Roy Jenkins to raise taxation and reduce spending as a percentage of GDP. The turnaround in the balance of payments was the main objective, but the dramatic improvement in the budget balance (which was also sought) was a consequence of discretionary policy actions, not a side effect of the the external environment.
In the late 1990s, yes there was the dotcom bubble but the economy as a whole was not growing unsustainably, and indeed the fears of a recession in 2001 proved unfounded. Hence Gordon Brown’s later claims to have delivered the longest period of uninterrupted economic growth since the Hanoverians (the fact that it began in late 1992 was a minor detail to him!).
And it’s clear that the budget surpluses of 1998-2000 were driven by fiscal policy measures, and not simply a second-order consequence of what was happening with the macro picture. There was a sustained run of tax-raising budgets starting with Norman Lamont and Ken Clarke and continuing with Brown’s budgets of 1997 and 1998, and at the same time there was a prolonged squeeze on government spending. These achieved their intended effects (with the big interest rate cuts and depreciation of sterling post-1992 providing some offsetting monetary stimulus).
In some circumstances, you are right that fiscal policy tightening can be self-defeating. But it all depends on the context.
Likewise, the increase in the budget deficit after 2001 was driven by domestic policy choices, not particularly by the external macro environment. The clear shift here was from holding real-terms public spending flat in the late 1990s to increasing it well above the trend (and actual) rate of economic growth from 2001 onwards.
The private sector credit and housing market boom took place after the period we were discussing (late 1990s), and was accompanied by larger budget deficits and a looser fiscal stance.
I’m not saying these are causally linked, only that – as a matter of history, as opposed to theory – there has been no obvious correlation in the other direction. I suspect that in reality the association between them is more complex and difficult to pin down. And that the government’s direct influence over its medium-term budget balance through policy actions is stronger than your model would allow.
While I agree that we, Liberal Democrats are ‘along at the lower end of the polls at about 12% of the vote’ and ‘Reform UK and the Greens are lapping at (our) heels’, I don’t agree with most of your suggested policies. The only two which appeal to me are embracing Keynesian economics and levelling up. We have a policy of investing £50 billion in the regions outside of London and the south-east and £150 billion for green policies. There is some recognition that the government needs to invest and increase spending to get economic growth back up the region of 3%. If we want the economy to grow by £80 billion a year then the government needs to think about increasing total spending by at least £33 billion a year.
Joe Bourke,
I do hope one day you will realise that the so called ‘automatic stabilisers’ to do not work. I hope you will set out all the things needed to improve the so called ‘automatic stabilisers’.
@Peter Martin: there is substantial body of work showing that high levels of national debt lower economic growth. Japan is just one example of this.
Just because a country is a currency issuer doesn’t mean issuing debt is always without negative effects.
It does mean the country is highly unlikely to default; but that’s not the only potential negative of too much public debt.
Well done on picking 2008, just before the financial crisis as the start date for your 15 year review of EU economic growth!
Clearly, “austerity” in the UK has never meant not running a Keynesian-size deficit.
We in the Coalition believe in sound finance and getting public finances back under control after Labour’s mismamagement…….But that was mere propaganda. In reality the Coalition were happy to have substantial budget deficits.
Growing forever is not possible. We live on a finite planet. Growth cannot be a long term solution.
We live in a country where for the lower earners incomes are shrinking. Let’s talk about fairness in a finite world and face the reality that talk of growth is simply a means of avoiding the issue.
Might it be more practical economics, and even longer term politics, to calculate what money is needed to run the country effectively with equity and set taxes, money creation accordingly?
Might it help if it were made clear that there are different types of governmental borrowing?
Might some debts be forms of investment/savings account which are a form of “positive debt”?
Bearing in mind “The Matthew Effect”, can any government which thinks, and often acts according to the wishes of “The Market” properly care for and advance the socio-economic contexts of all its people?
Might it help if our party made it clear that our current taxation set up/complexity is neither generally transparent, equitable nor adequately staffed?
Might the current neoliberal selfish, short term attitude and theory contexts obstruct the creation and maintenance of a cohesive and coherent state?
The issue isn’t policy, we have too much of it anyway, its hearts and minds. Reform obviously stand for right wing isolationism, the Green for what it says on the tin but what exactly do we want? The public do not understand who we are or what we want. Policy does suggest direction and intent but no one other than the very politically committed will pay the blindest attention. Radical policies might get noticed by the press but will always drive any conversation back to ‘can we afford it’. Who exactly are the liberal democrats and what is that they want? And please don’t say we stand for internationalism, or giving power back to citizens, try selling that on the doorstep.
A word from a rival show! Some of today’s contributors will be aware of “UBI and PR can work together.” And those will be aware that responses almost all ignored the final word, obsessed as they were with the dread word UBI.
The biggest threat to the LDs, I believe, is the possibility that we may soon be caught unready, with PROPORTIONAL REPRESENTATION suddenly upon us. And when it IS, we shall really be in trouble. We shall be left pathetically trailing behind the Green party.
Why? Because they are serious about huge and serious problems. ARE WE?
Footling hobby horses will leave us trailing behind potential comrades in arms. I know my semi-senile wingeing must get up many noses. Forget that and LOOK OUT FOR PR.
(And learn not to call UBI that dreary label: call it NATIONAL INCOME DIVIDEND, or “NID” !)
We have wasted a year and a half since the challenge was laid down, for a “BIG IDEA”. The response was mostly footling. And NID and PR are still (just) there for the grabbing. Find out what you can about Professor Guy Standing; and at times like this, mistrust the Guardian newspaper.
@ Alex,
“I’m not saying these are causally linked, only that – as a matter of history, as opposed to theory – there has been no obvious correlation in the other direction”
They are. It’s the principle of the sectoral balances. I won’t go into the algebra here, although it’s not difficult. A simple way of expressing them is to say that if we have a current account deficit on our trade then this must be supported by someone (Govt plus private sector) in the UK doing the borrowing. If one is borrowing more the other is borrowing less. To ask which way the causality works is an interesting question but there is no clear answer. Each of the three sectors influences the other with no-one having overall control. It’s a mistake, therefore, to think that Government can reduce its deficit by cutting its spending and raising taxes.
@ Michael BG,
I would say that the ‘automatic stabilisers’ do work to a large extent if the currency is allowed to freely float and Governments don’t fret overmuch about the size of their deficits. However, if they intervene overmuch to artificially prop up their currencies they are interfering with the stabilisers and can come unstuck big time as we last saw happen on Black Wednesday. (16th Sept 1992).
Similarly the Govt’s deficit should also be allowed to float. A large deficit is simply an indication that others want to save in the currency of issue. If they want to do that, why not just let them?
@ Peter
I appreciate your perspective on this, and you always make insightful and thought-provoking comments. I do understand the concept of the sectoral balances.
Nonetheless it remains the case that, in practice, the UK has experienced large, indeed rising, current account deficits both in boom times such as 1988-90 (when it was accompanied by a budget surplus, and was a symptom of an overheating economy) and in periods of recession or alongside large budget deficits (prompting concerns about the “twin deficits”).
If you map year-by-year the UK’s current account deficits against budget deficits you’ll find that they do not necessarily move in opposite directions. So, for example, while the fiscal stance was tight in the mid-to-late 1990s, the current account deficit was declining and indeed was almost wiped out by 1998. Over the period 2000 to 2008 there was a much looser fiscal stance but also a growing current account deficit, reaching almost 4% of GDP in 2008 (then an all-time high). In a number of periods the fiscal balance and the current account have improved (such as in 1975-81) or deteriorated (1999-2008) in tandem.
Clearly this reflects our persistently low level of net national saving (public and private) and reliance on overseas borrowing, what Mark Carney called “the kindness of strangers” – and therefore on investor confidence in the UK’s economic and fiscal fundamentals. It was the sudden loss of this confidence which posed the big danger both in the mid-1970s and following the Truss/Kwarteng car crash budget last autumn.
I was in Japan this summer. Wages in many areas are actually less in nominal terms than they were when I worked in Tokyo in the early 1990’s.
Japan’s post-war recovery was kick started by the provisioning of UN forces during the Korean war and from the mid 1950s they saw exceptionally high economic growth for over three decades.
In the mid 1980s the Bank of Japan changed course, massively expanding bank credit quotas and encouraging banks to lend to anyone with a pulse. that led to the creation of an enormous real estate and stock market bubble. The bursting of the bubble in the 1990s led to a deflationary recession that has lasted the best part of 30 years. Much of the public sector debt has arisen as private borrowers (corporate and mortgagees) repaid debt incurred during the bubble years. The government has continually had to run large deficits to prevent a deflationary recession deepening into a great depression as so much of household income was devoted to debt repayment rather than consumption. They have been able to do so as Japan has consistently run export surpluses that maintains a positive net investment position with the rest of the world and the propensity of the Japanese to save, given the stable or increasing domestic purchasing power of the Yen. The UK runs current account deficits with the rest of the world and has a negative net investment position that requires continuous external financing with a currency who’s domestic purchasing power has been rapidly depreciated by high levels of inflation.
@ Peter
“It’s a mistake, therefore, to think that Government can reduce its deficit by cutting its spending and raising taxes.”
Clearly, the government can do exactly this, and has done so several times in our postwar history. You can certainly argue that it doesn’t always work, or doesn’t always make sense. The wider macroeconomic context, financing/market pressures and the magnitude of the fiscal action being undertaken all matter. But to claim the government cannot reduce its deficit through fiscal policy measures is just dogma, surely? Or a theory untethered from reality, and from historical experience.
A few examples where the government did succeed in reducing its deficit by policy action:
– Labour / Roy Jenkins in 1968-70
– Labour / Denis Healey in 1975-78
– Tories / Geoffrey Howe in 1980-81 (you can argue about the wider effects of monetarism, but the fiscal tightening in 1981 was not self-defeating in its own terms: the budget deficit was sharply, and quickly, reduced)
– Tories / Ken Clarke & Norman Lamont in 1993-97
– Labour / Gordon Brown in 1997-2000
In almost all these cases the scale of the reduction in the budget deficit matches up pretty well with the policy measures taken – which would indicate that the measures achieved their intended results. They were not rendered self-defeating by negative multiplier effects reducing the government’s income.
There are of course counter-examples, but to say the government can never reduce its budget deficit by direct policy action – and can only hope to do so indirectly, or obliquely – is massively over-egging the pudding!
@ Alex,
“… but to say the government can never reduce its budget deficit by direct policy action ….”
I didn’t quite say that!
I will say that regardless of whatever policy is implements, the equation of the sectoral balances has to hold.
This that:
(G-T) = (S-I) + (M-X)
where G is Govt spending, T is Taxation Revenue, S is Private savings, I is Private Investment, M is imports and X is exports.
So a government can for example say they are cutting spending to reduce the deficit but if, at the same time, they are reducing interest rates to encourage us to save less and borrow more its difficult to know what is really causing it to fall.
This is what was happening during Osborn’s time as chancellor.
Similarly if Govt is taking action to reduce imports and increase exports there could be a similar lowering of the Govt’s deficit due to that.
Reducing Govt spending and/or Increasing taxation is more correctly described as a counter inflation policy.
Well, during 1996-99 period (the end of Ken Clarke’s time as Chancellor, the start of Gordon Brown’s, and the first couple of years of the MPC setting monetary policy), interest rates and the exchange rate were both rising, alongside higher taxes and lower government spending.
I’m not convinced economic policy, or the operation of a complex modern economy, can simply be reduced to equations, theoretical models, or truisms. That was the same mistake some monetarists made in the late 1970s and early 1980s, when proclaiming (in a narrow sense, correctly) that the equation MV=PY must always hold, as if that were the end of the matter…
@ Alex,
There’s nothing wrong with equation MV=PY. The mistake made by the monetarists was to assume that V remained constant with changing M.
I’m not sure what you’re getting at re the period 96-99. The relative position of the three sectors can be seen on the graph on this link:
https://gimms.org.uk/fact-sheets/sectoral-balances/
The British economist Wynne Godley developed the sectoral balance approach to macroeconomic analysis. He was always clear that changes in the flow of funds did not imply causation, rather they were a tool for analysing developing problems in the economy or unsustainable imbalances. An FT article from 2010 The dreadful potential of frugality notes
“There is an identity between the financial balances of the private, government and foreign sectors, as described by Prof Godley. For every borrower there must be a lender. The private sector surplus, for instance, is equal to the public sector deficit together with the balance of payments surplus. Normally, the private sector spends less than it earns. But during booms, households and businesses become profligate. A private sector deficit appears. This situation occurred in Britain in the late 1980s, in the US in the late 1990s and once again after the economy recovered in 2002.
Most contemporaries hailed the fiscal surpluses and apparent prosperity of those times. Prof Godley saw things differently. He argued that the private sector could not indefinitely spend more than it earned as it would accumulate too much debt. Nor could a balance of payments deficit be sustained for ever as foreign liabilities would become overwhelming.”
@ Joe,
Pleased to agree with you for once ! 🙂
@ Peter
There’s nothing wrong with equation MV=PY. The mistake made by the monetarists was to assume that V remained constant with changing M.
Agreed. Or to put it another way, they made the mistake of assuming the equation would apply in a textbook way in the real world. (See also Goodhart’s Law.)
Because the velocity at which money changed hands was in fact highly unstable during this period due to structural changes, the equation proved to be of little practical use to policymakers (since it relies on a stable velocity of circulation).
What really mattered was the reality of high inflation and the exercise of judgement in how best, and how fast, to bring it under control.
As I suggested (by saying the monetarists were correct “in a narrow sense”), MV=PY is fine as far as it goes. However it does not provide a prescription for managing the economy. Likewise the sectoral balance approach, which in essence is an analytical tool and a barometer which can signal underlying problems or features of the economy, as Joe says.
The large balance of payments deficit which opened up in the late 1980s signalled that credit-fuelled consumption in the economy had got out of hand, and for that reason Lawson was wrong to neglect it – even if he was right that outside of Bretton Woods and in an era of free capital movements we no longer needed to obsess about balancing the external account as had been the case in the postwar period up to the early 1970s.
May I add another new policy to the list of ones that the Lib Dems should look at? It is FLAT TAXES. They have the advantage of taking the poor right out of the tax system. It is said that the rich pay less tax with Flat Taxes, but this is not the case, as there is little scope for both tax avoidance and tax evasion, and, in the end, the tax take from the rich is higher. All three Baltic States have Flat Taxes and they work well there.
@ Alex,
I don’t think there is any suggestion that the sectoral balance concept is the be-all and end-all, but nevertheless it does give us some useful guidance in how to run the economy. It dispels some prevalent myths.
The most important is that a deficit in the Govt’s budget balance is always to be avoided or at least minimised. This is not true. It’s not possible for all the sectors to be in surplus simultaneously. If the government does manage to run a surplus then either the foreign sector has to be in deficit or the domestic sector has to be. The former is unlikely to happen unless the Government introduces the policies to make it happen. This could involve lowering our currency value and introducing trade barriers, both of which are likely to create friction with our trading partners -even the ones that take these measures themselves.
The latter isn’t sustainable. If the private sector is in deficit it will fairly quickly run out of money and we’ll soon see a recession or even a crash.
Once we take this message on board management of the economy becomes a lot simpler. We have only to fine tune fiscal policy to keep the economy at just the right “temperature”. This means steering a sensible middle path between having too much inflation and too many idle resources.
Of course the sectoral balances don’t tell us anything about what the correct balance should be or how we make the economy more equitable for all.
I am sceptical about flat taxes, if by that you mean a single rate of income tax. At least for an economy like ours (or those of comparable countries), I don’t think it’s possible to design them in a way that is (a) affordable and (b) will have acceptable distributional outcomes. The sums don’t add up. (I have the same misgivings about UBI schemes, for the same reason.) For the foreseeable future we’ll probably need to retain a marginal rate structure with at least two rates.
However, it is possible to obtain the advantages of ‘flat taxes’ which are touted by their advocates – the ones which are worth having – without dispensing with a marginal rate structure.
Our current tax system is riddled with complexity; is an obstacle course for ordinary taxpayers and a playground for accountants and their wealthier clients; distorts economic decision-making, often in arbitrary or contradictory ways; taxes fundamentally similar types of activity at different rates; creates unnecessarily high disincentives to work, saving and investment, thereby penalising wealth creation; and does not adequately tax economic rents and other forms of wealth extraction. It is certainly ripe for reform.
Many of these problems arise from the unsatisfactory tax base – ie the activities which are subject to the many different taxes, the proliferation of reliefs and exemptions, and so on. Simply going from three rates of income tax to one wouldn’t begin to address these.
Conversely, you could massively reduce complexity and address the drawbacks of the existing system while retaining a simple marginal rate structure for taxes on income. Much more important is to tax different forms or sources of income in similar or equivalent ways.
The intellectual and policy ground for this kind of agenda has been prepared by, among others, the IFS with their comprehensive audit of the UK tax system undertaken by Nobel Prize winning economist James Mirrlees more than a decade ago.
But fundamental tax reform takes a huge exercise of political will, sustained over many years. The last Chancellor who had any real interest in it was Nigel Lawson (whatever his faults, his tax reforms were bold, coherent, and in many cases stood the test of time). The 1986 bipartisan tax reforms in the USA were similarly important.
Unfortunately for taxpayers and the British economy, given the calibre of our current cohort of politicians, lofty tomes like the Mirrlees Review seem destined to gather dust on the bookshelves of university libraries…
” Much more important is to tax different forms or sources of income in similar or equivalent ways.”
There’s investment income, rent, pay from work, inheritance…. I can see difficulties around inheritance because it’s so lumpy.
Combining NI with income tax would be a good start.
And then there’s VAT.
oh – and capital gains !!
A wealth tax and free public transport are the two policies that stand out for me. We live in a unequal society and even the wealthy are fed up with it. The homeless on our streets are a constant reminder of how unequal we are. If we really want to clamp down on emissions from cars, free public transport especially on trains is the way to go. Perhaps from 10 – 3 and after 7 during week days for trains
John Shreeve,
When people decide to change their voting intention they are often concerned about some policies. They don’t often change their vote because of the values and principles of a political party. This is something people who are considering joining a political party are more likely to be concerned about.
Peter Martin,
I was referring to the UK. Do you have any evidence that in the UK since 2000 the automatic stabilisers have turned a recession into economic growth?
I agree with you that the management of the economy is about keeping it between too much inflation and too many idle resources.
Patrick Streeter,
Having done a Google search I found:
Latvia has three levels of income tax – 20%, 23% and 31%
Lithuania two – 20% and 32%
Estonia has one for income tax – 20% and two for the social tax which seems also to be an income tax of 13% and 33%.
If you increased the personal allowance say to £22,010.56 (NLW for 2024 for 37 hours a week) the basic rate would need to be increased hugely to make up for the over £61 billion it cost just next year to increase it. This amount increases over the following two years.
@ Michael BG,
I did say that the automatic stabilisers worked reasonably well providing that Govts didn’t fret too much about their deficits. This hardly applies to the UK govt in its response to the crash of 2008 – at least from 2010 onwards.
The Govts increased deficit is the essential part of the stabilisation process. The Government spends even more into the economy than it receives in taxation which helps the economy to recover. This is without any change in the rates of taxation or the policies applied to Govt spending. These, too, could be changed to provide even more assistance to the recovery process subject to the economic judgement of govt.
The automatic stabilisers worked to best effect in the USA which fretted least about the deficit. Not so good in the UK which fretted more. We implemented the opposite and totally wrong policies which partially nullified the mechanism itself. They hardly worked at all in the EU/eurozone which always has had an ultra orthodox attitude to the fiscal process.
In 2008 the EU and USA had similar sized GDPs. Now the USA is economically 30% larger. Incidentally, it was this failure on the part of the EU, including the UK which was still a member at the time , that created the conditions for the Leave campaign to be successful in 2016.
The call for free public transport might be possible for a small country like Luxemburg but isn’t realistic for a larger country like the UK. A call for less expensive rail and bus fares would be more doable, especially at off peak times. Even so it would cause some interference with the business models of operators who naturally would exaggerate the effects to extract more money from the ‘taxpayer’.
So we’d have the political problem of transport operators making good to extremely good profits at the same time as they were receiving what many would call hand outs from Government.
This wouldn’t be politically viable. So, as we’ve seen with the recent decision of some city councils, and their bus services, the only way would be to bring everything back into the public sector.