A timetable? Really?
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).