Progressives should unite for a fairer, slower reduction plan


The Government’s claims that the Budget was “tough but fair” and “progressive” have quickly unravelled following analysis by the Institute for Fiscal Studies, Financial Times, and by Tim Horton and Howard Reed on this blog. Despite Nick Clegg’s nonsensical protestations that the the IFS analysis did not include as yet undefined “future changes”, Lib Dem deputy leader Simon Hughes has conceded the point and is now urging Lib Dems to “come forward with amendments … [to the Budget that] improve fairness and make for a fairer Britain”.

Progressives of all stripes should help Mr Hughes with his mission. Lib Dem policies like a Mansion Tax and Capital Gains Tax would relieve pressure for the regressive policies in the Budget. But we should also work to challenge another Coalition myth which continues to have traction.

While the post-Budget analysis has focused on distributional elements, the broad left has been unable to win the argument that the scale and speed of Osborne’s Budget was a matter of choice. Instead the public and media appear to have accepted the Tory line that the total package of cuts worth £128 billion by 2015-16 was “unavoidable” because of “Labour’s debt crisis“.

This reflects considerable political skill by George Osborne and David Cameron in talking relentlessly about the risk of a Greek-style “sovereign debt crisis” and encouraging their Lib Dem colleagues to use the same language. But blame also lies with the Labour party, which refused to hold a comprehensive spending review before the election.

In the March Budget, Labour set out plans to “halve the deficit over four years.” They announced costed plans to increase taxes by £18 billion by 2013-14 and set out a desire to cut spending by £39 billion over the same period. But they failed to detail where the money would come from allowing George Osborne to say in his Budget speech, “What we have not inherited from our predecessor is a credible plan to reduce their record deficit.” Osborne is right and yet this does not necessitate the additional £32 billion in pain by 2013-14, rising to £40 billion by 2104-15, and up to £55 billion in 2015-16.

As outlined on Left Foot Forward on Tuesday, the decision to raise VAT was only necessary to pay for tax cuts for businesses including banks, the Lib Dems’ regressive tax threshold pet project, and to meet Tory promises on national insurance. The additional cuts have been made out of an ideological desire to erode the “structural deficit” in its entirety by 2015-16 putting growth and employment at tremendous risk. Three points are worth making.

First, until the financial crash Labour had succeeded in keeping national debt below the 40 per cent of GDP target that it set itself. In 2006/07, public sector net debt was 36.0 per cent of GDP. It rose rapidly primarily because of “financial interventions” to help the banking sector and because of the unemployment benefits and lost tax receipts caused by the recession. It currently stands at 62.2 per cent and under Labour plans was projected to peak at 74.9 per cent in 2014-15. As this graphic using data from the OECD shows, even at that level, the UK will be below a number of countries including Italy, Japan, and indeed Greece. Under the Tory plans net debt will now peak only marginally below Labour’s  70.3 per cent in 2013-14 – although if the Budget causes the economy to slow down by more than predicted

Second, the “structural deficit” was caused primarily by the recession not by Labour’s pre-crash spending plans. Left Foot Forward has been fond of showing this graph. Although Gordon Brown should have closed the gap earlier, it shows how in 2008, current spending and tax receipts were virtually in balance. The deficit was due to the Government’s capital spending programme which was perfectly sustainable while the economy grew. Crucially, it was only in November 2008 – in the midst of the banking crisis – that the Tories dropped their pledge to match Labour’s spending plans. At the time, Nick Clegg said, “David Cameron has learned nothing. It’s exactly what the Conservatives did in the 1980s.”

Third, markets were satisfied with Labour’s approach. There was much guff during the election campaign about what impact a hung parliament would have on markets. Similarly there was never any evidence that a Labour victory would result in Britain losing its AAA credit rating. Not least because markets knew the truth about debt levels and the deficit. Indeed, the yield on British Government Securities have been at historically low levels since the financial chaos of autumn 2008. Yields remained around 4 per cent through both the November 2009 pre-Budget report and the March 2010 Budget when Labour set out their deficit reduction plans.

During his Budget statement, George Osborne admitted that, “this was a crisis that started in the banking sector.” Indeed it was. But because of Cameron, Osborne – and now Clegg, Alexander and Cable’s – ideological position to cut deeply and rapidly, the next crisis may be caused by the government. The alternative is a fairer and slower deficit reduction plan.

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  • vi__sa

    That chart you are so fond of displaying – Brown NEVER met any of his targets in the last 4-5 budgets I have studied. Why should we believe that chart? Come off it – we all know we need to watch how much we spend and the government is no different.

    And you know the irony – most British taxpayers would probably still support higher taxes, if Labour hadn’t screwed it up so badly and WASTED a huge portion of taxpayers’ money. And you can’t blame the recession for that.

    Please be honest – people aren’t stupid.

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  • Don Quixote

    With regards to “this graph” what’s the datasource? I’d be interested to see it, if there’s a link?

  • Fat Bloke on Tour

    Will

    You need to work on your analysis if you are going to say that AD had not put in place a credible deficit reduction plan. He had and the figures were there to show it.

    Part One: The Curious case of the shrinking Output Gap

    The whole argument revolves around the structural / cyclical deficit question and how this has been manipulated by the Treasury to show the story it wants to sell.

    2009/10
    Total Deficit = 11.1%
    The OBR using Treasury figures and methodology along with some changes to Trend growth generated the following split:
    1) Structural Deficit = 8.8% of GDP up from the Treasury’s earlier view.
    From memory that was figure was in the region of 8.0%.
    2) Cyclical Deficit = 2.3%

    Now the structural deficit is a derived number, the cyclical deficit is calculated and then taken away from the actual deficit. This then leads to the output gap as this is the number used to generate the cyclical deficit. The output gap is the difference between an economy’s potential output and what it actually produces.

    Output gap and Cyclical deficit are linked as follows —
    Cyclical Deficit = Output gap (Year Y) x 0.5 + Output gap (Year Y-1) x 0.2
    Consequently the output gap has a huge and direct bearing on the structural deficit.

    Now the fun starts:
    2009/10 Treasury Output Gap = 6%
    2009/10 OBR Output Gap = 4%
    Therefore the cyclical deficit magically reduces from 3.1% of GDP to 2.3% of GDP all at the stroke of an OBR pen and the fact that they have reduced the trend rate of growth over past two years.

    All this in light of a 6.2% reduction in GDP and two years’ish of trend growth lost in the process.
    Consequently you could say that the Credit Crunch lost the country 10/11% of GDP.

    The question is how realistic is the output gap figure of 4%.
    The better question would be how realistic would an output gap figure of 6% be?
    Both figures do not to me seem to capture the dormant capacity of the country at the moment.
    Yet the lower figure is being used to maximise the structural deficit figure which is then being used to scare the troops into accepting the Coalition / Establishment’s Dog Boiling agenda to neuter the TB / GB settlement regarding the scope and quality of the public sector.

    The OBR suggests that after 5 years of bobbling along at or below trend we reached Dec 2007 with GDP less than 1% above trend, nothing controversial there but to suggest that after the hell of the Credit Crunch and the 8% ILO unemployment rate and all the people flexing their time to keep their jobs to suggest that we now have economic activity 4% below trend suggests that the “Three Brothers Grimm” of the OBR do not live or interact with the real world.

    And it gets worse.
    What is the OBR story for 2010?
    2.1% trend growth and 1.3% actual growth predicted.
    What happens to the output gap?
    Slight enlargement due to the slow growth?

    No you would be wrong, the OBR see the output gap closing over the next 12 months.

    Really the Emperor’s three little helpers are dancing bollock naked through Liverpool Street station as I speak.

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  • Fat Bloke on Tour

    Will

    Part Two: Bend it like Beckham or Deficit Forecasting and the Treasury

    Starting off with some numbers for 2009/10
    As always these are from memory and contain the odd schoolboy howler.

    Budget – March 2009 = £175bill forecast.
    PBR – Nov 2009 = £178bill forecast.
    Not looking good for AD’s pre-election boom-let sorry targeted investment package.
    Budget March 2010 = £165bill estimate.
    May 2010 = £156bill.

    That is the non financial intervention view of the budget deficit for 2009/10.
    In cash terms things were even better as we seemed to generate cash from our bank holdings.

    £156bill = 11.1% of GDP
    £50bill = Investment / 3.5% of GDP, something to be proud of.
    £106bill = Current Deficit.
    Investment can be broken down into gross and net with net investment being in the region of £35bill’ish / 2.3 or 2.5% of GDP.

    Other way of looking at it breaking down the headline number into structural and cyclical.
    The £156bill headline number then becomes:

    £33bill = Cyclical deficit at 2.3% of GDP.
    £123bill = Structural deficit at
    Again this can be split into £73bill current and £50bill investment.

    Now the issue in all these numbers relates to what would be needed to get the economy back on a sound footing in the medium term, say 2014/15. How strong would be the cyclical bounceback and when would it start? All the info available seemed to show that it had started and that it would be larger than the Treasury’s “conservative” forecasts seemed to suggest.

    The numbers above are the OBR view after they moved £12bill from the cyclical deficit to the structural deficit. All on the back of a dodgy Treasury view which they then made more extreme with some judiciously timed changes to the trend growth rate.

    It is at this point that all those of a conspiratorial nature should look away just in case they would want to impugn the pristine reputation of the “Three Brothers Grimm” or Sniffy’s Beard as they are colloquially known in the environs of G1.

    Now take the OBR changes out of the equation and the current part of the structural deficit then reduces to £61bill, or a lot less threatening than the £156bill headline figure, remembering that even this figure is based on the Treasury output gap of 6% which seems low given the scale of the Credit Crunch Recession and the state of the country at the moment.

    It is in this context that AD’s £18bill of tax rises and £39bill of cuts needs to be seen.
    What was being proposed was more than enough to stabilise the economy, the first two months of 2010/11 suggest that the recovery in tax revenues will confound the OBR / Treasury analyses. Finally the output gap and the related cyclical deficit need work so that the current results can be updated to better represent the actual economic conditions of the Credit Crunch.

    Credit Crunch = 11% of trend GDP lost
    Treasury / Budget View = 6% output gap.
    OBR view = 4% output gap

    Does the economy you experience appear 4% idle?
    Does the economy you experience appear 8% idle?

    If the true output gap is 8% does that mean the cyclical deficit is 4.6% of GDP?
    If the cyclical gap is 4.6% of GDP does that mean the total structural deficit is £90bill?
    If the total structural deficit is £90bill does that mean the current figure is £40bill?
    If the current deficit figure is £40bill does that make AD’s £57bill squeeze look prudent?

    Finally Sniffy got it wrong by saying that GB/AD didn’t know where the money was going to come from, it is coming from the same place as his £85/90bill slash-fest is coming from. Just a case that AD was not going to get involved with corporate welfare and the patient would have survived the operation.

    AD had a plan.

    It was a timid Edinburgh lawyer’s plan but it would have worked.

  • mike

    Hughes in his local paper Southwark News was defending Coalition and Budget

    he really has been caught out
    I think most Lib Dem MPs have been shocked at how the budget has impacted on the poor

    ……..and they look to the Lib Dem Front bench and then at the Tory front bench and there was no difference

    two legs good four legs bad

  • Jacquie Martin

    Simon Hughes is lining up to lead the ??? when they split from the LibDem party. Clegg will join the Tories – the loyal servant he is.

    vi__sa, I agree only with the fact that most people would support a higher tax rate. I’d have done it yonks ago. But the recession did account for less tax take. Before then tax and spending ran closely parallel. If spending the taxpayer’s money on keeping the country solvent, then like most businesses, loans are the short term alternative.

    Until we have the tax talk, we’ll never fully deal with the deficit. Guess who’ll the ConDems will line up to take the tax hit.

  • Mr. Sensible

    The best advice I think Mr Hughes can give his party and the coalition in terms of the budget is to get back to the drawing board and start again.

  • Will Straw

    Thanks for the comments:

    vi__sa – the charts from the IFS. I’d be interested to know which Budgets you’re referring to. Budget 2007 shows a “structural deficit” of -1% in 2005-06, -0.5% in 2006-07 becoming a surplus by 2008-09. We were heading in the right direction, the Tories were signed up and then the financial crash hit.

    Don – the picture is from here. The source is OECD: http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/oecd-countries-deficits-and-nation

    Fat Bloke – I think you’ve misread me. My whole argument is that the pace of fiscal consolidation (£57bn over four years) planned by Darling was about right but we presented the Tories with an open goal by not carrying out a spending review and setting out how we would have cut.

    Jacquie – I completely agree. That’s why it was so irresponsible of the coalition to CUT taxes (and then raise VAT to pay for it).

    Will

  • Don Quixote

    Thanks for that, Will…

    But I meant this one

    http://www.leftfootforward.org/images/2010/06/Public-finances-1997-2010.jpg

    Sorry for not being clear. It’s from the IFS, then? I don’t suppose you could post the link?

  • Fat Bloke on Tour

    Will

    I am still having trouble with your argument.

    From what I can see, AD had a credible plan, so Sniffy was wrong to say that there was not one, what was missing was the detail, the actual departmental figures. The framework itself had been well publicised – Health and DfOD excused everyone else to pay a share.

    AD was in exactly the same position as Sniffy today, figures are out but the departmental detail is not. Then the issue then becomes timing and I feel they were right to delay. Given that 2010/11 was being treated as carryover with the budget figures out in the open and the fact that the problem of early cuts had been identified I can see no issue in the CSR being delayed by 12 months.

    Regarding the politics of not detailing the changes before the election I fear that GB / Ad was damned if they did, damned if they didn’t with the important proviso that the fluid nature of the Treasury “conservative” forecasts would have meant that the review if it had been carried out in Q4 2009 the figures would have been in response to a projected deficit of £178bill rather than the £156bill that actually seems to be the figure.

    £22bill difference, another couple of those and soon we would have been talking about serious money.

    The politics would then have been about how to manage through a cash standstill budget across the middle three years of a whole parliament while managing to find £4bill extra pa for the Health and DfOD pledges.

    When the task is set out in those terms the AD plans looks eminently achievable. The issue now is not that Sniffy’s numbers are 70% worse than the ones he inherited it is just that, as with his “Efficiency Savings” debacle AD got there first and snaffled all the low hanging fruit. In addition with a going in position of a £50bill investment programme and the need to find £38bill of savings suggests that investment could be wound down over 4 years to provide the bulk of the savings without decimating the poor and the tax credit system.

    Consequently AD was probably looking at £5-10bill of tough calls, real cuts that needed to be handled with care, involving lots of detailed planning over a period of 3 years.
    In contrast Sniffy is looking at £35-40bill of real cuts over the next two years, at least a 300% increase on where we could have been and that is why he is proposing such a bloodbath of cuts.

    Add in the £12bill of tax cuts to select groups, the Corp Tax changes being particularly inappropriate, and he really has set out his stall to please his Establishment “Dog Boiling” booster club.

    £75bill / 5.3% of GDP / the “current” portion of the Structural Deficit removed in 4 years to March 2015 really is a gore-fest, they really have fired up the chainsaw for some slash and burn.

    AD’s £38bill reduction with a healthy portion coming from a reduction in the £50bill capital investment budget now looks like a walk in the park.

    However all this is now water under the bridge.
    Sniffy has bet the country on a voodoo economics long shot.
    I fear the bookies might win.

    Working on the art of the possible, pressure needs to be brought to bear on all the dodgy dealing behind this budget –

    The Treasury “conservative” forecasts,
    The output gap and the cyclical element of the deficit.
    The apparent buoyancy of the tax receipts, well the buoyancy of the tax receipts before Sniffy got to work.
    I feel we are being sold a pup by the Treasury / fiscal establishment.
    Not forgetting Mervyn “Moral Hazard” King who is a better empire builder than he is a central banker.

    Main thing is the pain from 2011 onwards will be the responsibility of one man only – Sniffy.
    Labour took the country into the Credit Crunch on an even keel, current account balanced, (tiny surplus?) borrowing only to invest.

    All the carping about the deficit has as much validity as the householder complaining to the Fire Brigade that although they had saved his house they had used too much water.

    The monetarist fable now unfortunately now almost an economic maxim that there is no such thing as a free lunch needs to be turned on its head pronto, the fear of debt and the paradox of thrift will kill the recovery if left un-challenged.

    The concept of the deadly delayed dinner needs to be publicised, that is based on the fear of debt people / governments will delay buying food / useful services until they have the full price often with fatal results as they starve when there is food in the fields and people on the dole.

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  • http://billyblofeld.wordpress.com Billy Blofeld

    By the time Progressives even get around to uniting to outline a fairer and slower deficit reduction plan it will be too late………

    …. the silence is deafening. The complaints about the people who have got their fingers out and are actually delivering the cuts is also deafening.

    What are Progressives / Labour for? Just complaining? Is Labour a pressure group or a party of government?

  • http://boffyblog.blogspot.com/ Arthur Bough

    Capital does not need to make these cuts, and some sections of Capital, in particular US Capital, is saying so very loudly. Ideologists like Roubini are also saying that such cuts at the present time are a lunacy. I continue to beleive that the real representatives of Capital within the permanent State Bureaucracy will stifle theri implementation. Even Norman Lamont has called the 25% figure “an ambition”.

    But, that does not mean we should look to the Capitalist State to fight our battles here any more than anywhere else. We need to mobilise against the Cuts ourselves. But, for the same reason such mobilisation should not simply be a defensive, negativist struggle. Our aim is not to protect the Capitalist Status Quo, but to put forward socialist alternatives, socialist solutions to workers problems here and now. As Marx and Engels put it to look after the needs of today, whilst taking care of the Movement of tomorrow. That’s why the reformist, Economistic struggles of the Trades Unions against cuts will always be inadequate.

    The Liberal-Tories have said that they want US to have a say on the Cuts, and how the Deficit is dealt with. That is good even if we know they don’t mean it. We should take them at their word in putting forward positive alternatives not just opposing cuts. To the extent that the Tories proposals on Co-operatives (with all of the limitations they want to place on them) allow us to open up that narrative about the desirability of a society in which Workers themselves own and control the means of production, and facilitate beginning that process here and now as a practical solution, all the better.

    In fact, the Liberal-Tory invitation to discuss the Cuts should be taken up warmly in order to promote such positive discussion, and direct demcoracy on every street, in every neighbourhood, and on every factory floor. As socialists I am sure there are a whole series of Cuts that we could put forward as an alterntive to cutting services or benefits. We have every opportunity to draw up such a programme, and to get it discussed and taken up by a wide section of society, not just by workers but in the middle class too.

    But, I also have a very simple proposal that I have put forward in my blog http://boffyblog.blogspot.com/2010/06/how-to-pay-for-deficit.html that could be used to symbolise such a set of alterntive proposals. I propose that every limited company be required to create new shares equal to 10% of its issued share Capital, and to hand them over to the government. They could be then sold by the arms length agency the government set up to handle the Bank shares that were similarly created and handed to the government. By taking payment in shares not cash it would mean that these companies suffered no loss of profits, or cash flow from which to pay wages, suppliers or to make investments. It means no withdrawal of demand from the economy. After all the creation of those vast amounts of Bank Shares didn’t bring the world to an end, and ever since the Banks have been once again making huge profits.

    As the total value of shares listed on the Stock exchange comes to well over a trillion pounds, these new shares would be worth more than 100 billion pounds. It would raise sufficient funds to pay off the debt overnight without having any impact on economic activity – indeed it would if anything stimulate growth.

    Of course, the Liberal-Tory Party will not adopt such a measure because unlike every otehr tax which falls on income or wealth – and which, therefore, the rich can avoid – this tax falls directly on Capital itself. It is not an attempt to redistribute income, but redistributes Wealth away from Capital, and towards Labour. Not only does it not have any economic downsides – even the fall in share prices when these shares came to market would be limited – and because it meets all the requirements of fairness etc. that the Liberal-Tory Party claim to subscribe to it is hard for them to argue against. That is precisely why the Labour Movement should put it forward as a solution.

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  • George Kendall

    It’s refreshing to read a Labour supporter willing to acknowledge some past mistakes.

    I think the present Labour leadership are missing the zeitgeist. Public opinion has shifted – http://www.ipsos-mori.com/researchpublications/researcharchive/poll.aspx?oItemId=2628 . What Alistair Darling said a year ago has been forgotten and the Labour leadership’s rhetoric gives the impression they are in denial. The country needs an effective opposition, so I hope your suggestions are taken up.

    While I like some of your article, I didn’t like: “The deficit was due to the Government’s capital spending programme which was perfectly sustainable while the economy grew”. Hmm. How’s that different from saying: “The deficit was due to the Government’s non-capital spending programme which was perfectly sustainable while the economy grew”? True. But not sustainable if the economy were to stop growing…

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