Duncan’s Economic Blog

Austerity versus Growth

Posted in Uncategorized by duncanseconomicblog on June 10, 2009

Interesting stuff today.

As was debated in the comments to yesterday’s post, there is an urgent need for a public debate on how we, as a country, plan on closing the fiscal deficit.

It looks like we are finally having that debate. As readers will be aware, I favour modest spending cuts coupled with tax rises. The Tories, I suspected, favoured vast spending cuts.

Fraser Nelson and David Davies have both hinted at this.

Now Andrew Lansley has gone public.

“We are going to increase the resources for the NHS, we are going to increase resources for international development aid, we are going to increase resources for schools,” he said.
“But that does mean over three years after 2011, a ten per cent reduction in the departmental expenditure limits for other departments. It is a very tough [Humphrys interrupts here]…spending requirement indeed.”

So that’s 10% off police, welfare, transport, defence for starters.

What’s more ConHome is already attacking Lansley from the right saying:

Unless the Conservatives get to grips with the size of the state – and that includes the size of the NHS – those private sector workers will get very angry indeed.

Cameron is now in a difficult position – he has the ‘moderate’ wing of his party calling for big cuts in spending and the ‘hardliners’ calling for savage cuts in spending. Meanwhile the leadership talk of ‘tough choices’ without ever specifying what they mean.

Osborne can talk up that the Tories as the ‘safe choice’ and claim spuriously that the markets are backing him, all he wants.

Osborne seems to relish the role of ‘safe choice’, but the ‘safe choice’ for who exactly? Certainly not for users of public services.

We had ten years of easy growth during which the city, and the property market, provided enough tax revenue for Britain to invest in public services without raising the tax burden substantially.

All political parties became complacent. The Tories spoke of sharing the proceeds of growth whilst Labour assumed it was possible to spend and not tax. This reminds me of the 1950s, when politicians, like today, assumed the business cycle was conquered. Crosland wrote in the Future of Socialism:

I no longer regard questions of growth and efficiency as being, on a long view, of primary importance to socialism. We stand in Britain on the threshold of mass abundance.

Clearly he was wrong.

There is now a choice. The last three elections have to some degree or other been fought on the grounds of ‘Labour investment versus Tory cuts’. At the next election this choice will be real. Here we are then on a traditional political economy debate about the size of public spending. Battle lines are drawn. I know which side I’m on.

This is Brown’s ideal territory and he did very well at PMQs today. Now he should go further, we stop to stop talking about a industrial policy and get on with it.

We have one year in Government until the next election. Let’s use it.

Let’s fight the recession with Government spending. Let’s do our upmost to combat unemployment, especially youth unemployment. Let’s get an industrial policy up and running – Government backed venture capital funds for start ups in growth industries, Government backed loan funds, Government backed training programmes – all aimed at rebalancing the economy towards green technology, pharmaceuticals, advanced manufacturing, renewable and technology & communications. We already have a world beating companies in these areas, let’s build upon them.

We have been radical with the banks. More radical than many thought possible. Now it’s time to radical for the economy as a whole.

Let’s make ourselves the ‘do something party’. Now is the time for action. And now is the time to lay out a vision of Britain after the recession, a Britain with world class public services and world beating industry.

The choice is clear – the politics of austerity or the economics of growth.

10 Responses

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  1. Jane Pir said, on June 10, 2009 at 3:05 pm

    “Labour investment versus Tory cuts”

    I invested in Northern Rock shares a while back. Labours investment in the UK is proving only slightly less profitable.

    Consider
    http://www.freerepublic.com/focus/f-news/2152691/posts (you will find many references to this, this was just the first that popped up in google)

    note:
    “it (IFS and Bristol University) found that young women with the least education stopped using contraception after the benefits were pushed up because they were trying to get pregnant”

    I worked, and I saved and I waited until I felt I could afford children before I got pregnant. Of course children are not only for the rich and should not only be for the rich but to call 450,000 extra children born to poor women with the lowest education an investment is to stretch the meaning of the word investment. Like his debt, like his destroyed economy, this is another of Gordon Browns time bombs.

    Those children are at most 10 years old right now. Wait until those children, many of whom were not brought into this world through love, but as an income stream, grow a few years older. In my child’s nursery, I see huge differences in the behaviour of children. Those who are wanted and loved and those who are here but neglected. The second category is very often a result of Gordon Browns investment.

  2. CharlieMcMenamin said, on June 10, 2009 at 4:36 pm

    Very rousing. I hope you’re right.

    But even someone as resolutely anti-Tory as myself can see that the question might rather be what sort of austerity are you prepared to put up with for what sort of growth.

    The banks remain key: whether we are going to have to continue to support them financially, or whether we rush to sell them back into the private sector (which I think would be wrong without breaking them up into smaller units and introducing regulation along Glass Seagall lines etc) they need some statutory encouragement to actually >i>invest in your proposed industrial restructuring. (This is why I think we should retain a national stake in them by the way- to make them invest in the sort of plans you outline). in any event, such a programme of industrial retooling is,in the short to medium term at least, likely to be less profitable than the status quo ante which brought the entire global economy so very close to collapse.

    So, for a while at least, the overall tax base seem likely to continue to be somewhat lower than it otherwise would have been even if the business cycle really has turned.(Me, I’m not sure about that at all as yet). Well, unless we really are on the verge of a new Long Wave and somehow new biotech/green/IT technologies are about to unleash a new era of profitability akin to that unleashed when electricity,steel and automobiles replaced rail,cotton and coal as the ‘leading edge’ of Western growth. Then higher rates of growth and higher tax takes would certainly be possible in the short-medium term. I don’t rule this out but it is such a big idea that I think it reasonable to wait for a bit more evidence.

    While we waiting, though, i can’t help but gently point out that any programme of national industrial restructuring plus a lower than expected tax take reduces government spending possibilities. Yes, the gilt market looks willing to bridge the gap for now. But whether they would for ever and a day, or whether they’d want to see govt spending move back towards being in balance over the cycle is a rather different question. The fact that the Tories are currently scaremongering doesn’t mean they’re simply inventing impossible scenarios.

    I support the kind of industrial reinvestment programme you describe. But I don’t think it is sensible to pretend it is likely to be do-able without some painful economies on the consumption side, including in terms of public services.

    • duncanseconomicblog said, on June 10, 2009 at 8:56 pm

      Charlie,

      Thanks for the comment – detailed and interesting as ever.

      You’re right that the banks will be key. I’m increasingly convinced we’ll need a new national bank, I don’t see why part of RBS can’t be used for this.

      I do think we are very far off the Tory nightmare scenario. Alhough yes, it is possible.

      I fully accept that the agenda I am outlining means more tax and less cosumption. It’ll be painful. But better than what the Tories propose.

  3. Mr. Mxyzptlk said, on June 10, 2009 at 7:29 pm

    “The Tories, I suspected, favoured vast spending cuts.”

    You missed out “Targeted primarily at the Unemployed or low waged the sick, infirm and the elderly”

  4. newmania said, on June 11, 2009 at 11:49 pm

    I admire and respect you as a human being Duncan , I do , and because I consider you such a brainy swot ,I lament Duncan honest ,I lament . I pour forth my ululations that such obvious talent charm and ‘idiosyncratic’ good looks are spent on incanting nonsensical New Labour slogans into an echoey tunnel . Why ? It is a sad sad waste of talent .. .. I mean this is just lying isn’t it
    Tipping more money into Public Sector Pensions and waste does not make growth. Raising taxes does not make growth .The tax burden not raised substantially are you having a private little joke ? Had spending remained at 97 levels we would pay no income tax…. Misleading I know but not entirely. not when this boom only meant your mortgage cost more .Directing resources away from Profit does not make growth
    Gorgeous pouting Ruth Lea spanked Hain and sent him to the Nursery on QT when he tried to repeat Brown`s lies about cuts * ,and in real life the money is already just not turning up even while Labour are talking about increasing funds to the NHS (itself a lie see IFS) .In your last paragraph you seem to want to return to the 70s compete with loon pants and concept Albums .What on earth makes you think the government knows where to put money ? Duncan were you there for the 20th century ? Did you notice the triumph of the planned economy over the West ? I missed it
    We are borrowing £500,000,000 a day . This cannot go on and anyone sane knows it . The only question is the timing of cuts or rather the timing of cuts in demand and liquidity . Most of the spending has nothing to do with either .
    Look Duncan can I ask a boon.? Would you please stop using the word “Investment “ when you are referring to “spending “ .“ Spending “ it is paid for a thing we call “Taxation” that’s when we are using English and not the native tongue of the gibber people .If you sold ‘investments ’ in disability payments for the 2,000,000 with achey backs and sad feelings you would not get many punters in the shop

    PS
    Tell you something you did get right though , keeping Brown was a disastrous mistake .You should have heard that Question time audience , they were laughing at Hain , when he suggested Labour might win , I have never seen anything like it .Brown is cold dead meat and that laugher will have sent shivers down a few spines , I kid you not

    • duncanseconomicblog said, on June 12, 2009 at 8:18 am

      Newmania,

      Welcome back…

      First off the word ‘investment’ is sometimes correct – building, etc. But, fair enough I am happy to use the word ‘spending’.

      Pensions do add to growth through increased pensioners spending.

      Obviously ‘waste’ is not a good thing, but its a word always used to justify cuts. Obviously I want to cut waste, the difference between you and me is how we define it.

  5. Will M said, on June 12, 2009 at 8:42 am

    I fully agree that this is the best strategy for Labour. The moment the public realise how tough these cuts have to be, Tory support will evaporate. There has been no work done by the party to prepare the ground, and no appreciation by the public of what the choices in front of them are.

    Insert vague mutterings about Osbourne’s complete lack of comprehension of strategy…

  6. newmania said, on June 12, 2009 at 8:52 am

    Pensions do add to growth through increased pensioners spending.

    Money thats is directed away from the productive to the non productive stops growth .You are forgetting that its doesnot cease to exist just becassue it is not put into admittedly desirable social goodies . You might wish to look at Robert Chote in the DT today tearing a hole in Brown`s lies about cuts .

    Seriously I support the NHS , I do not want a heartless country but you have to start from something like the truth to have any sort of sustainable position. Usually you do, not today IMHO

  7. CharlieMcMenamin said, on June 12, 2009 at 9:25 am

    Both political parties wish to being fully open about the nature of the problems ahead, for fear that honesty will send the electorate screaming in fear into the arms of their opponents. So Cameron et al wish to continually infer that the problems are all about Labour profligacy, and the government, in so far as it has a discernible communications strategy on these matters, want to focus on the prospect of Tory cuts.

    I have a very strong hunch that whoever is in government after the next election will both have to raise taxes and make cuts (or, just as important, not expand spending in reflection of the demographic time bomb represented by the aging population’s health and allied needs). Of course the balance of tax rises and spending cuts is a key question- but not one that is currently highlighted in any front line policy discussions.

    It is the Tories who have raised the slogan of ‘Austerity’ – but I wonder if it can be turned to the left’s advantage? After all the last time the UK went through Austerity as government policy was to pay for the consequences of a war, and rebuild the country after the economic exhaustion of 1939-45. That rebuilding crucially involved stuff like founding the NHS. Many people have made the point that ‘solving’ (if that is what has happened) the bank crisis has left us with a bill equivalent to fighting, and possibly losing, a small war. So there is a rheotric of rebuilding the economy and our ability to function in the global marketplace which should surely be available to the left. (This is surely what Duncan’s programme of industrial retooling is about) Sacrifice now for gain latter. But for it to work it has to take the majority of people with it- it may mean raising taxes and holding down real wages for a while but there must be some compensation in terms of measures of social solidarity, analogous to the founding of the NHS. Pensions seem to me to be a likely key issue here given the aging population….

    But i don’t expect Labour to take this option. I think they’ll try to stick with the frankly ludicrous line of ‘Things Aren’t That Bad/Look They’re Getting Better/We Saved the World Economy You Know/The Tories Want to be Thatcherite Beasts and We Don’t.


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