Duncan’s Economic Blog

Osborne’s Trap

Posted in Uncategorized by duncanseconomicblog on October 9, 2010

The BBC Website is leading with the story “Chris Huhne hints at a shift in public sector cuts”, following an interview given to the Telegraph.  I think, as I said last week, that Labour should take this very seriously indeed.

This started on Wednesday with a story in the FT, written by well connected economics editor Chris Giles rather than by their political staff, saying that the Treasury was looking to “reprofile” the programme of spending cuts to due to the “difficulties” of cutting so quickly, such as financial penalties in contracts, etc.

This line of argument has been extended by Chris Huhne who notes that spending cuts could be slowed due to “economic conditions”.

Huhne it is worth noting is a former economist, a former head of a credit rating agency and a member of the “star chamber” having agreed the cuts to his own DECC budget early.

I’m taking these stories seriously and see them as preparing the grounds for a slowing of the pace of cuts.

Some commentators last week couldn’t see this happening – Cameron, Clegg and Co have invested so much political capital in the need to cut the deficit and the “there is no alternative” line that they can’t back down now. I’m not so sure.

Remember the Tories backed Labour spending plans until the financial crisis hit and then totally reversed course at the time of the fiscal stimulus, despite every nearly serious economist writing at that time attacking them.

I wouldn’t put it past Osborne to try a similar political gambit at this stage.

Again, as I said last week, this causes potential problems for Labour.

Obviously we could repeatedly shout “told you so” at Osborne, but I’m not really sure that would feed through to the public mood especially when it means department budgets are being cut by 20% rather than 25%.

And it would mean moving more the pain to 2014/15 and 2015/16, i.e. in the run up to an election. That might help Labour.

But the real danger is what it does to Labour’s response. I’m guessing here but I suspect that Labour’s broad approach under Miliband and Johnson will be to attack Osborne for cutting to quickly and “risking the recovery” coupled with arguing for a halving of the deficit over 4 years using a 50/50 mix of tax rises and spending cuts. Call it “Darling Plus”.

Slowing to broadly Labour’s pace in 2011 to 2013/14 would neatly neutralise the first charge.

Look what this slowing in cuts could do the numbers, and bear in mind that Osborne is looking at £15bn of welfare cuts.

The table below is from an old post.

 

Note how Osborne is (was?) looking to tighten fiscal policy by £41bn, £66bn and £90bn in 2011/12, 12/13 and 13/14, whilst Labour, using some variant of the Darling plan (either as was or with a 50/50 mix) would be looking at £25bn, £42bn and £56bn.

(Rough numbers to follow, it’s Saturday morning and I can’t face excel).

Imagine Osborne slows to, say, £35bn, £50bn, £70bn.

Now look deeper at what this means in terms of cuts to public spending.

Osborne would presumably be proposing cuts to public spending of around £22bn, £36bn and £49bn.

Labour of £12.5bn, £21bn and £28bn.

That sounds like quite a big difference, and it is. But remember that Osborne has proposed £15bn of cuts to the welfare budget. Subtract that to get the proposed cut to departmental spending (which is the metric Osborne will use) and we get.

In 2011/12 Osborne would claim he was proposing cuts to public services of around £7bn against Labour’s £12.5bn.  In 2012/13 the numbers would be £21bn for Osborne against an equal £21bn for Labour and in 2013/14, it would be £35bn for the Government against £28bn for Labour.

In other words, for two years (and possibly longer), Osborne would be able to claim he was cutting public spending in line with the cuts proposed by Labour before the election and at the rate still supported by them now.

This all has to be viewed through the lens of where George Osborne, a very political Chancellor, wants Labour to be in 2015. My best guess – in a position that can be characterised as proposing tax increases to pay for more welfare spending. Slowing down the pace of his own spending cuts helps him get to that position, and I reckon he’ll calculate that achieving that is worth a few weeks of being taunted with “I told you so”.

Labour needs to prepare ways to maximise the advantage of Osborne backing down, without falling into his neatly set trap.

11 Responses

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  1. Will M said, on October 9, 2010 at 11:08 am

    I think Osbourne’s approach come 2015 / 2016 would be “oh look, the economy’s doing really well now, tax receipts are up, and our debt doesn’t look so big now our GDP’s increasing… so those cuts we thought we needed, well, not so much now. Here, tax payers and welfare recipients, look how generous we are. Re-elect us please.”

  2. Adam White said, on October 9, 2010 at 7:26 pm

    so Duncan, gut feeling, do we need to distance ourselves from this 4 year plan soon? And be as flexible as possible on fiscal policy past some central commitments?

    • duncanseconomicblog said, on October 9, 2010 at 7:37 pm

      Gut feeling.

      4 yr plan economically irrelevant given we’re out of office and Osborne plans to eliminate whole deficit. Better to ensiage what we will have to deal with in 2015, then what we might do now.

      I think we need a longer term (6/7yr) plan to eliminate the structural deficit, with the pace guided by economic conditions.

      • Agog said, on October 10, 2010 at 10:47 am

        Yes, until you went all Peterson Foundation at the end. Do you really think that the private sector will have deleveraged sufficiently over that period? Or would you plan to get seriously neo-mercantilist and aim for big current account surpluses? Is there really a good reason to avoid budget deficits, other than the public’s current aversion to them?

        Can we please not fixate on one number? (And if we really do need to fixate on one number, can it please be the unemployment rate?)

        • duncanseconomicblog said, on October 10, 2010 at 10:59 am

          I agree the unemployment rate is more important – politically and economically.

          I’m also scepitcal of export led recovery.

          • Agog said, on October 10, 2010 at 6:06 pm

            No offence intended with that Peterson line btw! These are really helpful posts, and very much appreciated. I get exasperated sometimes with the way the debate is heading – I am proud to call myself a deficit-denier, and worry that the principled case for deficit spending is not being made enough amidst all this political expediency (ironic I guess in a way – normally it’s the spending that’s expedient).

            • Agog said, on October 10, 2010 at 6:08 pm

              PS – I didn’t know Huhne had been head of a ratings agency. They should make him wear a clown’s outfit to Cabinet meetings…

  3. CS Clark said, on October 10, 2010 at 10:35 am

    Just so I’m clear, is the danger now that Labour’s clothes will be stolen and it will be left without even the plan it already had to cover itself, or more that it will look like the Tories are being reasonable in slowing cutting when the manner they do so is still much worse than the Labour plan but no-one will get the differences?

    I suspect you’re right on many levels, not least of which is that there’s been an awful lot of the use of a line about how the coalition’s plans are not that much worse than Labour’s (and no sign of embarrassment over saying that just after/before saying that Labour had no plan to cut the deficit) but I wonder if this is being done through necessity rather than clever-clever maneuvering – not just the necessity of listening to people saying that it could hurt the economy too much but the necessity of finding that they couldn’t find all those efficiency savings and cancel all those contracts right away.

    • duncanseconomicblog said, on October 10, 2010 at 11:03 am

      Yes, I worry that Osborne, without openly saying so, will adopt some of the features of the Darling plan.

      Economically, this please me, politically it’s a danger to Labour.

  4. Do Ants Dream of Empire? said, on October 11, 2010 at 1:16 pm

    Duncan,

    That’s an interesting googly that Osbourne is bowling. It will be difficult to say to the middle class you have to pay more in tax or see reduced services in order to keep people out of the labour market on benefits.

    There is another, more subtle, effect too.

    Moving unskilled people from benefit to work will reduce labour rates for low skilled workers, pushing rates towards the floor of the minimum wage.

    This is a transfer from those workers, many of whom will never have been on benefits, to those employing them or their customers. This is largely the middle class.

    Couple this with below inflation increases in the minimum wage and hundreds of thousands, perhaps millions of the poorest people in our country will see falling real incomes and falling standards of living.

    The impact on working poverty and inequality may be subtle but pervasive.

    My thinking is expanded here.

    http://wp.me/p10CiX-r

  5. Strategy, not tactics « Hopi Sen said, on October 27, 2010 at 4:43 pm

    […] we need to understand is the strategic bind that the Conservatives seek to put Labour in. Duncan Weldon wrote a very good post on that very topic, and the question of how to respond to any particular reform needs to come back to the answer to […]


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