Duncan’s Economic Blog

You’re wrong Frank

Posted in Uncategorized by duncanseconomicblog on April 16, 2009

Don Paskini has brought to my attention an article by Frank Field in the Spectator, in which he calls for government spending cuts.

Frank does his best Snowden impression and one is left wondering when he’ll complete act and defect to the Tories. Simply put the article is a disgrace. The economic wisdom of the 1930s is dressed up in crude morality and the incorrect language of necessity to justify an appalling conclusion. The article is simply a disgrace. But more than that, it is dangerous too. Economically it is suicide and politically it makes it harder for the government to do what is required.

A few ‘highlights’ below:

No government, however intent on making the pips of the rich squeak, has been able to raise in taxation more than 37 per cent of our gross domestic product. It is as though one of Adam Smith’s invisible hands has constructed a lead ceiling over the amount of income governments can lift off us taxpayers.

France manages 44%, Italy 43%, most Scandinavian countries the high 40s. And surely a crackdown on tax havens will help?

The government appears to hope that it will gain enough cover by repeating ad nauseam that it is Keynesian common sense to borrow during the downturn and pay back when the economy is on a more even keel. Whether it really believes this is anyone’s guess.

The thing is Frank, it is Keynesian common sense. We face a severe recession caused by a lack of demand. Only the Government can provide that demand at the moment. If the Government does not step up to the plate then the recession will be longer. GDP will shrink more and government debt will continue to increase.

The 30 per cent fall in sterling over the past year is cheerfully presented as opening up huge new export opportunities. While these opportunities seem somewhat delayed in registering in the balance of payments, its inflationary stimulus is already all too apparent. Despite the ever-present predictions of deflation, three of the four official price measurements are now on an upward path. The first signs of difficulty in raising any of the new walloping tranches of debt will not only result in long-term interest rates rising, no matter what the Bank of England gets up to in printing money, but will push sterling into yet another nosedive. Rising long-term interest rates and a collapse in sterling will place a firm grip around the government’s throat.

And now the real nonsense begins. The 30% fall in Sterling is a good thing as I, and Hopi, keep saying. The inflationary stimulus? That would be CPI falling from 5.2% to 3.2% in the last five months would it? Three of the four official measures registered slight increases in month on month figures in the last data release. Is one data point now an upward path? Long term interest rates are not an issue. 30 year gilt yields – the longest term interest rates in the UK are currently 4.4%, they’ve been below 5% since 1998.

Deflation is still the threat. I’m sorry Frank can’t see that. The fact that the USA, China, Japan, Ireland, Spain and much of Asia are in deflation seems to have escaped him. The fact that Sterling’s 30% fall, by raising the cost of imports, has prevented it here is to be welcomed.

The government not only has a moral duty now to cut public expenditure, but may be forced to do so by its inability to borrow on the scale necessary.

Words fail.

It might be worth trading in the 45 per cent tax rates, which the IFS believes will pull in little new revenue, for allowing pension contributions at the standard rate of tax only, with perhaps £5 billion being added annually to the revenue stream

And the first solution Frank proposes? Cut a planned progressive, and popular, tax in favour of a more regressive one on pensions. ‘Cos it’s not like we have a problem with pension funds is it?

The annual £180-190 billion gap will take some filling. Trident’s replacement comes in at between £15-£20 million. ID cards still have a £5 billion price tag. Freezing the health budget in cash terms could save something like £7.5 billion a year. Postponing the school leaving age and ceasing to overreach ourselves in sending 50 per cent of pupils to university, many of whom never complete their first year, would only bring in modest sums.

I raise these programmes as examples of the kinds of cuts that will be required to bring the national accounts towards balance. I am not suggesting that this is the programme, or that this list is adequate. But the threat to the country’s solvency is now so serious that both opposition and government need to use next week’s Budget on what needs to be done this year to begin rebuilding the country’s solvency.

What else do you want to cut Frank?

Once again we face a demand deficit, deflationary recession. The type not faced by Britain since the 1930s. And Frank’s solution? The policies of the 1930s. Disgraceful.


14 Responses

Subscribe to comments with RSS.

  1. Will M said, on April 16, 2009 at 3:09 pm

    “crude mortality”

    I presume you mean “morality”? 🙂

    • duncanseconomicblog said, on April 16, 2009 at 3:13 pm

      That would make more sense wouldn’t it?

      Thank you.

  2. charliemarks said, on April 17, 2009 at 5:18 am

    I like Field on some issues – Europe, devolution in England. But what is he thinking. Speaking out with the Tories on the smear in a teacup scandal, now this. (He’s already called for a national government…)

    Spending cuts? Well, we could scrap Trident, ID cards, the Afghan war, etc.

    That wouldn’t hit ordinary people too much, would it? Can’t say it would find favour amongst the big business elite (loss of corporate welfare!) but who cares, quite frankly.

    Rather than spending cuts, we need a fiscal stimulus – something that’d have a multiplier effect – & the best way to do this would be investment in renewable energy – it’s labour intensive (people working and hence, able to spend their wages in shops, etc.) and it’d help reduce carbon emissions…

    • duncanseconomicblog said, on April 17, 2009 at 8:14 am

      This is the upsetting thing, I qute like Frank on various issues too.

      There will obviosly have to be cuts/tax rises at some point, just the idea of doing it now is crazy.

      I’m all up for a job focused stimulus.

  3. […] Duncan has something better. An argument that makes sense. They’re trying Frank Field’s economic plan in Ireland, of course. So if that doesn’t work, Frank’ll be thoroughly discredited and never heard from again, right? Yeah, right. […]

  4. CS Clark said, on April 17, 2009 at 2:53 pm

    ‘ceasing to overreach ourselves in sending 50 per cent of pupils to university, many of whom never complete their first year

    Hmm. According to this PDF report from the NAO ‘The United Kingdom compares favourably with most other countries in the Organisation for Economic Co-operation and Development, with the fifth highest estimated graduation, or ‘survival’, rates in 2004, behind Japan, Ireland, Korea and Greece.’ and the drop-out rates have been fairly consistent over time, the 1st year completion rate being 90-91% between 1999-2000 and 2004-2005 (p.5).

  5. ben said, on April 17, 2009 at 3:56 pm

    youv got to wonder what he thinks he’s doing, and where he got those figures on imports exports and inflation i dont know….the balance of trade has shifted sligtly in our favour, not massively, but compared to german and japanese exports falling through the floor its a major success. If he thinks hes setting himself up for the leadership hes got another thing coming, such blatant disloyalty isnt appreciated in the party

  6. Kate said, on April 17, 2009 at 7:34 pm

    “We face a severe recession caused by a lack of demand.”

    No, we don’t. There’s no shortage of demand, there’s a shortage of finance. Finance for businesses -> wages -> spending -> demand. It’s not as though the population has suddenly underone some Damascene conversion to austerity. Don’t mistake media coverage for reality.

    Also, even assuming your thesis is correct, in what way are tax increases the solution to ‘lack of demand’? Shurley shome mishtake?

    • duncanseconomicblog said, on April 18, 2009 at 8:48 am

      Tax rises are not the solution. Once the economy recovers, tax rises will be needed to pay down debt.

    • charliemarks said, on April 18, 2009 at 10:20 pm

      Effective demand – there’s a lack of effective demand. People might want goods and services, but are cutting back for a variety of reasons.

  7. David Boothroyd said, on April 18, 2009 at 12:20 am

    I agree with your argument but would like to note that Philip Snowden never joined the Conservatives. He became National Labour despite hating Ramsay Macdonald’s guts, but then swiftly lost his liking for them and in 1935 he gave support to the Liberal Nationals. They may have been in alliance with the Conservatives but it wasn’t actually the Conservative Party.

  8. Michael said, on April 18, 2009 at 12:23 pm

    Well you assume that Keynsianism actually works.

    As it doesn’t, perhaps Mr Fields has a valid point.

    Also, the government hasn’t even followed Keynsian methods; Keynes would be appalled at the idea of bailing out failed banks and bankers.

    Under Keynsian ideas, the government should build infrastructure (not fund PFIs which just lumbers us with more debt). Useful things that underpin a societies workings, not fat pensions for failed bankers and politicians.

    • duncanseconomicblog said, on April 18, 2009 at 1:48 pm

      I’ve been arguing that the stimulus should take the form of infrastructure spending.

      I don’t support bailing out bankers, there is a need though to bail out banks.

  9. charliemarks said, on April 18, 2009 at 10:22 pm

    The other annoying thing about Field was his commenting on the Damien McBride affair. It helped grow the scandal – which the Tories are using to full effect to make themselves look whiter than white.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: