Progressive should unite to help Simon Hughes make the Budget fairer. Progressive taxation and a slower reduction plan are the way ahead.
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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20 Responses to “Progressives should unite for a fairer, slower reduction plan”
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
https://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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