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