Balls walks straight into Cameron’s trap

Leading economist Ann Pettifor, co-founder of the think tank PRIME, on how shadow chancellor Ed Balls walked straight into the Tory trap in his LSE speech yesterday.

Ann Pettifor is the co-founder of the think tank PRIME

David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit at the LSE yesterday – and was promptly trapped. That framing goes as follows: we (the government) have spent beyond our means, and the way to pay for it is by cutting (public sector) jobs and raising taxation – like VAT.

Ed Balls’s speech concedes (as Labour has done since Alistair Darling’s time at the Treasury) the deficit reduction-emphasis agenda set by his opponents – and by so doing, implicitly concedes the need to cut public sector jobs.

But I am being unfair. Balls began his speech by mentioning Labour’s “emphasis on jobs and growth”, but the speech immediately morphed into Labour’s concession to the coalition, that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.

But the highlight of the speech – the soundbite that his spin doctors no doubt intended the media to emphasise – is a call for a cut in VAT “to boost consumer confidence and jump-start the economy”; Cameron flashed back his retort: “slashing taxes”, he argued, would only make the UK’s fiscal deficit worse.

And so Balls is trapped: the debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.

‘Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’, we have to raise taxes, like VAT. “Slashing” VAT – when it is higher VAT returns that are paying down the deficit – is unacceptable to the coalition, to the Treasury, to orthodox economists and to the bulk of the British public.

But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’, i.e. higher taxes, to pay down the ‘credit card’ – but the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit (which I and others have argued it cannot do), but by employment. Put 2.43 million people back to work, and – hey presto! – the deficit will vanish. Get 2.43 million people, including thousands of skilled and unskilled workers, clever and talented student graduates, to address Britain’s very real insecurities in energy, food and health and – hey presto – the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month). And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.

Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment. The only thing that will restore confidence will be… employment.

And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security and rising fuel and food prices.

So Ed Balls’ speech should have gone like this: jobs will cut the deficit; look after unemployment – and the budget will take care of itself; and if the private sector can only create 88,000 jobs in three months – while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits and causing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.

Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs. That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.

Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment. Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is really important; for the coalition, it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.

So let’s go on emphasising the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising.

22 Responses to “Balls walks straight into Cameron’s trap”

  1. Neil Crawford

    RT @leftfootfwd: Balls walks straight into Cameron's trap http://t.co/Xyuo07x

  2. Hens4Freedom

    RT @leftfootfwd: . @EdBallsMP walks straight into Cameron's trap writes @AnnPettifor: http://bit.ly/iGdbDk #EdBallsLSE #NewsClub

  3. Bob

    Actually I doubt the core assumption of this post. VAT tax has had an impact on ordinary consumers by contributing to a massive rise in basic good prices. This sudden rise in basic good prices causes by the combined hit of a regressive value added tax rather than a progressive tax like income, capital gains or inheritance have forced many people to reduce money spent on food to be sure that fuel prices can be meet over the coming years.

    The impact of a sudden rise in prices at the very time the government itself was talking about major cuts to public sector pay and benefits and the global economy has hit a weak spot has clearly spooked consumers.

    Balls is a solid Keynesian. As such he is constantly looking at the impact of tax and spending on overall GDP. As a Keynesian he understands that all taxes are not created equally. The VAT tax is direct to people who have the fewest options on their spending but who are overall most important in keeping the economy going since there are so many of them. While a person making £70,000 years could afford to keep their living standard going even if they had a small income tax increase and would also save and not spend a tax cut, people, especially people with families, living on under £25K a year will spent any tax cuts and will have to make cuts because of rising prices to core things like food, energy, or basic services presenting a real threat to the UK economy

  4. Ian Oltoft

    A more interesting title might have been “Cameron Traps Balls”

  5. Alexander Fraser

    If it is so easy to create 2.4 million jobs why has no one done it before? If it was easy now it would have been easier before the recession started. Do you really think the government has the resources to finance public works that would employ even a fraction of that number of people? What would be the return on those public works? How would the government finance them? With yet more borrowing? We are up to our necks in debt already.

    For our economy to start growing again we need to put people into jobs that create value – both for themselves but also for the wider economy. With some important exceptions and qualifications, the private sector is far far better at creating jobs that create value than the public sector is. Any recovery plan has to focus on liberating and stimulating the private sector. It would help if people like you said so.

  6. Mike Bell

    Ed Balls needs to discredit the crude analogy of the maxed out credit card and start from first base by educating the public on the basics of Keynesian economics. It should be an easy sell because it makes more sense than the Osborne and Cameron approach.

  7. @Parlez_me_nTory

    Balls walks straight into Cameron’s trap http://is.gd/92gG9p Not sure where to start with this one

  8. Frank O'Brien

    This interpretation is incorrect, and very strange coming from someone who describes themselves as a Keynesian.

    Ed Balls made no mention of consumer confidence. Cutting VAT will raise disposable incomes and lower inflation. This will benefit the whole of society and disproportionately benefits the poor.

    As to its economic impact, whatever happened to the Keynesian multipliers? It is the strange Treasury/OBR dogma that a VAT hike will have less of an impact than the tax netted, because people will simply increase their spending. They haven’t.

    This is because the multipliers are greater than 1, that is, they have a bigger impact than simply the tax netted (hikes can dent confidence, retailers struggle and stop investing, lay off workers, who then cut their own consumption, and so on).

    The CIPD estimates 250,000 jobs wil be lost as a direct rsult of the VAT hike. http://www.cipd.co.uk/pressoffice/_articles/Treasuryselectcommittee011110.htmReversing it would of course save those jobs.

    A Keynesian approach is to let the multipliers operate in a positive direction. Cutting VAT would do that.

  9. Frank O'Brien

    This interpretation is incorrect, and very strange coming from someone who describes themselves as a Keynesian.

    Ed Balls made no mention of consumer confidence. Cutting VAT will raise disposable incomes and lower inflation. This will benefit the whole of society and disproportionately benefits the poor.

    As to its economic impact, whatever happened to the Keynesian multipliers? It is the strange Treasury/OBR dogma that a VAT hike will have less of an impact than the tax netted, because people will simply increase their spending. They haven’t.

    This is because the multipliers are greater than 1, that is, they have a bigger impact than simply the tax netted (hikes can dent confidence, retailers struggle and stop investing, lay off workers, who then cut their own consumption, and so on).

    The CIPD estimates 250,000 jobs wil be lost as a direct rsult of the VAT hike. http://www.cipd.co.uk/pressoffice/_articles/Treasuryselectcommittee011110.htm
    Reversing it would of course save those jobs.

    A Keynesian approach is to let the multipliers operate in a positive direction. Cutting VAT would do that.

  10. Daniel

    Unless I’m much mistaken, this blog isn’t critical of the proposed lowering of VAT but rather recognises that alone it’s not going to solve our economic problems- instead, we need to create employment.

    Which, I believe, Ed Balls has been suggesting- I haven’t read the speech, I don’t know if he brought it up here.

  11. Jon

    I assume you would want to create the 2.43 million unemployed through public service employment? If so lets do some numbers:

    2.34 million x a reasonable public salary of £20,000 = £46 billion per year.
    Tax remuneration for the Treasury through PAYE + NI = £4,000.
    Remaining 16K is spent in shops with a 20% VAT rate = £3,200
    Total treasury income per person = £7,200.
    Benefit to the treasury = 17.4bl

    Treasury saves paying 2.43million people the dole at £56 per week, £2,912 for the year, £7.07bl for 2.43 million.

    Treasury benefits by £24.7bl in total
    Cost of employing 2.43 million people directly is 43bl

    Your plan has a £18.3bl shortfall. And I highly doubt that you can raise £19bl through taxes paid further down the chain. If it was that easy the government would do it. Why else do you think a Labour government had so many unemployed for the 13 years they were in power?

  12. Sean Fernyhough

    Cutting taxes to increase aggregate demand where there is fear of unemployment/underemployment and an expectation of poor income growth is likely to have a lot of leakage into paying down debt and increasing savings.

    Meanwhile government debt isn’t analogous to a household’s debt.

  13. Cahal

    Jon,

    She isn’t suggesting that the government alone employ these people. She’s suggesting some programs that restore confidence and assist the private sector in employing, known as ‘crowding in’.

  14. Jerry Hall

    . @EdBallsMP walks straight into Cameron's trap writes @AnnPettifor: http://bit.ly/iGdbDk #EdBallsLSE

  15. mr. Sensible

    I don’t agree with all of this; I think VAT is an important part of this, as if people aren’t spending (I think VAT has something to do with the retail sails figures) VAT returns will fall.

  16. Theo Blackwell

    Several points:

    – even full employment didnt mean getting joblessness down to zero – it assumes about 500k unemployed for labour market flexibility, which is a desirable.
    – dont see any evidence that the overall deficit will be met by this measure. We can all agree that employment needs to be emphasised, but the scale of the deficit caused by the crisis needs targeted tax increases/breaks and spending restraint. Within that envelop there is a question about how and where you do this, and what you should be looking at is areas where there is a better multiplier effect: for example giving tax breaks to rich people who will spend money on a skiing holiday is not as effective as a tax break to low income people who will spend it locally. In this situation, the case for a VAT reduction is clear.

    Balls didn’t fall into any trap, he’s being realistic about the situation. The real trap would be to describe solutions to the current problems in terms of a simplistic trade-off

  17. John Woods

    It is not simple to create jobs and any student of economics will quote that even Keynes did not understand the problem. He suggested that the government should simply bury money in the ground and tell the unemployed that they could keep the money when they dug it up. We have allowed the destruction of most of out manufacturing base, technicians from the EU are undermining the ability of plumbers, bricklayers and other skilled crafts to make a decent living by working for half the going rate. I asked a plumber why he did no have an apprentice and he said that in the past he had taken on apprentices. Most of them dropped out when they had completed Part 1 of the apprenticeship and started to pass themselves off as plumbers.
    I suggest you read the article by Rana Foroohar in last week’s Time magazine which deals with the American economy which has an even worse problem than we have. This issue is not simple and anyone who thinks it is, is fooling themselves and trying to fool the rest of us.

  18. Phil

    @4 Mike Bell,
    Totally agree that Labour should refute the old Thatcherite Tory “household” analogy, updated to “maxed out credit card”.
    However, no Labour MP seems prepared to say that household finances are completely different to a govt’s finances because in a household, usually, the income of the breadwinner(s) is derived from an external source (third party employer) and therefore is entirely separate from the outgoings – thus, outgoings can be cut without diminishing income. But, as soon as a govt starts cutting its expenditure, it inevitably diminishes its own revenues and incurs extra costs elsewhere in the system. Govt finances are intricate and more similar to a business’ finances.
    That said, it isn’t as easy a sell as one might imagine, because the “household” or “credit card” analogy seems to resonate ‘intuitively’ with any voters who don’t stop to think things through.

  19. richard mackinnon

    RE comment 4 and 14 ‘Labour should refute………household or credit card anology’
    It isn’t easy to discredit these anolgies because they are accurate. They resonate ‘intuitively’ with voters because they make common sense.
    It is reasonable to compare the running of a households finances with running a country. Voters are not daft they understand (and the first politician to expalin it was Margaret Thather) that the country’s finances are the same as a household and if a family’s spending is greater that its income then trouble lies ahead.
    Labour poiticians don’t seem to undestand this simple concept. Until the present bunch own up to the hellish legacy Gordon Brown left for our children (-20K per man, woman and child) then Labour will never govern again.

  20. Jen

    older people who want to retire but can’t should broker their job to a young person – they can have my hard grafting job when I am 60 and I will be so worn out by then that I would gladly swap my slave labour job for their benefit. They get to earn £140 a week, and I get half that if there’s a swap. They get extra money and I get to have a bit of a life before I die. This will save the government money – I know other women who would gladly do this. Also the older unemployed don’t run up bills vandalising, or getting into crime, well rarely, so another saving by giving the youngsters some work, and some wages – it’s a win win for oldies wanting to swap their hard labour jobs with a more fit and able youngster

    Jen

  21. NORBET

    RT @leftfootfwd: Balls walks straight into Cameron's trap http://t.co/jvwzLBE

  22. Link Loving 26.06.11 « Casper ter Kuile

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