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”
Will Straw
Thanks very much for all the comments, particularly from Mr Dale for answering the questions so quickly. Could I just remind a couple of people (John77 and Andy in particular) that you can make your points without reverting to personal insults. It might be OK on Comment is Free but it’s not on here.
Iain – (1) Of course there will be cuts and, when they come, they will be painful. But the Conservative dogma to start the cutting in 2010-11 has very little economic support; (2) Fair enough if it works out that way but Cameron should stop saying the Government is guilty of “moral cowardice” if his the Tory plans are so similar; (3) The CBI think it will be £163bn and the IFS also think it will come down so I’ll take you up on your bet.
Fony – comparisons with the 1980s are spurious as Martin Wolf makes clear in today’s FT: “More serious, in my view, is the assumption made by Mr Osborne that, in current circumstances, a sharper tightening of the structural deficit than the government plans would be expansionary. He is seduced by irrelevant parallels with the fiscal tightening of 1981, when there was also room to slash interest rates. In current circumstances, monetary policy is unlikely to be an adequate offset.”
El Sid – I think you’re on to something. Given that we’ve had a banking crisis as well as a budget crisis, we desperately need to broaden the base of the economy in order to ensure a higher trend rate of growth. Unless you have a 100% belief in Ricardian Equivalence (I don’t) then we need the public sector to help prime the pump in these circumstances. My fear is that a process of budget consolidation now would leave us with a lower trend rate of growth because there would be no support for investment (which has fallen off a cliff). But I completely see that the decision is fundamentally a trade off and judgment call.
All the best,
Will
chaplain
Will Straw. What’s your background? Have you ever had a real job? Have you ever been responsible for anything or anybody? Why are you just recycling garbage. What are you hoping to get out of it?
El Sid
It might have been clearer if I’d said in my previous post :
I do know that the wrong way to work out government spending is to say “We budgeted _to overspend by_ x, we’ve only overspent by y, therefore we can spend x-y on bread and circuses”.
I’ve been thinking on this some more overnight. Will, you mentioned Ricardo. I too don’t believe in a literal equivalence, but I think you can view the OE analysis as framing the debate as trying to beat Ricardo. We’re looking for short-term spending with benefits that outweigh the long-term costs. We lost that game when we paid for a short-term VAT cut with perpetual taxes on unemployment. That was dumb.
I think my favourite “stimulus” was the deal that effectively extended the payment terms for corporate taxes. Not sexy or votewinning, but it was a lifesaver for the cashflow of many small businesses. It was a perfect response to tide them through a 6-month period in which demand fell off a cliff and bank lending was non-existent. Thus a large amount of economic capacity was saved at a relatively low cost – we beat Ricardo.
Maintaining our industrial base is critical, as long as the recipients are a good long-term base. Looking back in history, saving Rolls-Royce was a great deal, they had made huge investments in new technology that would lead the way out of recession, whereas bailing out the organisation responsible for the Marina and the Allegro was a bad idea. I’d highlight the APT as a cut too far in the early 80s – the technology got sold to the Italians who then sold it back to us in the form of the Pendolino trains, and the loss of that industrial base has probably led to our trade deficit being made even worse by importing the Javelins from Hitachi etc.
So we need to be smart, and avoid cutting that kind of project that could deliver long-term benefits. I have a feeling that a lot of capital projects in the defence industry come into that category – being brutal about it, they act as a subsidy to maintain a technological base in an industry where we are a world-leading exporter. We need to look after such industries as we haven’t got many of them left and they are our way out of this mess, however icky we may feel about arms sales.
It’s a mistake to suddenly start thinking about stimuli just because the GDP stat goes from +0.1% to -0.1%. If a scheme beats Ricardo at any time, then we should do it, if it doesn’t we don’t. However, it will be much harder to find quick wins like the tax delay from now on. Solutions to a long, grinding malaise are very different to the solutions to a six-month credit crunch – the two dips have very different characters. Which in turn makes me wonder if the correct response to the first dip was more Keynesian, the response to the second dip should be more Austrian. I understand that is an awkward stance for some of the more yah-boo political types to cope with. :-))))
You can obviously argue about the specifics but let’s say that on average, every bp at which you borrow £1bn, costs 100 jobs in perpetuity. Thus if you borrow £10bn at current rates, that costs the country 45,900 jobs forever. You’ve just put the entire working population of Blackburn on the dole – so you better have a laser-like focus on using that £10bn to generate at least 45,901 new, long-term jobs.
Concentrates the mind a bit, no? :-)))
It actually gets worse than that, because by the end of this debt cycle we’ll be paying 8% or 10% on gilts rather than a mere 4.59%. So the marginal cost of that £10bn is actually Blackburn plus Oldham or Burnley. Translate that to the whole deficit and it gets mindboggling. Borrow £178bn and you’re condemning the West Midlands to unemployment. Borrow £178bn two years running and you’ve just put the whole of Scotland or Yorkshire on the dole. And so on – there is nothing progressive about running a deficit unless you have that relentless focus on beating Ricardo.
In turn that makes the whole language of cuts a bit meaningless, you’re defining the debate in terms of organisational inertia. What matters is doing deals that beat Ricardo.
It’s not about what you do with that final £3bn that takes you up to £178bn deficit. If you can find £278bn of deals that win the game, you do that. If you can only find £78bn of deals that win the game, that’s what you borrow. What you borrowed last year is irrelevant.
Obviously a basic problem with this framework is you can never be sure at the time that you’re doing a good deal. But at least it allows you to dump the obviously stupid spending. I’ve no idea of the scale – I can imagine that there’s maybe £20bn of game-winning expenditure that the government could do that isn’t happening at present. A potential £20bn stimulus if you like. But at the same time you’ve got to eliminate current spending that is losing the game – I’ve no idea how much that is. People seem to talk of a structural deficit of £60-90bn. Presumably that is the part of the deficit that we can’t afford long-term, which I think means that in my language, that’s £60-90bn that is losing the game. We should stop spending it, in our own interests.
Look at it another way, for as long as we are running a deficit, every £218k spent by government loses a Briton their job for life. If that £218k does not generate at least one new job in perpetuity, it should not be spent. I certainly would not like to be the politician that has to explain to that Briton why they don’t have a job any more.
The deficit is a moral issue, not a number on a balance sheet.
Apologies for rambling on, but thanks Will and Iain, as I feel I’ve now found a framework for thinking about this stuff which crystallises things I only had fuzzy feelings about before.
El Sid
Ga. Of course I meant
“We lost that game when we paid for a short-term VAT cut with perpetual taxes on _employment_. That was dumb.”
Roger Thornhill
Was going to comment on hatstand economic ideas at LFF http://cli.gs/bpbWt but seems others have had a go.