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”
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
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.
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.
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.
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