Duncan’s Economic Blog

A timetable? Really?

Posted in Uncategorized by duncanseconomicblog on July 12, 2010

Over the past few weeks there have been growing demands that the five leadership contenders set out their plans to balance to budget/eliminate the deficit. Commentators, including many on the left, seem convinced that until Labour sets out how it would close the deficit, or even “what you would cut”, the party will have no credibility in attacking the coalition’s policies.

Is this actually right? I’m happy to persuaded on this one, but it seems to me to be both misguided politically and possibly dangerous economically.

By way of background here – I think the Party was absolutely right, economically, to run the kind of deficits we did in 2008/09/10. I actually supported, and called for, a bigger stimulus at the 2009 budget and again at the PBR of that year.

That said I do recognise that we can’t run deficits forever. It’s not sustainable economically and, one could make a strong case that politically, and in terms of power, running deficits in the long term means giving bond markets yet more influence over fiscal policy.

But, we need to be very careful here. How much of the deficit in 2009/10 was actually a policy choice? Very little – less than 15% of it was due to discretionary stimulus, the rest was simply the functioning of the automatic stabilisers as tax revenues fell and welfare spending increased with unemployment.

I am naturally suspicious of any attempt to set a timetable for deficit reduction, I worry that our timetable (halving the deficit over four years starting in 2011) was too quick. Of course it might have turned out to be too slow. If the economy does recover very quickly, if the export and investment boom predicted by the OBR does kick off in earnest in 2011, then halving the deficit would be fine. But if growth remains very sluggish, then it would mean taking a huge risk with the recovery.

Against this uncertain background, is there really such a huge risk in saying that the pace of deficit reduction will, to a large extent, depend on the state of the economy?

How detailed should our plans be? I am genuinely curious as to what the commentators want the candidates to draw up?  Do they demand an alternative budget now? Presumably this would have to be updated each year? Do they want Labour to complete a shadow comprehensive spending review in October?

I’d point out the Tories never did this in opposition.

Is it enough to set out broad principles?

I’d argue along the following lines.

We set out a budget in March 2010 which gave our plans tax and spending plans for the next 12 months. We do not believe the rise in VAT, the £6bn plus of “in year spending cuts” or the capital spending cuts (including BSF) are required. We think they will actively harm the recovery. We also think the cutting corporation tax but paying for it by slashing capital allowances will harm investment and represents an indirect tax cut for financial companies.

In 2011, we’ll have to see how the economy is performing before deciding on our tax and spending plans. But we do believe that a 50/50 mix of tax cuts and spending rises is more appropriate than what the coalition is planning. And that we think the government is cutting to fast in general and risking the recovery. In the end what drives down the net/GDP ratio is not surpluses but growth.

We also think that any act of fiscal consolidation must be guided by two principles –

(i) is this fair way to close to the deficit?

(ii) Will this harm growth?

I think this is much more sensible way to proceed than writing a whole shadow budget. I’d far rather the contenders started outlining, as some already have, visions of what the economy should look like in the future rather than getting bogged down in the minutia of a hypothetical budget at this stage.

I suspect much of this commentary is driven by worries over the coalition’s high poll ratings and a view that support should have moved towards Labour after the BSF cuts. To which I think the best reaction is simply to calm down. The last election was only two months ago, the next one isn’t for another 58 months. To use a football analogy, we’re only 3 minutes into the first half, let’s not do something we might regret.

(And thanks to Tom for the football analogy).

11 Responses

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  1. Mr. Mxyzptlk said, on July 12, 2010 at 6:50 pm

    Duncan

    ‘That said I do recognise that we can’t run deficits forever. It’s not sustainable economically’

    I showed my wife that piece of your post alongside my (her) credit card bill
    she said ‘you dont know what you are talking about’

  2. liammurray71 said, on July 12, 2010 at 8:51 pm

    Good to have you back.

    The perceived need to set out a more detailed deficit reduction plan is political rather than economic. Your pitch is reasonable enough (even if I’m more hawkish than you) but there’s a reasonable view that Labour will only ever gain any sort of traction with the public by offering an alternative narrative on addressing the deficit. It would be an unfair characterisation but your argument is too easily parodied as ‘let’s wait & see, growth will sort it’; if that sticks to any Labour candidate they’ll struggle to project an air of economic seriousness.

    Also, remember how misinformed or easily-led ‘joe public’ are over concepts like national debt & growth. I overheard a train conversation in which someone compared Keynesiasm to hoping for a pay rise to pay off the credit card….!

    • duncanseconomicblog said, on July 13, 2010 at 8:33 am

      Liam,

      Good to be back.

      I agree that Keynesianism is not the “easy sell” and the narrative has to be careful.

  3. […] while also saying how quickly you can cut depends on growth?  Given that the bloke who wrote this post on that very matter has been sitting in Harriet Harman’s office doing her economics for her […]

  4. CharlieMcMenamin said, on July 13, 2010 at 10:07 pm

    Hmm.
    It’s the wrong question.

    The deficit does, eventually, have to be closed.

    ‘Growth’ , in the abstract, is not the way to close it. Targetted growth is.

    By this I mean we have to shift our economy from an over dependence on financial services – and also , I would argue, from an over dependence within the manufacturing sector on arms. We have to develop a national market niche not so dependent on the pirates of the City or footloose financial capital because, as we have seen, that may bring the whole country to the brink of disaster. & stands every chance of doing so again at some point in the future.

    We need to incubate high tech, Green industries. & use the (declining) resource of our international language to maximise our creative services and industries in their global appeal.

    The question of closing the deficit gap should be seen in this context. Yes, there will be cuts – but for what? To simply reassure the bond markets? Or to invest in our kids’ future?

    • duncanseconomicblog said, on July 13, 2010 at 10:56 pm

      Charlie,

      I agree entirely that we need to rebalance away from financial services and that that will require very large, state led action. Probably expensive state led action – at least in the short term.

      I worry that any government cutting spending now will not especially care about this, the cut of the Forgemasters loan is an early indication. Short term saving, long term cost.

  5. Vino said, on July 14, 2010 at 7:30 am

    Good to see you back blogging, Duncan. I agree that Labour, as the _opposition_ shouldn’t spell out detailed spending cuts or tax increases – after all the Tories said remarkably little about their cuts in opposition. The key thing must be to make the case _against_ what the government is doing – and pointing out that cuts are hitting the poor hardest and that Osborne’s claim that “we are all in this together” is fiction!

  6. vimothy said, on July 14, 2010 at 12:08 pm

    Duncan,

    Very interesting post, but let me just push back on some of the things you’re saying here:

    1, You say that you were supportive of the govt’s stimulus measures; this is very laudable, but did the government actually provide additional stimulus to the economy? According to the Harvard Business Review UK govt contributed a very meagre amount (though substantial amounts to the financial sector): http://hbr.org/hb/article_assets/hbr/1001/F1001E_A_large.gif

    2, You say that the government cannot run a deficit forever; can you explain why not? Obviously in a steady state with no growth, the government cannot run a deficit, but assuming we have growth and the private sector wishes to accumulate wealth, we must have deficits.

    3, Since, as you note, most of the deficit was not discretionary (though I believe that the discretionary part was not stimulus but rather purely to reflate the financial system and keep everyone in champers and lobster sandwiches), what makes you think that the reducing the deficit is within the power of the government in any case? I.e., it was not discretionary then; what makes it so now?

    It seems to me that in general the Tories’ arguments are pretty effing stupid: if government spending is keeping the economy afloat, and the government stops spending, what reason is there for a rebound in private investment?

    • duncanseconomicblog said, on July 14, 2010 at 12:28 pm

      Vimothy,

      Thanks for the comment.

      1 – I’d rather we had a larger stimulus and I’d rather it was focussed on investment rather than consumption (VAT cut/cash for clunkers). We didn’t try and close the deficit in the face of recession, unlike Ireland. That is at least something.

      2 – Let me rephrase, we can’t run 10%+ of GDP deficits forever, obviously with low interest rates and decent growth we could run smaller deficits forever. It’s growth that brings down debt/GDP ratios.

      3 – I agree, as long as the corp sector in particular is not investing, it’s hard top see how the govt can close the deficit.

      The question of investmen is the big one, and will recieve more attention in posts over the next few weeks.


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