Contrary to what you may have read on Iain Dale’s diary, I have not lost my economic marbles. Indeed, it is Mr Dale who shows a clear lack of economic understanding.
“I did a short turn on Sky News yesterday alongside Will Straw of Left Foot Forward. Incredibly, he seemed to be advocating that far from cutting public expenditure, we should be borrowing and spending more. He reckoned there was some sort of ‘slush fund’ available to pump money into various sectors because unemployment hadn’t reached the heights many people thought it might. So just because the government hadn’t spent money on unemployment benefit, it could now spend this money on other, as yet undefined, things.
“And there you have the difference between the left and the right. If it were me, I’d use the money to reduce borrowing, whereas Will would spend, spend, spend. And we all know where that gets us.”
Yes, we do, Iain. The economic stimulus of autumn 2008 – opposed by the Tories – has dampened the worst impact of the recession, particularly on the labour market. And yet, the British economy “remains very depressed” according to the National Institute of Economic and Social Research.
And far from Dale’s claim, I was at pains to suggest that there wasn’t a “slush fund” (Martin Stanford’s words) and that any additional economic stimulus should be spent on essential investments. The point here is not to borrow further but to ensure that money not spent on unemployment benefits is used for investment – a point on which I was happy to co-sign a letter in today’s Guardian organised by Colin Burgon MP. For the record, here’s what I said on Sky:
Straw: And of course because the impact of the recession has been less severe on unemployment than previous recessions, there is some money that’s been saved and that can be used for really important projects like infrastructure investments and so on, particularly in green industries.
Sandford: So there’s a slush fund essentially to try and woo the voters?
Straw: No I don’t think we should see it as a slush fund to woo the voters. I think economic times are much, much, much too serious for that. If this money emerges, it should be used for investment purposes for the good of the country.
As for Dale he appears to be in cloud cuckoo-land on a number of fronts. On Sky he said:
“I’ve never expected massive cuts in the first year. So I think it’s a convenient scare tactic for Labour to say that there will be massive cuts which will lead to unemployment and all the rest of it. But I think it’s a false argument.
“I think the more interesting argument is whether this is going to be Gordon Brown’s budget or is it going to be Alistair Darling’s? Because I think Alistair Darling actually understands the seriousness of the situation. He himself has predicted a deficit of £178 billion this year. But we see from tax revenues which are plummeting that it could be much more than that. So any govermment which comes after May 6th will have to make clear what their plans for cutting the deficit are going to be.
Three questions for Iain Dale (I won’t hold my breath):
1. Why do you think cuts in 2010-11 are necessary when they are opposed by the 67 economists who wrote to the Financial Times, the Confederation of British Industry, the Institute for Fiscal Studies, and the IMF?
2. Why is it a Labour scare tactic to fear the pace of cuts from an incoming Tory government when David Cameron has accused the Government of “moral cowardice” by failing to promise immediate public spending cuts?
3. Which economic report have you read which suggests that the deficit will be above £178 billion?
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33 Responses to “The economic consequences of Mr Dale”
FCAblog » The economic consequences of Left Foot Forward
[…] That Straw fellow over at Left Foot Forward claims, in reference to himself, "I have not lost my economic marbles." […]
Billy Blofeld
The more Labour spend, spend, spend…….. the harder the poor will be hit when the day of financial reckoning comes.
If you are poor, then soon you are going to get poorer and get hit harder. You will be able to thank Gordon Brown for that.
….I’ll forgive the deadbeats and Labour groupies who signed the original letter. They are just too slavishly loyal, star struck and damp knickered to realise otherwise.
Oh well.
P.S. The letter would have been complete if dear old Viv Nicholson had signed up too………
Matt Sellwood
Dear Lord, we must stop agreeing like this! You’re absolutely right, it is economic madness to enter into a round of swingeing cuts, particularly when there are areas of vast public good (housing being just one) which are crying out for investment.
El Sid
I don’t know whether the government should spend £178bn more than it earns, or £150bn or £200bn. I’m not that clever. But I do know that the wrong way to work out government spending is to say “We budgeted x, we’ve only overspent by y, therefore we can spend x-y on bread and circuses”. That’s how you manage a stationery cupboard, not an economy.
The only thing that should determine the level of spending is the long-term good of the economy. Keep your eyes on that distant target, not the short-term preoccupations of this year’s budget.
Keeping an eye on the long term is critical, because there ain’t no free lunches. If there were, we could increase the deficit to £300bn, £400bn, whatever it takes to get the country back up to trend growth of 2.7% or so. We can’t, because to spend today, we have to reduce growth tomorrow. And if it’s not done cleverly, the reduction in growth tomorrow is much greater than the short-term boost of borrowing today.
For instance, you may have seen the Oxford Economics analysis at http://www.spectator.co.uk/coffeehouse/3303481/howbrowns-stimulus-will-destroy-jobs.thtml – they reckon that the PBR08 stimulus kept 35k people off the dole in 2009, but all bar 5k will return to unemployment in 2010. So it’s a pretty fleeting stimulus for all but the 5k. However you’re stuck with the £12bn cost of the stimulus for ever. OE estimate that the increased taxes needed to pay interest on that loan will cost 170k jobs in 2012-13.
OK, you can argue the numbers. I’m not qualified to gainsay professional economists, but there’s obviously a subjective element to this stuff. But you get a feel for the argument – when we look back in four years time, will we think that the short-term benefit of those 35k jobs for a year in 2009 was worth losing 170k jobs for?
That equation in itself suggests that we’re reaching the limits of what a government can do to stimulate the economy efficiently. Having said that, I don’t think that cutting VAT on plasma TVs was a particularly clever way of spending that cash, the benefits could have been much greater. I’d have rather it was spent in ways that would have benefited UK plc in the long-term as well as the short-term, such as reducing gas imports by making the housing stock more energy efficient.
Look at this another way. Let’s say that this “slush fund”/”extra-money-from-skilful-economic-management” amounts to £5bn over 4 years, which seems to be the order of magnitude quoted in the press.
There are two extremes to the argument, forgive me if the labels sound personal. Take the Straw (Brown?) option and spend £1.25bn in each of the next four years, but you’re borrowing the money (at 4.59% for long-term gilts currently) so that come 2015 you’ve added £230m cost to every year’s interest bill, less whatever benefits you get from the long-term effects of the stimulus.
Take the Dale (Darling?) option and you get no short-term stimulus, but you have an extra £230m to spend in every Budget in perpetuity. That’s an extra £230m to spend on teachers, tax cuts or say government R&D in low-carbon technologies. Even better, use it for tax credits and you’ll get a 3-4x multiplier effect on every £ spent.
So Will – your challenge is to find a way of spending £5bn over the next 4 years that will benefit the UK as much as an extra £800m spent every year in perpetuity on cleantech R&D.
That’s what the deficit debate boils down to.
Fony Blair
Any money the govt spends is at present increasing the debt (or deficit if it’s SPENT rather than invested in structual programmes).
By the way didn’t Thatcher have over 200 economists lambasting her over the economy with none supporting her….I think post ’79 things picked up somewhat. Sometimes so called academic experts really have no idea about the real world. If the answer isn;lt in a text book they’re stumped!
Low tax economies are growth economies (even less unemployment benefot to pay!)
Keep up the doodling!
Fony Blair