Why you should be unimpressed by the deficit debate

December 9, 2011

Since 2009, Labour has not explained what it would cut if it were in government right now. Now the latest budget forecasts suggest that if Labour wins the next election, it would have to continue making cuts. They have a dilemma: they need to restore their economic credibility by having a plan for reducing the UK’s debt, but if they announce the sort of things they would cut, it may reduce their core support. As a Labour party member, Politics graduate and someone who has an A-level grasp of economics, I’ve been unsatisfied with the debate around this. So I’m going to explore this area of policy as a lay person and see if I can either come up with any answers, or conclude that we really are screwed. In this piece I’ll start with regurgitating what I understand. (Disclaimer: this is pretty stream-of-consciousness, so no references I’m afraid.)

Labour’s main problem

Except when you have a war, a strong economy is what normally wins incumbent parties elections, and a weak economy is what lets opposition parties in. To be more precise, it is a perception of economic competence that will secure a party’s place in government. The past two changes of government can be explained this way: Labour won in 1997 because even though the economy had been growing for the previous 3-4 years, the Conservatives’ ignominious exit from the European Exchange Rate Mechanism had destroyed their reputation as economic managers. In 2010, Labour was given the heave-ho because of the perception that, notwithstanding Gordon Brown’s heroic efforts to rescue the economy from total collapse, the party was at least partially responsible for the biggest recession in living memory, and this was compounded by an irresponsible fiscal policy.

The Conservatives used a couple of lines to convince the electorate that Labour had wrecked the economy. Comparing the country’s books to a household budget doesn’t hold water, unless your house has its own internal market economy. The analogy that Labour finds it more difficult to shake off is that it “failed to fix the roof when the sun was shining”. Objectively, this is a pretty handy summary of the structural deficit problem.

Fiscal policy – the basics

The core argument of Keynesian economics is that, through a multiplier effect, tax cuts and public spending increases help economic growth by putting more money in people’s pockets. A fiscal policy of balancing the books is unhelpful because when there is a recession, raising taxes to maintain the level of revenue while more people are out of work and cutting discretionary spending to maintain the level of spending while more people are claiming benefits will take money out of people’s pockets and lead to a downward economic spiral.

Allowing deficits to happen in recession – at a bare minimum, through the “automatic stabilisers” of lower tax receipts and higher benefit payments – means that more money is flowing to the economy from the government and the multiplier effect will help lift the economy out of recession. Discretionary stimuli, like tax cuts or capital spending projects, will help boost a flagging economy even more. Therefore fiscal deficits aren’t necessarily bad.

The corollary to this is that in a period of economic growth, the government should seek to balance the long-term books by seeking fiscal surpluses. Once again the automatic stabilisers play a part – in a boom, people who were on the dole in the recession are now earning money and paying taxes. The general prosperity of the nation gives the government a bit of leeway to raise taxes or cut spending without damaging their electoral prospects too much.

Labour’s approach

Labour, famously, played around with those rules. After sticking by the Tories’ spending plans for the first few years of government, they started running deficits, even though the economy was growing. Brown invoked the golden rule, whereby deficits are okay if the money borrowed is spent only on investment (or, to put it in economic terms, capital spending). This investment, in hospitals, schools and infrastructure, is a one-off payment and is expected to pay for itself through a healthier, better-educated workforce and an economy with greater capacity, reflected in higher tax receipts.

What doesn’t happen under the golden rule is increases in current spending that aren’t paid for by taxes. To use a simple example, increasing the number of policemen – who will, naturally, expect to be paid every year once recruited – needs to be paid for by either finding savings in the rest of the police’s budget, cutting other public spending, or raising taxes. If you do none of these things, you have to borrow to pay their wages and you will need to borrow the same amount every year. This is basically what the structural deficit is. And this is what the government have been trying to eliminate by 2015.

When the economy returns to pre-2008 levels of activity – which is apparently years away – the “cyclical” part of the budget will be balanced, but there will still be a structural deficit. Only when the structural deficit is out of the way can Britain’s debt then start being paid off.

The structural deficit

This is where my understanding starts running out of steam. I presume that you have the public spending that is paid for by taxes, the capital spending that is paid for by borrowing (and can be paid for in the long term) and then the current spending that is paid for by borrowing. It is the latter that we ought to be worried about. What I don’t understand is how it originated; between the last surplus in 2002 to the recession, there must have been some unfunded current spending increases. Assuming that these increases were on “nice to haves”, and using the principle of “first in first out”, would these not be the first areas to target spending cuts on? What we seem to have instead is a free-for-all where our cherished public services are being cut to the bone. Maybe I haven’t delved as deeply as I could, but I haven’t seen any explanation of this by our leaders.

A lot of the blame for the crisis has been put at the door of the PFI projects, which do involve current spending commitments that cannot be got out of easily. But that – and the perennial problem of “public sector waste” – surely cannot be the whole obstacle we face. Elsewhere you hear the charge that Labour built too many schools, for example. Here there may be a distinction between schools replacing old ones (which will, presumably pay for themselves down the line) and brand new schools requiring brand new teachers, which involve expenditure on an annual basis. Can there be many of these that weren’t adequately funded?

The Coalition’s priorities

Assuming that the cuts to spending that the government wants to eliminate will be unsustainable even by the time the economy has recovered, I can appreciate why the bond markets have been frightened and why the government believes that pursuing austerity in a time of economic fragility trumps an extended stimulus (though I’m not qualified enough to condone it or not).

But I can’t help thinking the government are going above and beyond this, by using austerity to compensate for the high levels of investment and the rescue package under Labour, which are one-offs and can be paid off once the budget is in surplus again (i.e. once the economy is on a firm footing again and unsustainable current spending has been eliminated).

George Osborne made a great deal of his “expansionary fiscal contraction” which aimed to stimulate the private sector by scaling back the public sector to free up credit and labour. This approach is said to have worked for Canada in the mid-1990s. What has become clear since Osborne’s espousal of this is that the conditions Canada enjoyed – a booming US export market – are absent for the UK as the Eurozone suffers the current crippling crisis.

Rather than encouraging the private sector to take up the slack, withdrawal of public sector spending has depressed aggregate demand for goods and services, thus weakening rather than strengthening the private sector. The Chancellor has now pledged more support for capital projects, but who knows if this is going to be enough to balance the books in six years.

This is what I want to find out:

  1. What current spending increases were made by Labour without a corresponding rise in tax receipts (or, vice versa, what tax cuts were not matched by spending cuts)?
  2. How much of the structural deficit the government wants to eliminate consists of this type of spending?
  3. Of these items of spending, what is being cut and how painful will such cuts be compared with the others?
  4. Given the amount of investment the economy needs, is it really the structural deficit we’re worried about, or unsustainable current spending? Can the markets not be kept happy with reductions in the latter as long as a longer term structural deficit only consists of capital spending which will deliver future growth?

Any useful pointers welcome.

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What’s in a lack of name?

November 7, 2011

There were a few things I didn’t like in Drive, the recent Ryan Gosling, um, vehicle. They largely revolve around the fact that the baddies are defeated not by an uplifting feat of driving in the big stock car race that never materialises, but by a series of stomach-churning killings.

But I can forgive the makers that. It had an 18 certificate after all and neither Carey Mulligan nor Christina Hendricks are at that stage of their careers that a sex scene was on the cards, making a bit of the old ultraviolence inevitable.

When shattered heads weren’t making me wince it was the lengths the script went to avoid naming the protagonist.

Not that having an anonymous lead character is new. There are some valid reasons for doing this:

  1. Hey, this guy is such an outsider, and so mysterious, that his name has been lost somewhere in his dark, dark past
  2. Hey, this story is basically an allegory about today’s society and the protagonist represents the viewer
  3. Hey, the film is based on a novel that’s written in the first person and she manages never to refer to her own name

Of course, a screenwriter can cite any of the above reasons when actually he’s simply a lazy SOB.

It can be done well. A good test of this is when you don’t realise until the credits roll that the plucky young chancer you’ve been cheering on for the last 90 minutes has never revealed who they actually are.

The clue is in the title of Withnail & I but Bruce Robinson manages to get away with it. Arguably he was on safe ground as “I” is actually named Marwood in the script. There are only really two characters with whom Marwood interacts, and both Monty and Withnail are so self-obsessed it’s no wonder they never address him properly.

It works in Fight Club, because Ed Norton’s character narrates the whole damn thing (though even so, his name is probably – SPOILER ALERT – Tyler Durden anyway). And they get around it in the Sergio Leone Dollars Trilogy, starring Clint Eastwood as “The Man With No Name Except When It’s Blondie Or Joe Or Manco”.

When it doesn’t work it jars. In Layer Cake, “XXXX” is having a chat with Michael Gambon who keeps addressing him as “young man” and “dear boy” long past the point when any sane person would have said “I’m sorry – you must forgive me – I’m hopeless with names!”

And in Drive, “Driver” and Irene’s son Benicio are checking out a car or something while garage owner Bernie tells Irene what a great kid “Kid” is and then beckons him over by calling him Kid or Buddy or Champ or something. If I was [rolls eyes] “Driver”, I’d have told Benicio that Bernie meant him, and stayed by the car in a passive-aggressive message to Bernie to call me Dave, goddamnit.

So may I request, Hollywood, that the next time you withhold a name from your hero, at least do something fun with it. Like have all the other characters get his name wrong. Or have the character’s name as “Dave” in the credits.

 

The day the NHS felt a bit under the weather

October 12, 2011

There’s been enough hyperbole on Twitter today to to give Health Ministers a run for their money as the House of Lords rejected two amendments designed respectively to slow down the progress of the Health Bill (Lords Owen and Hennessey), or bin it altogether (Labour).

Despite claims littering my feed that the NHS has now been destroyed by those bastard Lords, there are still a few stages that it needs to go through. Yes: by waving the Bill through its second reading, peers have indicated that they’re going to enact it eventually. But to describe this as the death knell for the NHS is a little premature.

There are those who are implacably opposed to the Bill on the reasonable grounds that with £20bn of efficiency savings to make before the next election, forking out £3bn on a top-down reorganisation is an unnecessary expense. The Government’s argument is that the reforms are needed to facilitate these savings, a point accepted to some extent by Shadow Health Secretary Andy Burnham – though he argued at the weekend that legislation is avoidable.

The concessions the Lib Dems managed to force on Andrew Lansley after the “pause” in the legislation in the spring seemed to have bought their votes today. After all that faff it would have been a bit churlish of them to reject the whole thing.

So while we are stuck with this piece of legislation, we know that the thing is malleable. Heck, what might have swung the vote on the Owen-Hennessey amendment today (to refer certain parts of the Bill on accountability to a special committee) was probably the Health Minister’s last-ditch promise to make a necessary amendment to make clear that the Secretary of State will still be accountable, thus negating the need for Owen’s committee. There’s been a lot of uninformed stomping of feet about the behaviour unelected members of the upper house but, to be fair, they have been a lot less partisan and childish in their approach to the legislation than our elected representatives in the Commons.

Contrary to popular opinion the purpose of the Bill is not to privatise or destroy the NHS, but to devolve responsibility for commissioning hospital and other services to GP surgeries. Yes, the new system may lead to more private sector operators providing services, but the NHS will still be free at the point of delivery. And there’s no rule saying that the private sector has to be evil. One problem the NHS faces even now is that services for some conditions are not integrated well enough. Why shouldn’t a private sector company with expertise in logistics and supply chain management be drafted in to help design services?

Of course there are still major concerns with the legislation:

  • The Government have promised “no frontline cuts” but are devolving the responsibility for cuts to local areas. That amendment to maintain the accountability of the Secretary of State will at least make sure he gives a shit.
  • There’s a danger that private sector companies could profiteer from the by creaming off the most lucrative surgeries and leaving trusts with ever-dwindling budgets to carry out costly but essential work.
  • While it’s probably a good thing for hospitals and other providers to be more business-like in order to improve the patient experience and make savings, they can’t be forced by the regulator to fight to the death when people’s lives are at stake and where collaboration may well be the solution in many cases.
  • NHS trusts are to be freed up to perform more private work. It’s difficult to see how this could not lead to longer waiting lists for NHS patients.
  • There are a lot of health conditions, including long-term or rare conditions, that would be ignored by GPs so need to be commissioned on a regional level – patient groups and specialist providers will want assurance that they won’t fall through the gaps.*

I’m pretty confident that none of these will get past the Lords. There are enough of them who are open-minded and wise enough to make sure the dodgiest bits of the Bill get expunged during the Committee and Report stages.

And there will be plenty more opportunities to Save The NHS.

*This post is completely personal opinion, though I should declare an interest that I do work for examples of these in my job.

How will today’s graduates afford retirement?

September 9, 2011

Free tertiary education. A job for life. Affordable housing. Final salary pension. All a thing of the past, we’re told. The children of the baby boomer generation are looking increasingly likely to be worse off than their parents.

The Young Fabians recently considered the implications of the last of these, and how individuals entering the world of work can be encouraged to start putting money aside in a pension scheme. There was a broad consensus that better financial education was needed and the demise of the Child Trust Fund – as a way to get citizens in the habit of saving from an early – was not. The pension industry’s marketing of itself to young people was found wanting, particularly as their selling points – the tax-free nature, the employer contributions – were not familiar to some of the young professionals in the session itself.

Rachel Reeves MP noted that formulation of pensions policy involved, quite rightly, the likes of the ABI, the financial services sector and employers, but seemed to have ignored the views of the very people who it was aimed at.

While the pensions industry could be given a kick up the arse, I get the feeling a significant barrier to take-up is the effect of the economic downturn. Since 2008 there have been three trends. Firstly people, particularly the young, have a lot less job security and are less likely to want to put money away for a long period of time when they might need some in the bank in case things take a turn for the worse. Secondly, with the cost of borrowing pushed down, there is no incentive to save as it is difficult to find an interest rate which will beat inflation. Thirdly, the shortcomings of the financial markets as a generator of wealth have been exposed, so that the “value of investments may fall as well as rise” warning on financial products is even more ominous for an unseasoned investor.

Talking about pensions is not enough to address the generational divide. Even if we all signed up for a pension, retirement doesn’t sound like fun. With credit still crunched and house prices still out of the reach of thirtysomethings, there are going to be a lot of people who will not own a home outright by the time they retire.

Only one in twenty over-65s currently live in the private rented sector with three quarters in owner occupation and a fifth in social housing, according to the CLG. In comparison, 36% of 25-34-year-olds rent in the private sector. Now of course many of them will buy eventually, but the rate of those still renting when they hit 65 (or whenever we’ll retire) is going to be a lot higher than 5% the way things are going. Apparently if I continue paying £1200 into my pension pot per year and assuming it earns an average of 7% growth a year, I will get around £5000 per year in retirement. This sum would barely cover rent this year, let alone after 40 years of inflation.

Housing will have to be made a lot more affordable if the pensioners of the mid 21st century are going to keep a roof over their heads.

The voters who could have changed the country

May 9, 2010

Combined, the Labour and Liberal Democrat parties have 315 seats in the House of Commons – 11 seats short of the 326 required for a majority. As it is, any potential Labour-Lib Dem coalition would have to look to Plaid Cymru and the SNP to secure support for a government, so a Lib Dem-Tory pact currently looks more likely to succeed (if they can agree to cooperate).

There must be many people who voted Lib Dem on Thursday with the intention of keeping the Tories out, who are now looking at the negotiations and feeling like idiots. I know at least one, and he didn’t even end up with a Tory MP.

There were so many close calls on Thursday night and Friday morning that I wondered just how many people Labour and the Lib Dems needed to vote with their heads rather than their hearts to make an anti-Tory coalition a no-brainer rather than a pipe dream. I decided to find out.

There were 17 Tory gains on Thursday that had majorities of less than 1000. These are the 11 constituencies that have the smallest Tory majorities:

Warwickshire North (Labour in second place) – 54

Camborne & Redruth (LD) – 66

Thurrock (Lab) – 92

Hendon (Lab) – 106

Oxford West & Abingdon (LD) – 176

Cardiff North (Lab) – 194

Sherwood (Lab) – 214

Stockton South (Lab) – 332

Lancaster & Fleetwood (Lab) – 333

Broxtowe (Lab) – 389

Truro & Falmouth (LD) – 435

Adding up those figures, plus a voter in each constituency to tip the balance, you get 2402. That’s 2402 people in Britain who could have voted for the party that came in second place rather than the party they actually liked, who could have elected a centre-left candidate rather than allowed a Tory to be elected, who could have changed the course of the election and its aftermath.

Massive counterfactual I know, and it would only give the coalition the slimmest of edges over the Tories but I just thought you should know.

Labour should sit this one out – Why a Tory-Lib Dem coalition might benefit Labour

May 8, 2010

What I’m about to suggest might well be unpopular with everyone who voted but I’ve given this so much thought I decided to write a blog. And I don’t write many blogs.

Just for the record, being in power is great – in the past thirteen years the Labour government have achieved things that wouldn’t have been achieved under the Tories: the minimum wage, public service investment, redistributive tax credits and reducing crime.

But government inevitably makes a party unpopular – being forced into unnecessary wars, pressurised into knee-jerk reactions by the press, making difficult decisions that end up backfiring. In Thursday’s election, Labour have done very well, seat-wise, given the amount of damage they’ve sustained over the past few years and the fury that they’ve faced from the press.

Sadly, Gordon Brown hasn’t done enough to keep the public on side. He has been very strong on the economy compared with the other two party leaders, but he just couldn’t communicate it well during the debates. Although he managed to shake off Andrew Rawnsley’s bullying allegations and the Gillian Duffy disaster (incredibly Labour retook Rochdale), he has still come across as a difficult person to work with. He simply cannot last as Prime Minister or, indeed, leader of the Labour Party.

There is the chance that should Liberal Democrats and Tories not reach a deal, Brown, or at any rate the Labour Party, could form a coalition. Given the combined vote share of the parties stands at 52%, this would be popular in the country at large and I’m sure a lot of natural Labour voters would be happy to compromise with the Liberal Democrats on things like civil liberties, Trident and Heathrow.

The trouble is they’d need the support of the nationalist parties – that could leave the door open for costly deals to keep support for the government and I cannot see this lasting. The more parties Labour relies on, the more volatile every major Commons vote will be.

If a Labour-Liberal Democrat government fell apart, it would be enough to put the Tories into power at the ensuing General Election – and of course, the majority of the public doesn’t want this.

Furthermore, Labour doesn’t want another election so soon given its precarious finances and relatively good number of MPs, which could fall if the Conservatives gain popularity from a faltering coalition government.

Under the circumstances, Nick Clegg is right to enter negotiations with the Conservatives with their mandate in the public and Parliament. Who knows how well a coalition between the Tories and Liberal Democrats will do. But while it wouldn’t have the power to carry out its policies, Labour would benefit in several ways.

Firstly, it wouldn’t risk haemorrhaging any support by being part of an unstable coalition with the Liberal Democrats and nationalists.

Secondly, it would stand to benefit electorally from any blunders committed by a Tories and Lib Dems, who, of course, would have to make the difficult decisions given the present state of the economy. One caveat to this is that the Tories and Lib Dems would have some ammo to use against Labour.

Thirdly it would give Labour a chance to regroup and figure out what it stands for and then hopefully regain some ground at the next general election, assuming the coalition holds.

As Chris Addison said at his show on the eve of the election, trying to figure out who the next Labour leader should be is like interviewing people for a job and then realising at the end there’s no one left and thinking “we’re screwed”. Most of the candidates, several of whom would make a good future Prime Minister, have never been in opposition so a stint on the Speaker’s left will give them some perspective and a chance to develop some mettle.

No one knows how a Lib-Con coalition would affect voting intention but Labour could be in a good position to enter government again, albeit as part of a coalition, especially if Clegg secures some electoral reform. This is the reality Labour will have to come to terms with over the coming weeks.

Can it get any worse for Labour?

July 26, 2008

The overall verdict on the result of the Glasgow East by-election, where the SNP overturned a Labour majority with a swing of 22%, seems to be that Gordon Brown can’t even win in the Scottish Labour heartlands, and a similar swing replicated across the country would all but destroy the party (20 MPs left is the figure being bandied about).

I don’t think it’s as bad as all that. It’s bad, certainly – I’m dreading a 1997-sized landslide for Tories at the next general election – but Labour lost to the Scottish Nationalists, who actually provided Labour’s core voters with a left-of-centre alternative. The SNP proved themselves as a credible political force last year when they took Holyrood, and with a largely positive year in power up there, I’m not surprised they performed so strongly in their first Westminster test since then.

South of the border, Labour are still the only major (ostensibly) left-wing party traditional Labour voters have to vote for, so they’ll do a better job of hanging on to their seats in northern cities and avoid a complete wipeout. But it’s still clear that the core voters don’t like the party any more. If Brown can’t prove that he’s on the side of the worker, many of them will not vote at all, or opt for the BNP, allowing the Tories or Lib Dems to sneak in in seats where Labour thought they had healthy majorities (cf Crewe and Nantwich, which was compounded by a poor campaign).

It’s looking more and more likely that Labour are going to have to make some kind of lurch to the left to win back their heartlands. With Cameron having basically won back the Middle England voters who elected Blair in 1997, the next election is lost – it seems that if they want to avoid utter humiliation, Labour’s job is to abandon their chase of the Daily Mail’s favour and focus on working-class friendly policies. (So a slight modification of my opinion after the local elections.)

What the Republican party is really like

June 1, 2008

Last week it emerged that Texan evangelical preacher John Hagee once told his flock that the Holocaust was God’s way of getting the Jews back into Israel. John McCain, the Republican presidential nominee, responded by saying, “you know what John? I’d rather you hadn’t backed me for President. Have your endorsement back.” Which is fair enough.

The thing is, this Hagee character said back in April that Hurricane Katrina happened because of a gay parade in New Orleans, which was “offensive to God”. McCain was apparently okay with this. Not surprising for the cynics among you, but still: bloody hell.

Fun fact: Hagee has also referred to the Catholic Church as “the Great Whore”.

Hansard: how to read between the lines

May 21, 2008

Remember Tracy Temple, John Prescott’s old bit on the side? Ever wondered what she’s doing now? Tory frontbencher Eric “eats too many” Pickles does and has. Yesterday he asked Ed Miliband, who’s in charge of the civil service, in which Department she works.

Parmjit Dhanda, a minister at the Department for Communities and Local Government, was inexplicably asked to reply instead. He said:

“It is not Government practice to name individual civil servants below the senior civil service or comment on their employment.”

Erm, so that’ll be the DCLG then…?

What Labour should do next

May 14, 2008

These are some thoughts I’ve had over the past week or so about politics and that. Of course, if I was more committed to my art I would be writing in-depth about the draft legislative programme, but I’m not.

It looks like Labour will lose the next General Election. What Gordon will probably do is try and court the centre ground voter as much a possible, by pandering to the right-wing press. The trouble is, this hasn’t done much good in the past few months. The Tories have pretty much got the centre ground sewn up with Cameron’s changes, and I don’t think it’s Labour’s ideology that is doing them any harm in the polls but a string of blunders and half-baked policies that make them look incompetent and a spent force as a Government. The Tories have the initiative, policy-wise.

 

Labour’s undoing seems to be an obsession with polls and what the media thinks of them, and the way they act on this clearly isn’t working. Now that it looks highly likely the Tories will win the next General Election, I think they should abandon this and just be a bit more honest. Do what they think is right. Go back to core Labour values. They’ve got nothing to lose by doing so and maybe if people saw what the real Labour can do, they’d have a bit more respect for them.

 

If, somehow, like Major in 1992, they do manage to hang on in 2010, perhaps by ditching Gordon, there’ll just be another five years of division, dithering and unnecessary authoritarianism which will alienate Labour from the people, leaving the party like the Conservatives pre-Cameron. Another three or more terms in the wilderness. I agree with Jonathan Freedland in the Guardian today that a period in opposition would be refreshing the party – particularly all the young policy wonks who’ve known nothing but Government.

 

Cameron hasn’t got what Tony Blair has – sure he has some coherent ideas and a good joke writer – but I don’t think Labour are as hated as the Tories were by 1997. Obviously we’ll have to see how the recession goes. So assuming that we have only two more years in power, how about making the Labour Party something to believe in again? Ignore the press – except maybe the Guardian – and actually think policies through. Listen to and understand the swing voters but don’t go announcing the first thing that comes into your head in a shallow attempt to get them onside. Use the time also to push through things that the Conservatives are going to abandon when they get into office – target child poverty, for example. Leave the public services in a good state, so the Tories can’t beat us with the stick that we’ve beaten them with for the past eleven years. Then after four years of Cameron pissing everyone off with his smug, phoney ‘I care, honest’ line Labour won’t look as bad and might have a recovery.