Even the keenest, most aggressive deficit cutting rhetoric used in any of the main political parties still envisages a large deficit for many years to come. Politics over the next decade is likely to be hugely shaped by this backdrop. It won’t squeeze out all other issues but, just as the 9/11 terrorist atrocities caused civil liberties and foreign affairs to dominate much of the political debate in subsequent years, the deficit is likely to dominate over the next few.
What will the practical consequences of that be? What issues may come to dominate political debate?
Privatisation returns
How to cut debt? Selling off assets is one option. For the last few Parliaments, privatisation has been mostly off the political agenda, and where it has been pushed – as with Royal Mail – it has been a matter of arguing over how the service can survive, rather than any particular need for revenues from the sale. Expect that to change as more sell offs are pushed simply to pay off debt.
Inflation looks less bad
The idea that low inflation is good, achievable and sustainable has become such widespread conventional wisdom that the question of the Bank of England having an inflation target is almost never discussed, nor even is the level at which it is set.
Yet in the past inflation has played a major role in tackling large government debt – eroding its real value year after year.
Low inflation brings many benefits, but it would be surprising if no-one starts being attracted to relaxing a bit on inflation in order to speed up the reduction in debt.
Where will growth come from?
Debates about export-led growth or growth driven by consumer consumption have had a low profile in Britain in recent years. The balance of payments statistics get almost no coverage and the edge has come off debates amongst domestic economists on the causes of growth. With many firms and consumers laden with debt and with a public sector overall having to prune rather than splurge, the question of what drives economic growth is likely to move centre stage, not just in terms of tax cuts or not but also in terms of how the economy should be structured.
Should profits flow overseas?
Britain has benefited massively from having an open economy over the previous decades and even centuries. But when companies such as Google dominate certain sectors, earning large profits and paying taxes on much of them to other governments, will that historical record be able to sustain the immediate demands that foreign companies should pay more tax in the UK rather than UK residents having to pay up more in tax in order to cut debt?
Anyway, that’s enough from me; over to you. What’s your view?
Follow @libdemvoice.org on Bluesky
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Paul Simon: Born at the Right Time
F10 is passed overwhelmingly. Now the work begins...
Blackness Road - 1967 #dundeewestend
Torchwood is now a Cardiff Bay institution
Paul Duffy selected by Lib Dems for Runcorn & Helsby by-election
Alex Macfie
Craig Levene
theakes
Thelma Davies
Simon R
11 Comments
I predict that they will look a lot like foreign affairs policies: reactionary, partisan, and frequently asinine. Twenty years later, the mess will be second-guessed by history students who think the invasion was a bad idea.
This is
http://www.bloomberg.com/apps/news?pid=20601087&sid=aep07kubU84Y&pos=1
All good sense, Mark. My heretical view is that the inflation target should be 4% and interest rates should go up before long to encourage saving and lending. Also we should stop worrying too much about the level of the debt.
But you asked about the politics and talked about the policies.
At national level there really should be a serious attempt to cut bureaucracy and serious campaigns to close down lots of big government schemes (the LDs have identified some of them such as ID cards and Trident but there are many more). Things which it would be difficult to get closed down looked at in policy terms and in isolation, could qualify under “can’t afford them”. There is real scope here for some effective political campaigning.
The other big battle will be over services, many of them local. If the scale of cuts is as high as some idiots are suggesting (15-20%) here will be a vast number of local revolts. Liberal Democrats will find themselves in the middle of these battles and leading many of them – but many will be spontaneous. How LD Councillors running Councils manage to cope with the situation will be crucial. The opportunity for non-mainstream poloitical groups will be huge including those on the extreme right.
My view is that the scale of the public revolt may be so great that whoever instigates the cuts will be forced to change tack after a couple of years at the most. Not getting any votes has a salutory effect on politicians.
Tony Greaves
The other big battle will be over services, many of them local. If the scale of cuts is as high as some idiots are suggesting (15-20%) here will be a vast number of local revolts. Liberal Democrats will find themselves in the middle of these battles and leading many of them – but many will be spontaneous.
I made the case for 4% inflation a year ago in an FT op-ed. It was covered by LDV at the time: https://www.libdemvoice.org/commenislinkedldv-tim-leunig-coordinated-inflation-could-bail-us-all-out-11380.html. I stand by the original article.
I am not sure how you prevent google repatriating profits, and in any case Britain receives more profits from abroad than it sends out.
Remember that interest rates are low, so the carrying cost of the debt is relatively small. This is not the end of the world – the issue is getting us into a position to be able to do it again, in the next recession.
Good point about distinction between policies and politics Tony.
Interesting predictions Mark. You’re surely right that the deficit and debt will frame our politics for the next decade.
On privatisation, I agree this may resurface but the scope for conventional privatisations through stock market flotations of state-owned assets is much less than it was in the 1980s; most of the family silver has been sold. The Royal Mail is the main exception but there are several other smaller government enterprises (like the Royal Mint) that could be sold, although the sums they would raise are small.
As Vince Cable has argued, other interesting areas to explore in the longer term are realising an income stream or capital value from parts of the large public sector property portfolio (eg using some MoD land for housing development); realising value from intangibles such as spectrum, airport landing rights and emissions trading; and potentially also from the Highways Agency if this were linked to an income stream (ie through road user pricing, although the widespread introduction of this would be controversial and undersirable if accompanied by big brother technology rather than M6-style tolls.)
Agree that a moderate dose of inflation would be very welcome to our political masters as they seek to erode the real value of the national debt, as you rightly say happened post-WWII. The problem is our credibility in bond markets (already fragile) would suffer perhaps fatal damage if such a policy were to be suspected and the result would be a financing and currency crisis or simply the search for ever higher yields on new government debt as a means of inflation-proofing.
So rather than pursue a deliberately inflationary strategy, the next government might instead opt to boost its credibility with the markets (and thus buy time for a gradual rather than crisis-driven deficit reduction timescale) by borrowing mainly in index-linked gilts and reaffirming its commitmen to Bank of England independence and the 2% inflation target. We shall see…
The point about a new debate on where growth will come from is very germane. The hopeful answer is business investment and net exports, but in current circumstances they look unlikely to fill the gap of private sector deleveraging and looming public sector cutbacks. Yet, the public sector cannot be expected to sustain demand for much longer.
So I suspect the debate will also move to the supply side policies that will nurture prosperity in the medium and long term: the level, complexity and structure of taxation, the relative roles of manufacturing and services, reform of the banking system and financial regulation, labour market reform etc. These issues (with the partial exception of banking reform) are currently in the background but are equally important to the future as repairing the dreadful public finances.
I’m sure Tony is right that cuts (and tax rises) will not go down well with the electorate, so it will be incumbent on politicians of all parties who have presided over this mess (including the Lib Dems who supported Brown’s profligate borrowing and spending during the boom, despite correctly claiming the boom was unsustainable) not to be opportunist but rather to treat voters like grown-ups and explain the true scale of the problem. That does not mean fear-mongering: the fiscal crisis is huge but it can be solved in an orderly fashion if the tough decisions are faced up to – the alternative is to duck them and invite the IMF in to put our house in order…
Some good points Mark and also in comments, especially from Alex.
On inflation: it would indeed help to reduce the stresses caused by the massive public and private debt burden if there were a modest uptick in inflation. But make no mistake, this would amount to default by stealth (how very Gordon Brown!) and would not go down any better with net savers – mainly retirees and near retirees – any more than it would with the bond markets. Don’t expect any party to be honest about this.
On Growth: I have been trying to argue with regrettable lack of success over the years that this is the elephant in the room. Unfortunately the debt-fuelled boom was unsustainable that same boom created such a feel good factor that such voices were drowned out.
Britain’s economy has been in relative decline since about the 1850s and a series of disastrous policies are about to make that decline much worse – and us all a lot poorer. Alex is right that we need to make some profound structural changes to the way the economy works. This will upset a lot of cosy little applecarts so there will be fierce resistance. Unfortunately I see no senior politicians interested in opening up the debate; I’m not sure if this is because they simply don’t ‘get it’ or because they don’t want to take on the vested interests. Either way, it’s not good enough.
The one glaring omission in Mark’s piece is lack of any mention of the government’s responsibility for managing its affairs with some degree of efficiency. Productivity is notoriously hard to measure in the public sector but there’s no doubt it’s been declining for years. Reversing that decline would provide much of, possibly all of, the financial leeway we need. Since neither of the big parties has anything sensible to say this, it’s an open goal for the Lib Dems.
Unfortunately, the Lib Dems having nothing sensible to say about it either which drives me to despair. I don’t expect Nick Clegg to know the answers but I do expect him to comprehend that there’s a problem, that it’s big, and that he must find answers. He can’t expect to be taken seriously with proposals like the utterly vacuous “Four steps to a fairer Britain”
Privitisation? Really what does the state have left to sell off (that would actually raise much money)? We have sold off the electrictiy suppliers, national grid, water companies, british gas, british telecom, most of the North Sea oil, the railways, probably going on half the schools and hospitals (via PFI projects). air traffic control, london underground (PPP), lots of the prisions etc etc
The obvious thing that springs to mind is the Government’s shares in banks but it will be a long time before these can be sold at a profit.
The boom wasn’t only unsustainable, it wasn’t real either. What should have happened, post Major, was that the space created by a smaller state should have been filled up by private enterprise leading to real products and services that would have had to answer to customer needs. Unfortunately, New Labour had different ideas and, to maintain their popularity, soaked up all the available capital (and some) to fund any project which seemed to tackle any subject which achieved hostile media attention. Add a chunk of anti-libertarian, war on terror driven spending and we lose our privacy and some civil liberties as well. Oh the glory years of New Labour.
It is going to be hard unwinding this with so many people now relying on the public purse for their wages and/or benefits. People are not prepared to countenence cuts. The latest piece of double-think which they and many others are clinging to is that we can’t cut spending now because the recovery is not yet assured. No doubt GDP will start to go up, but that does not mean that we have growth. Rising GDP as a result of more billions of borrowing is not “a recovery”. The longer we don’t make cuts, the longer it will take for any real recovery to appear. Even with low interest payments, we will do ourselves a lot more damage than if we took our medicine up front.
Geoff
Spot on.