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.

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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.

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