Ministers have been sounding a gloomy tone recently and it's not just because of the eurozone crisis. Work by the Financial Times using the Office for Budget Responsibility model suggests that the structural deficit is £12bn higher than previously thought, a slippage of 25 per cent.
It seems that the level of spare capacity in the economy, both in terms of plant and labour (with the right skills mix), is lower than was previously thought. I would add a note of caution here as spare capacity is more difficult to forecast than most economic variables.
What this would imply is yet more spending cuts or tax increases, but politically that is not viable given the sluggish growth in the economy which, according to the Bank of England, would have tipped into recession but for quantitative easing. What the Bank also admits that QE has pushed inflation higher than it would have been by 0.75 to 1.5 per cent. Of course, inflation also reduces the real value of the debt.
In any event we aren't going to see value added tax go up to 22.5 per cent which is what would be required to plug the gap. But it is does show how difficult will be for the Government to meet its structural deficit target and have some good economic news by the time of the next general election.
Showing posts with label budget deficit. Show all posts
Showing posts with label budget deficit. Show all posts
Monday, 19 September 2011
Tuesday, 26 July 2011
0.2 per cent is just good enough
The latest quarterly figures for GDP growth of 0.2 per cent are just good enough in political terms, especially given that special factors knocked off 0.5 per cent: Growth . They are below expectations and disappointing comparatively, but just enough to prevent Ed Balls creating a political firestorm.
Consumer demand is being hit by the squeeze on incomes. But what is not talked about very much is the underlying structural weakness of an economy that is so dependent on consumer demand, something like two-thirds of the total. Debt fuelled 'privatised Keynesianism' as Colin Crouch has called it is not going to return any time soon.
In terms of short term fixes, a cut in VAT has been recommended. That would stimulate consumer demand and have a positive effect on inflation. However, it would also cut revenues and that would undermine the deficit reduction policy which is already encountering plenty of difficulties.
Consumer demand is being hit by the squeeze on incomes. But what is not talked about very much is the underlying structural weakness of an economy that is so dependent on consumer demand, something like two-thirds of the total. Debt fuelled 'privatised Keynesianism' as Colin Crouch has called it is not going to return any time soon.
In terms of short term fixes, a cut in VAT has been recommended. That would stimulate consumer demand and have a positive effect on inflation. However, it would also cut revenues and that would undermine the deficit reduction policy which is already encountering plenty of difficulties.
Saturday, 21 May 2011
Why we should take debt seriously
There are those who argue that Britain's debt problem is not serious and simply a cover for David Cameron to slash the public sector. Two interesting posts by economist Mark Harrison argue the contrary case: Debt
Quite apart from anything else, having a large debt means that a great deal of money is spent servicing it. Britain has the lowest costs of any major country in terms of servicing its debt, but even so it cost a mouth watering £44 billion last year. Think of the opportunity cost of that.
Britain has been living beyond its means in terms of personal and public consumption for some time. How that burden is shared out between public expenduiture cuts and reduction in personal income is a matter for political judgement. However, 'rebalancing' the economy certainly involves a squeeze on personal incomes so that there is an export led recovery.
Of course, there is a political cost to that. But even if confidence in the Coalition's economic competence is declining, as polls suggest it is, voters evidently many reservations about Ed Miliband.
It may provide an opportunity for parties of the populist right like UKIP who have an alternative narrative about globalisation and Europeanisation. However, such parties are often not well led and it is difficult for them to succeed under a first past the post system.
The one leader and party that is riding high in Britain at the moment is Alex Salmond and the SNP. The Scottish question could potentially become the equivalent of the Quebec question in Canada: never resolved, but always a key factor in national politics.
Quebec has, of course, achieved considerable autonomy and even has a ministry of foreign affairs. The future for Scotland might not be separation, but it could come close to what was mooted in Quebec at one time: sovereignty-association.
Quite apart from anything else, having a large debt means that a great deal of money is spent servicing it. Britain has the lowest costs of any major country in terms of servicing its debt, but even so it cost a mouth watering £44 billion last year. Think of the opportunity cost of that.
Britain has been living beyond its means in terms of personal and public consumption for some time. How that burden is shared out between public expenduiture cuts and reduction in personal income is a matter for political judgement. However, 'rebalancing' the economy certainly involves a squeeze on personal incomes so that there is an export led recovery.
Of course, there is a political cost to that. But even if confidence in the Coalition's economic competence is declining, as polls suggest it is, voters evidently many reservations about Ed Miliband.
It may provide an opportunity for parties of the populist right like UKIP who have an alternative narrative about globalisation and Europeanisation. However, such parties are often not well led and it is difficult for them to succeed under a first past the post system.
The one leader and party that is riding high in Britain at the moment is Alex Salmond and the SNP. The Scottish question could potentially become the equivalent of the Quebec question in Canada: never resolved, but always a key factor in national politics.
Quebec has, of course, achieved considerable autonomy and even has a ministry of foreign affairs. The future for Scotland might not be separation, but it could come close to what was mooted in Quebec at one time: sovereignty-association.
Wednesday, 18 May 2011
The economic outlook
The Magna Carta institute at Brunel University run by Justin Fisher held an interesting event on 'The Coalition - one year on' at the British Academy earlier this week. I plan to talk about some of the other presentations later, but here is a summary of what I had to say (my statistics generally come from the National Institute for Economic and Social Research).
The 'privatised Keynesianism' model identified by Colin Crouch in which the economy is driven by consumer debt linked to the housing market is no longer viable in the medium term, if at all. Consumer spending is forecast to fall by 0.6 per cent in 2011 (it still accounts for two-thirds of aggregate demand).
Consumers are being squeezed by inflation at 4.5 per cent with real disposable incomes falling. Indeed, I think that the Bank of England has de facto abandoned the inflation target. That may not be a bad thing, but they won't admit it is what they have done. Given fiscal consolidation, the economy needs a monetary stimulus and inflation also erodes the debt burden.
Real house prices are forecast to fall by 4.5 per cent in 2011, although the London market is still relatively buoyant, especially at the higher end where it is driven by foreign buyers. There is a fear of unemployment, particularly in the public sector. The Government's austerity rhetoric may have dented consumer confidence.
Export led manufacturing growth is forecast to be 6.9 per cent this year and 4.3 per cent in 2012. This is mainly driven by the weakness of the pound. All three political parties support rebalancing the economy and this is one of Nick Clegg's little known strategic objectives. However, much of manufacuturing is now essentially assembly operations and much of the value chain in industry has been wiped out. It should be noted that past government industrial policy interventions have not been conspicuoulsy successful.
The OBR's growth forecast for 2011 is now seen as rather optimistic and many commentators anticipate 1 to 1.5 per cent. It is unlikely that the economy will grow faster than the trend rate of 2.1 per cent until 2013. The higher growth rates recorded recently have little to do with government policy but reflect the fact that they have been hit less hard by the banking crisis (so far, but they are exposed to a Greek default). The German economy also has strength in high quality, high valued added manufacturing.
The output gap is probably larger than we thought whuich means that the sustainable output of the economy is lower than thought. Productivity growth is likely to be low and the economy will not grow as fast as it did without generating inflation.
It should be noted that the Coalition Government does not aim to eliminate the cyclical deficit (the cyclically-adjusted current budget) so in fact Conservative and Labour positions on the budget are less far apart than the rhetoric would suggest. There will be public spending increases in real terms over the Parliament, although as a share of GDP public expenditure will fall back to 40-41 per cent.
Given that the weakness of the recovery will depress tax revenue, even if (a big if) spending targets are met, net borrowing will fall to 3.6 per cent of GDP in 2015-16 rather than the projected 1.5 per cent. The current budget will run a deficit of 2.2 per cent of GDP compared with the 0.2 per cent forecast.
The Government has been criticised for the lack of a growth strategy, but there are limits to what governments can do to stimulate growth. The most useful measures such as skill formation only bear fruit in the medium term.
The 'privatised Keynesianism' model identified by Colin Crouch in which the economy is driven by consumer debt linked to the housing market is no longer viable in the medium term, if at all. Consumer spending is forecast to fall by 0.6 per cent in 2011 (it still accounts for two-thirds of aggregate demand).
Consumers are being squeezed by inflation at 4.5 per cent with real disposable incomes falling. Indeed, I think that the Bank of England has de facto abandoned the inflation target. That may not be a bad thing, but they won't admit it is what they have done. Given fiscal consolidation, the economy needs a monetary stimulus and inflation also erodes the debt burden.
Real house prices are forecast to fall by 4.5 per cent in 2011, although the London market is still relatively buoyant, especially at the higher end where it is driven by foreign buyers. There is a fear of unemployment, particularly in the public sector. The Government's austerity rhetoric may have dented consumer confidence.
Export led manufacturing growth is forecast to be 6.9 per cent this year and 4.3 per cent in 2012. This is mainly driven by the weakness of the pound. All three political parties support rebalancing the economy and this is one of Nick Clegg's little known strategic objectives. However, much of manufacuturing is now essentially assembly operations and much of the value chain in industry has been wiped out. It should be noted that past government industrial policy interventions have not been conspicuoulsy successful.
The OBR's growth forecast for 2011 is now seen as rather optimistic and many commentators anticipate 1 to 1.5 per cent. It is unlikely that the economy will grow faster than the trend rate of 2.1 per cent until 2013. The higher growth rates recorded recently have little to do with government policy but reflect the fact that they have been hit less hard by the banking crisis (so far, but they are exposed to a Greek default). The German economy also has strength in high quality, high valued added manufacturing.
The output gap is probably larger than we thought whuich means that the sustainable output of the economy is lower than thought. Productivity growth is likely to be low and the economy will not grow as fast as it did without generating inflation.
It should be noted that the Coalition Government does not aim to eliminate the cyclical deficit (the cyclically-adjusted current budget) so in fact Conservative and Labour positions on the budget are less far apart than the rhetoric would suggest. There will be public spending increases in real terms over the Parliament, although as a share of GDP public expenditure will fall back to 40-41 per cent.
Given that the weakness of the recovery will depress tax revenue, even if (a big if) spending targets are met, net borrowing will fall to 3.6 per cent of GDP in 2015-16 rather than the projected 1.5 per cent. The current budget will run a deficit of 2.2 per cent of GDP compared with the 0.2 per cent forecast.
The Government has been criticised for the lack of a growth strategy, but there are limits to what governments can do to stimulate growth. The most useful measures such as skill formation only bear fruit in the medium term.
Sunday, 20 March 2011
No longer Boy George
It should be no surprise that in the weekend before the budget both the Financial Times and The Economist have published profiles of the Chancellor of the Exchequer, George Osborne. The one in the FT magazine is particularly long and favourable and looks as if it could have been 'placed' by the Chancellor's political advisers.
However, the message of the two pieces is essentially the same: the Chancellor is no longer Boy George. Before the election there were concerns that he would not be up to the role. He was seen as too preoccupied with scoring political points. But he has grown into the role well. Although not a workaholic, civil servants think that he has mastered the technical aspects of his brief well. He has an appetite for reforming taxes, rather than just cutting them.
He also has a good working relationship with the prime minister, symbolised by the fact that he works most of the time out of No.11 Downing Street rather than the Treasury. The door to No.10 is kept pinned open and the Chancellor takes a leading role in regular strategy discussions. The relationship between the Prime Minister and the Chancellor is the fulcrum of government and when it breaks down (Lawson and Thatcher) or is tense (the Blair-Brown 'dual monarchy'), the reverberations are felt throughout Whitehall.
David Cameron has a long way to go as Prime Minister and is currently enjoying a good war. However, Osborne is now seen as a potential successor in a way that he wasn't before. The Tory right see him as more attuned to their way of thinking than the Prime Minister.
One problem is Osborne's public image. He doesn't expected to be liked, but he does hope to earn the respect of the people. However, an Economist poll shows that William Hague is seen as the most likely successor, followed by Nick Clegg! Osborne only gets 9 per cent.
In part this reflects the way in which Nick Clegg is the public No.2 in the government and has acted as a lightning conductor for its policies. What is also interesting about the Economist poll is that although the electorate have taken on board Labour's message that the government is cutting too far, too fast and that the poor will suffer most, they also largely blame the existence of the deficit on Labour. That effect may, of course, fade over time and a big responsibility rests on Osborne for restoring the economy to better health.
However, the message of the two pieces is essentially the same: the Chancellor is no longer Boy George. Before the election there were concerns that he would not be up to the role. He was seen as too preoccupied with scoring political points. But he has grown into the role well. Although not a workaholic, civil servants think that he has mastered the technical aspects of his brief well. He has an appetite for reforming taxes, rather than just cutting them.
He also has a good working relationship with the prime minister, symbolised by the fact that he works most of the time out of No.11 Downing Street rather than the Treasury. The door to No.10 is kept pinned open and the Chancellor takes a leading role in regular strategy discussions. The relationship between the Prime Minister and the Chancellor is the fulcrum of government and when it breaks down (Lawson and Thatcher) or is tense (the Blair-Brown 'dual monarchy'), the reverberations are felt throughout Whitehall.
David Cameron has a long way to go as Prime Minister and is currently enjoying a good war. However, Osborne is now seen as a potential successor in a way that he wasn't before. The Tory right see him as more attuned to their way of thinking than the Prime Minister.
One problem is Osborne's public image. He doesn't expected to be liked, but he does hope to earn the respect of the people. However, an Economist poll shows that William Hague is seen as the most likely successor, followed by Nick Clegg! Osborne only gets 9 per cent.
In part this reflects the way in which Nick Clegg is the public No.2 in the government and has acted as a lightning conductor for its policies. What is also interesting about the Economist poll is that although the electorate have taken on board Labour's message that the government is cutting too far, too fast and that the poor will suffer most, they also largely blame the existence of the deficit on Labour. That effect may, of course, fade over time and a big responsibility rests on Osborne for restoring the economy to better health.
Thursday, 30 December 2010
A re-run of the poll tax protests?
The general secretary of the TUC, Brendan Barber, has said that 2011 may be the year in which country says no to government just as in the case of poll tax. The plan seems to be to stage a wave of strikes in the run up to the royal wedding to cause maximum embarrassment to the Government.
Something of a particular reading of history seems to have occurred in the case of the poll tax. There were riots in Trafalgar Square and other acts of defiance, particularly in Scotland. However, what really scared the Government was that they were losing electoral support on the issue and that contributed to the fall of Margaret Thatcher.
They also lost the intellectual case on the poll tax which violated a fundamental principle of taxation originally set out by Adam Smith: there should be some relationship between a tax and ability to pay. I am not sure that the Government has lost the intellectual case on the deficit. Many voters think the country has been living beyond its means.
However, voters think that protests can be effective. In a recent Populus poll, seven out of ten of those polled said public protests 'can be effective ... and played a big part in getting the last Conservative Government to scrap the poll tax.'
One in five could see themselves being involved in protests against spending cuts, while two in five think 'a degree of disobedience and public disorder' is sometimes necessary to make governments take notice of issues.
Something of a particular reading of history seems to have occurred in the case of the poll tax. There were riots in Trafalgar Square and other acts of defiance, particularly in Scotland. However, what really scared the Government was that they were losing electoral support on the issue and that contributed to the fall of Margaret Thatcher.
They also lost the intellectual case on the poll tax which violated a fundamental principle of taxation originally set out by Adam Smith: there should be some relationship between a tax and ability to pay. I am not sure that the Government has lost the intellectual case on the deficit. Many voters think the country has been living beyond its means.
However, voters think that protests can be effective. In a recent Populus poll, seven out of ten of those polled said public protests 'can be effective ... and played a big part in getting the last Conservative Government to scrap the poll tax.'
One in five could see themselves being involved in protests against spending cuts, while two in five think 'a degree of disobedience and public disorder' is sometimes necessary to make governments take notice of issues.
Wednesday, 15 December 2010
Do we need a Plan B ?
There has been a certain amount of excitement in the media about a 'Plan B' drawn up by Cabinet Secretary Gus O'Donnell to stimulate the economy should it run into renewed difficulties. There has even been talk once again of a 'double dip recession'.
Barring a cataclysmic crisis in the eurozone I do not think that negative growth is likely. Indeed, the risks of a massive crisis may have been reduced by hints from the United States that it might intervene if things got really bad.
Nevertheless, there is a dismal prospect of relatively low growth (below current forecasts of a little over 2 per cent), rising unemployment as public sector job cuts take effect and continuing inflation well above target. In different circumstances the Bank of England would have already taken action to curb inflation.
Disposal income is being squeezed. Many people are not getting any salary or wage increases or ones below the rate of inflation. The cost of everyday items such as petrol and utilities is going up and petrol in particular will rise further once VAT increases. Because of trends in world commodity markets, the cost of food and clothing has been rising (the depreciation of sterling has also not helped, although that has now come to an end and the pound has been rising against the dollar and the euro recently).
The civil service has always prepared contingency plans for economic difficulty. 'Brutus' and 'Cranmer' were two famous ones in the past and no doubt there are more in the National Archives at Kew. It's sensible to have contingency plans, but it doesn't mean you have to implement them.
David Cameron is understandably very sensitive about the subject because it implies that the Government's deficit reduction plan could be more economically damaging than he admits. My view has always been that the Coalition Government will not manage to eliminate the structural budget deficit over the lifetime of a Parliament, but if you don't start with a tough target, you will fall way short.
No doubt all this will come up at PMQs today.
Barring a cataclysmic crisis in the eurozone I do not think that negative growth is likely. Indeed, the risks of a massive crisis may have been reduced by hints from the United States that it might intervene if things got really bad.
Nevertheless, there is a dismal prospect of relatively low growth (below current forecasts of a little over 2 per cent), rising unemployment as public sector job cuts take effect and continuing inflation well above target. In different circumstances the Bank of England would have already taken action to curb inflation.
Disposal income is being squeezed. Many people are not getting any salary or wage increases or ones below the rate of inflation. The cost of everyday items such as petrol and utilities is going up and petrol in particular will rise further once VAT increases. Because of trends in world commodity markets, the cost of food and clothing has been rising (the depreciation of sterling has also not helped, although that has now come to an end and the pound has been rising against the dollar and the euro recently).
The civil service has always prepared contingency plans for economic difficulty. 'Brutus' and 'Cranmer' were two famous ones in the past and no doubt there are more in the National Archives at Kew. It's sensible to have contingency plans, but it doesn't mean you have to implement them.
David Cameron is understandably very sensitive about the subject because it implies that the Government's deficit reduction plan could be more economically damaging than he admits. My view has always been that the Coalition Government will not manage to eliminate the structural budget deficit over the lifetime of a Parliament, but if you don't start with a tough target, you will fall way short.
No doubt all this will come up at PMQs today.
Sunday, 7 November 2010
Doubts about public expediture plans
The Institute of Government has pointed out that although by 2014-15 public spending as a share of national income would be back to the same level as it was in 2006-7, the composition of that spending would be very different. Expansions in the share of national income spent on pensioner benefits, the NHS and overseas aid would be funded through reduced spend on education, law and order and defence.
At Fathom Consulting's quarterly Monetary Policy Forum, the former Home Office permanent secretary Sir John Grieve said 'it seems most improbable' that the government would hold fast to its plans. Rachel Lomax, a former permanent secretary of three government departments, said the public might not accept large cuts in police and prisons that had not been flagged before the election.
The Public Accounts Committee has expressed doubts over the Government's ability to make genuine efficiency savings. Whitehall failed to make the mere 3 per cent savings set out in the 2007 comprehensive spending review. Two years into the three year programme to release £35bn in cash from efficiency, only £15bn of savings were reported. Of those, the National Audit Office, it judged only 38 per cent, or less than £6bn, to be value for money savings.
The committee is concerned that in order to reduce costs, departments will rely soley on cutting frontline services. The committee says it was concerned at the implications of evidence from the Treasury 'that it will simply reduce departments' budgets and then walk away from the responsibility for the delivery of the level of savings required across government.'
Of course, cutting back office services can have its impact. There are two EU committees working in a technical area which have been highly dependent on the UK and the Netherlands for their work, although with general political support from other North European countries. The UK may now not be able to afford to be involved. Up to now UK interests have been very well looked after because of its involvement.
At Fathom Consulting's quarterly Monetary Policy Forum, the former Home Office permanent secretary Sir John Grieve said 'it seems most improbable' that the government would hold fast to its plans. Rachel Lomax, a former permanent secretary of three government departments, said the public might not accept large cuts in police and prisons that had not been flagged before the election.
The Public Accounts Committee has expressed doubts over the Government's ability to make genuine efficiency savings. Whitehall failed to make the mere 3 per cent savings set out in the 2007 comprehensive spending review. Two years into the three year programme to release £35bn in cash from efficiency, only £15bn of savings were reported. Of those, the National Audit Office, it judged only 38 per cent, or less than £6bn, to be value for money savings.
The committee is concerned that in order to reduce costs, departments will rely soley on cutting frontline services. The committee says it was concerned at the implications of evidence from the Treasury 'that it will simply reduce departments' budgets and then walk away from the responsibility for the delivery of the level of savings required across government.'
Of course, cutting back office services can have its impact. There are two EU committees working in a technical area which have been highly dependent on the UK and the Netherlands for their work, although with general political support from other North European countries. The UK may now not be able to afford to be involved. Up to now UK interests have been very well looked after because of its involvement.
Wednesday, 6 October 2010
The big society
This was the unifying theme of David Cameron's speech to the Conservative Party conference. The implication was that this was the way forward which would enable the country to withstand the cuts in public expenditure necessitated by the budget deficit and take us to the sunlit uplands beyond.
The 'Big Society spirit' was mentioned more than once, as was the notion that 'your country needs you'. The prime minister used the example of the 100,000 people who had volunteered for the Olympic Games as evidence that additional volunteers were available. He attacked the notion that 'if government takes care of this, we won't have to'.
Citizenship was more than a transaction - although citizens have been increasingly encouraged over the years to define themselves as consumers of public services with certain entitlements, not least by New Labour. In other words, this idea has become quite embedded. This is not to say that it should not be challenged, but it's a perception that will be hard to dislodge.
It was noticeable that the attacks on Labour got the loudest applause in the hall. He managed to define Labour, in terms of the views of Ed Balls, as opposed to aspiration and there was a neat dig of Neil 'we've got our party back' Kinnock. Ed Miliband was more or less a non person, which is probably the way to play it for now. The prime minister's defence of the union also went down well with the audience.
The comment that we were geared up to fight old wars did not sound like good news for the Navy or the RAF. It seemed to me that there was a clear endorsement of Ken Clarke's refreshing approach to criminal justice issues.
It was interesting that two references were made to football, the last World Cup and the hope of holding the 2018 one in England.
I didn't think there was much that was new in the speech, but probably there didn't have to be. It was an attempt to define Cameron's distinctive approach and brand. There is such a thing as society, but it's different from the state (Sam Cam's idea originally) and it needs to be an active and engaged society. I don't think it is just cover for the cuts, but I'm not fully convinced either.
Interesting how much the cameras focused on Sam Cam during the warm up video and at other times. But she was looking very glamorous.
The 'Big Society spirit' was mentioned more than once, as was the notion that 'your country needs you'. The prime minister used the example of the 100,000 people who had volunteered for the Olympic Games as evidence that additional volunteers were available. He attacked the notion that 'if government takes care of this, we won't have to'.
Citizenship was more than a transaction - although citizens have been increasingly encouraged over the years to define themselves as consumers of public services with certain entitlements, not least by New Labour. In other words, this idea has become quite embedded. This is not to say that it should not be challenged, but it's a perception that will be hard to dislodge.
It was noticeable that the attacks on Labour got the loudest applause in the hall. He managed to define Labour, in terms of the views of Ed Balls, as opposed to aspiration and there was a neat dig of Neil 'we've got our party back' Kinnock. Ed Miliband was more or less a non person, which is probably the way to play it for now. The prime minister's defence of the union also went down well with the audience.
The comment that we were geared up to fight old wars did not sound like good news for the Navy or the RAF. It seemed to me that there was a clear endorsement of Ken Clarke's refreshing approach to criminal justice issues.
It was interesting that two references were made to football, the last World Cup and the hope of holding the 2018 one in England.
I didn't think there was much that was new in the speech, but probably there didn't have to be. It was an attempt to define Cameron's distinctive approach and brand. There is such a thing as society, but it's different from the state (Sam Cam's idea originally) and it needs to be an active and engaged society. I don't think it is just cover for the cuts, but I'm not fully convinced either.
Interesting how much the cameras focused on Sam Cam during the warm up video and at other times. But she was looking very glamorous.
The child benefit row
Denying child benefit to higher rate taxpayers has caused a media storm and disquiet among Conservative activists and backbenchers, despite the fact that relatively few people are 'unfairly' affected, mainly stay-at-home mums although they are a group close to the heart of some Conservatives.
However, it seems that 83 per cent of voters approve, although that is not that surprising given that around that percentage do not lose out from the proposals: Poll
I think David Cameron made something of an error by appearing to offer a married couples tax allowance as a sop. Admittedly, it is in the coalition agreement, but it was supposed to only apply to basic rate taxpayers and the Liberal Democrats might not like it being extended to higher rate taxpayers.
What this particular disproportionate row does illustrate is the difficult politics of reducing the deficit. Given that this particular measure saves only about £1bn, it appears that stopping child benefit at 16 is still on the cards, as is restricting the availability of bus passes. More generally, we are shifting from a universal welfare state to one provided as a safety net for those in need.
However, it seems that 83 per cent of voters approve, although that is not that surprising given that around that percentage do not lose out from the proposals: Poll
I think David Cameron made something of an error by appearing to offer a married couples tax allowance as a sop. Admittedly, it is in the coalition agreement, but it was supposed to only apply to basic rate taxpayers and the Liberal Democrats might not like it being extended to higher rate taxpayers.
What this particular disproportionate row does illustrate is the difficult politics of reducing the deficit. Given that this particular measure saves only about £1bn, it appears that stopping child benefit at 16 is still on the cards, as is restricting the availability of bus passes. More generally, we are shifting from a universal welfare state to one provided as a safety net for those in need.
Tuesday, 28 September 2010
Red Ed? Come off it!
That was Ed Miliband's message as he gave a heartfelt (and apart from the odd stumble) polished performance to the Labour Party conference this afternoon. Sometimes it did feel as if the Revd. Blair had been replaced as vicar by his curate who combined youthfulness, earnestness and a commitment to optimism, the theme on which he ended.
Ed Miliband tried to differentiate himself from Old and New Labour, while acknowledging the latter's achievements, by presenting himself as part of a new generation which wanted a new politics. How many times have we heard politicians say before that they want to change politics?
He presented his back story quite well, with a self-deprecatory remark about his father, Ralph (Adolph) Miliband. There were also references to the future in terms of his 16 month old son.
One of the clear themes came through to me was that he was not going to vacate the centre ground of politics, although he also argued that the centre ground can be re-shaped. He endorsed the central premise of the New Labour argument: one can deliver both economic efficiency and social justice. He also tried to make a strong ethical appeal, emphasising that 'my values are my anchor'.
He also made clear that the party 'wouldn't always like what I have to say ... but lead I will.' Militant trade unionists got a slap on the wrist with a reference to 'overblown rhetoric about waves of irresponsible strikes'.
On the deficit, he said that the need to reduce it would have meant painful cuts under Labour. Even if Labour regained office, it would not be possible to reverse all the cuts. Fiscal credibility had been hard won by New Labour and it must be won back. What this all came down to at the end, however, was a rather lame endorsement of the approach of halving the deficit.
One of the most potentially important statements was the announcement that he would vote in favour of AV in referendum, a move away from the opportunistic opposition Labour had been pursuing. It should increase the chances of the measure passing.
So a good start, but the real tests lie ahead. How will he match up against David Cameron at question time?
Ed Miliband tried to differentiate himself from Old and New Labour, while acknowledging the latter's achievements, by presenting himself as part of a new generation which wanted a new politics. How many times have we heard politicians say before that they want to change politics?
He presented his back story quite well, with a self-deprecatory remark about his father, Ralph (Adolph) Miliband. There were also references to the future in terms of his 16 month old son.
One of the clear themes came through to me was that he was not going to vacate the centre ground of politics, although he also argued that the centre ground can be re-shaped. He endorsed the central premise of the New Labour argument: one can deliver both economic efficiency and social justice. He also tried to make a strong ethical appeal, emphasising that 'my values are my anchor'.
He also made clear that the party 'wouldn't always like what I have to say ... but lead I will.' Militant trade unionists got a slap on the wrist with a reference to 'overblown rhetoric about waves of irresponsible strikes'.
On the deficit, he said that the need to reduce it would have meant painful cuts under Labour. Even if Labour regained office, it would not be possible to reverse all the cuts. Fiscal credibility had been hard won by New Labour and it must be won back. What this all came down to at the end, however, was a rather lame endorsement of the approach of halving the deficit.
One of the most potentially important statements was the announcement that he would vote in favour of AV in referendum, a move away from the opportunistic opposition Labour had been pursuing. It should increase the chances of the measure passing.
So a good start, but the real tests lie ahead. How will he match up against David Cameron at question time?
Monday, 27 September 2010
The UK economy is on the mend
That is the verdict of the International Monetary Fund in a positive report on the UK economy: Fund .
The report praises the Coalition Government's 'strong and credible' deficit reduction plan. While fiscal tightening could dampen short-term growth, it will not stop it, one in the eye for the double dip recession school of thought. CPI inflation should be back on target by 2012.
There are some araes of concern in relation to the banks and the report emphasises the need for the momentum of financial sector reform to continue. Backing for Vince, then. BTW, it was interesting to see my local Conservative MP Chris White writing an 'I'm with Vince' piece in the local paper.
Quite how 'Red Ed' will respond to this remains to be seen. It is his first test on the economic front.
The report praises the Coalition Government's 'strong and credible' deficit reduction plan. While fiscal tightening could dampen short-term growth, it will not stop it, one in the eye for the double dip recession school of thought. CPI inflation should be back on target by 2012.
There are some araes of concern in relation to the banks and the report emphasises the need for the momentum of financial sector reform to continue. Backing for Vince, then. BTW, it was interesting to see my local Conservative MP Chris White writing an 'I'm with Vince' piece in the local paper.
Quite how 'Red Ed' will respond to this remains to be seen. It is his first test on the economic front.
Thursday, 16 September 2010
Asking the right questions
A Populus poll in The Times earlier this week read like bad news for the Coalition Government's deficit reduction strategy, but legitimate doubts have now been raised about the appropriateness of the questions: Poll
One thing that needs to be borne in mind is that setting a target for deficit reduction is one thing and achieving it is another. So Labour's halving target could have turned out to be a 30 per cent reduction in practice and the Coalition's target may well fall short at around 80 per cent over the lifetime of a Parliament.
One thing that needs to be borne in mind is that setting a target for deficit reduction is one thing and achieving it is another. So Labour's halving target could have turned out to be a 30 per cent reduction in practice and the Coalition's target may well fall short at around 80 per cent over the lifetime of a Parliament.
Monday, 13 September 2010
The conference season is under way
The pace of politics is quickening in the run up to the vitally important Comprehensive Spending Review. This week we have the TUC Congress and this will be followed by the Liberal Democrats, suddenly a more significant event on the political calendar.
On the radio this morning one public sector trade union leader said that not one public sector job should go. This shows a complete disconnect with reality. Even under a Labour Government there would have been public sector job cuts.
According to the June budget, we are already spending £44 billion on debt interest. This is more than we spend on defence (£40bn) or public order (£35bn). It represents a substantial opportunity cost. If the deficit was not cut, interest rates would go up, the UK's credit rating would decline and we would be spending even more on interest.
The BBC's Nick Robinson made a journey down the A1 last week in which he talked to members of the public about spending cuts. People found it far easier to say what they wouldn't cut than what they would. Overseas aid was mentioned, but this is a small proportion of the total budget.
Another popular candidate was 'welfare' and this is certainly a big ticket item. Child benefit may be stopped at 16 and the age at which people become eligible for the winter fuel allowance may be raised. In this way some dent may be made in the £194bn spent on 'social protection'.
On the radio this morning one public sector trade union leader said that not one public sector job should go. This shows a complete disconnect with reality. Even under a Labour Government there would have been public sector job cuts.
According to the June budget, we are already spending £44 billion on debt interest. This is more than we spend on defence (£40bn) or public order (£35bn). It represents a substantial opportunity cost. If the deficit was not cut, interest rates would go up, the UK's credit rating would decline and we would be spending even more on interest.
The BBC's Nick Robinson made a journey down the A1 last week in which he talked to members of the public about spending cuts. People found it far easier to say what they wouldn't cut than what they would. Overseas aid was mentioned, but this is a small proportion of the total budget.
Another popular candidate was 'welfare' and this is certainly a big ticket item. Child benefit may be stopped at 16 and the age at which people become eligible for the winter fuel allowance may be raised. In this way some dent may be made in the £194bn spent on 'social protection'.
Thursday, 1 July 2010
The AV referendum
As expected, this has been scheduled to coincide with the local and devolved elections next May in the hope of boosting turnout. One of the problems with PR as an issue is that although it excites the political class it doesn't feature in the most important isues selected by the electorate in the polls.
In many ways it will be a watershed for the coalition. If the Liberal Democrats win the referendum, then they will have got one of their most sought after lasting gains from the Coalition - although in practice AV is just a modified version of first-past-the post and isn't going to make a massive difference to outcomes. It certainly may not offset the loss of left-leaning votes the Lib Dems are likely to suffer. But, of course, it could be the start of a slippery PR slope.
If the referendum fails, which is the less likely outcome, then Liberal Democrats will be asking what they have got out of the coalition given the sacrifices they have had to make on other policies. Either way, tensions within the coalition will increase at the time that public expenditure cuts start to bite. Already the Lib Dem MP for Cheltenham is complaining about the closure of the Commission for Rural Communities quango in his constitency with the loss of 60 jobs.
My guess is that the Coalition Government will not be able to eliminate the structural deficit in the lifetime of the Parliament because the political costs will be too high. It's an ambitious target, but certainly preferable to Labour's unambitious one which would not have reassured the financial markets. However, I think there may be some trimming as the electoral cycle progresss and if the strictural deficit is reduced by, say, three-quarters, that will be a result.
In many ways it will be a watershed for the coalition. If the Liberal Democrats win the referendum, then they will have got one of their most sought after lasting gains from the Coalition - although in practice AV is just a modified version of first-past-the post and isn't going to make a massive difference to outcomes. It certainly may not offset the loss of left-leaning votes the Lib Dems are likely to suffer. But, of course, it could be the start of a slippery PR slope.
If the referendum fails, which is the less likely outcome, then Liberal Democrats will be asking what they have got out of the coalition given the sacrifices they have had to make on other policies. Either way, tensions within the coalition will increase at the time that public expenditure cuts start to bite. Already the Lib Dem MP for Cheltenham is complaining about the closure of the Commission for Rural Communities quango in his constitency with the loss of 60 jobs.
My guess is that the Coalition Government will not be able to eliminate the structural deficit in the lifetime of the Parliament because the political costs will be too high. It's an ambitious target, but certainly preferable to Labour's unambitious one which would not have reassured the financial markets. However, I think there may be some trimming as the electoral cycle progresss and if the strictural deficit is reduced by, say, three-quarters, that will be a result.
Monday, 28 June 2010
Ring fencing the NHS
The British Medical Association, the doctors' trade union, has complained that 'haphazard' cuts are harming the National Health Service: Cuts This announcement comes on the eve of their conference, but also when Conservative backbenchers are starting to complain about 'ring fencing' the NHS in the Comprehensive Spending Review.
If one does that, and also tries to keep cuts in defence and education down to ten per cent, that means that some departments could have to cut expenditure by a third in real terms which is very dificult to achieve without, for example, drastically cutting environmental protection services.
Some cuts could hit the NHS directly, for example cutting back on social care for the elderly could make it more difficult to get them out of hospital, leading to bed blocking. Warwickshire County Council is already proposing increases of fees for some services delivered to the home of 1,000 per cent, admittedly from a very low and hopelessly uneconomic base level.
The NHS does face the problems of an ageing population, an expanding medical technology frontier that drives up costs and rising patient expectations. Howver, here are a few suggestions:
1. Mrs Thatcher famously said 'we have dealt with the opticians' (or words to that effect, I don't have the transcript in front of me). I went my first eye test last week and it was free. Should that be the case for someone who is not poor? I was also interested to read on the back of the form that I was given that I could get a voucher towards my spectacles if I was a prisoner on leave.
2. Should prescriptions for free for everyone who is elderly? Or should the better off be at least asked to pay for a season ticket of £100 or so a year?
3. Anyone who was talked to GPs infornally will know that patients make considerable differential use of the service regardless of their state of health. Should charging be introduced, again with exemptions? Of course, that would really hit at the idea of a NHS free at the point of use and need and would probably be too politically controversial.
The Conservative pledge on the NHS was politically expedient. But does it make for good policy? Vince Cable didn't think it made economic and political sense and the former Labour health minister doesn't think it makes sense now.
If one does that, and also tries to keep cuts in defence and education down to ten per cent, that means that some departments could have to cut expenditure by a third in real terms which is very dificult to achieve without, for example, drastically cutting environmental protection services.
Some cuts could hit the NHS directly, for example cutting back on social care for the elderly could make it more difficult to get them out of hospital, leading to bed blocking. Warwickshire County Council is already proposing increases of fees for some services delivered to the home of 1,000 per cent, admittedly from a very low and hopelessly uneconomic base level.
The NHS does face the problems of an ageing population, an expanding medical technology frontier that drives up costs and rising patient expectations. Howver, here are a few suggestions:
1. Mrs Thatcher famously said 'we have dealt with the opticians' (or words to that effect, I don't have the transcript in front of me). I went my first eye test last week and it was free. Should that be the case for someone who is not poor? I was also interested to read on the back of the form that I was given that I could get a voucher towards my spectacles if I was a prisoner on leave.
2. Should prescriptions for free for everyone who is elderly? Or should the better off be at least asked to pay for a season ticket of £100 or so a year?
3. Anyone who was talked to GPs infornally will know that patients make considerable differential use of the service regardless of their state of health. Should charging be introduced, again with exemptions? Of course, that would really hit at the idea of a NHS free at the point of use and need and would probably be too politically controversial.
The Conservative pledge on the NHS was politically expedient. But does it make for good policy? Vince Cable didn't think it made economic and political sense and the former Labour health minister doesn't think it makes sense now.
Tuesday, 22 June 2010
The unavoidable budget
That is how George Osborne billed his emergency budget today. He also described it as 'tough but fair'. No doubt subsequent debate will focus in part on how far it is.
The Chancellor said that a position in which one pound in every four spent by the Government was borrowed was not sustainable. Nor was it acceptable to have nearly half of national income spent by the Government. A quarter of a trillion pounds will be spent in debt interest over the lifetime of the Parliament.
77 per cent of the target of eliminating the structural deficit over a five year period would be met by spending cuts and 23 per cent by tax increases, largely through a 20 per cent increase in VAT from next January. The current exemptions from VAT remain in place.
Among the most controversial measures will be a two year pay freeze for the public sector (athough the 28 per cent of those earning under £21,000 a year will get a flat £250 increase in each year) and a three year freeze in child benefit. The Chancellor argued that means testing child benefit would have involved too many transaction costs.
One interesting commment by the Chancellor was that the UK was over reliant on financial services and a bank levy will be introduced in 2011. He also said that Conservative governments in the early 1990s made a mistake when they cut capital rather than current spending.
In a sense we will get a second instalment of the pain when the results of the public expenditure review are revealed on Ocrober 20th. However, there is now a credible medium-term fiscal strategy in place which should satisfy the international markets. Credbility with them was a criterion that the Chancellor specifically mentioned.
The Chancellor said that a position in which one pound in every four spent by the Government was borrowed was not sustainable. Nor was it acceptable to have nearly half of national income spent by the Government. A quarter of a trillion pounds will be spent in debt interest over the lifetime of the Parliament.
77 per cent of the target of eliminating the structural deficit over a five year period would be met by spending cuts and 23 per cent by tax increases, largely through a 20 per cent increase in VAT from next January. The current exemptions from VAT remain in place.
Among the most controversial measures will be a two year pay freeze for the public sector (athough the 28 per cent of those earning under £21,000 a year will get a flat £250 increase in each year) and a three year freeze in child benefit. The Chancellor argued that means testing child benefit would have involved too many transaction costs.
One interesting commment by the Chancellor was that the UK was over reliant on financial services and a bank levy will be introduced in 2011. He also said that Conservative governments in the early 1990s made a mistake when they cut capital rather than current spending.
In a sense we will get a second instalment of the pain when the results of the public expenditure review are revealed on Ocrober 20th. However, there is now a credible medium-term fiscal strategy in place which should satisfy the international markets. Credbility with them was a criterion that the Chancellor specifically mentioned.
Tuesday, 15 June 2010
Cuts message has not got through
It seems that many members of the public think that public expenditure cuts will only hit a few background bureaucrats and will have no effect on them, even though the Institute for Fiscal Studies has said that the budgets of some 'unprotected' departments may need to be cut by as much as a third.
Despite warnings by the prime minister that 'every single person' will be affected, more than two out of five respondents to a ComRes survey think that spending cuts will affect them only a little, if at all. Fewer than one in four people, 23 per cent, expected to be affected a lot by the cuts.
One of the worrying aspects of the current situation is that the output gap - which is effectively a measure of the amount of spare capacity in the economy - is smaller than expected. Whilst there is spare capacity in labour, as indicated by the increasing number of people in part-time work, it may not have the necessary skills. There is a concern that some physical capacity has been destroyed for ever by the recesion. This would help to explain why inflation has been so high which may mean that the Bank of England will have to raise interest rates before too long.
The Social Market Foundation has argued that 'universal benefits' would have to go, including paying child benefit and winter fuel payments to the better off. It was always assumed that the social contract that supported the welfare state required that the better off get some benefits from it, but it may be that such universalism is no longer feasible or even required.
Despite warnings by the prime minister that 'every single person' will be affected, more than two out of five respondents to a ComRes survey think that spending cuts will affect them only a little, if at all. Fewer than one in four people, 23 per cent, expected to be affected a lot by the cuts.
One of the worrying aspects of the current situation is that the output gap - which is effectively a measure of the amount of spare capacity in the economy - is smaller than expected. Whilst there is spare capacity in labour, as indicated by the increasing number of people in part-time work, it may not have the necessary skills. There is a concern that some physical capacity has been destroyed for ever by the recesion. This would help to explain why inflation has been so high which may mean that the Bank of England will have to raise interest rates before too long.
The Social Market Foundation has argued that 'universal benefits' would have to go, including paying child benefit and winter fuel payments to the better off. It was always assumed that the social contract that supported the welfare state required that the better off get some benefits from it, but it may be that such universalism is no longer feasible or even required.
Monday, 14 June 2010
Growth outlook is gloomy
The Office of Budget Responsibility is expected to publish growth forecasts today that will show those that Labour was working on were hopelessly optimistic. No suprise there.
Many independent analysts have been calling for some time for a body like the OBR. Of course, how independent it really is will be the subject of debate. But, unlike politicians, it does not have an incentive to make out that things are better than they really are.
The boom revenues from taxation are unlikely to return. Public sector net debt is forecast to rise from 36 per cent of national income in 2007-8 to 75 per cent in 2004-15. This alone would raise interest payments to close to 2 per cent of national income.
Moreover, these figures do not take into account the effect of an ageing population on public sector pensions, state pensions and the NHS. Nor do they take into account payments on PFI projects which often have a duration of thirty years.
Retirement ages and life expectancy have got completely out of kilter. However, these are evidently not going to be tackled soon and the Government has no evident appetite to means test free bus passes or winter fuel payments.
We are in for a period of slow growth, rising unemployment and reductions in public services. Whether the public are really ready for this is questionable.
Many independent analysts have been calling for some time for a body like the OBR. Of course, how independent it really is will be the subject of debate. But, unlike politicians, it does not have an incentive to make out that things are better than they really are.
The boom revenues from taxation are unlikely to return. Public sector net debt is forecast to rise from 36 per cent of national income in 2007-8 to 75 per cent in 2004-15. This alone would raise interest payments to close to 2 per cent of national income.
Moreover, these figures do not take into account the effect of an ageing population on public sector pensions, state pensions and the NHS. Nor do they take into account payments on PFI projects which often have a duration of thirty years.
Retirement ages and life expectancy have got completely out of kilter. However, these are evidently not going to be tackled soon and the Government has no evident appetite to means test free bus passes or winter fuel payments.
We are in for a period of slow growth, rising unemployment and reductions in public services. Whether the public are really ready for this is questionable.
Tuesday, 8 June 2010
Fiscal Nimbyism
It's becoming evident that the public response to the proposed cuts in public expenditure is what is called 'Fiscal Nimbyism': I'm in favour of cuts, provided they don't affect me. It is also reminiscent of an old joke about the British: they want Swedish public services and American taxes.
Whilst one can understand the electoral pressures that lead the National Health Service to be treated as a sacred cow, it is questionable whether it is sensible to fence off a fifth of the budget in this way. Of course, there will be cuts in the NHS: the so-called 'efficiency savings' will see to that.
But isn't it time to have a more fundamental debate about how we deliver health care that gets beyond complaining about the number of administrators?
Whilst one can understand the electoral pressures that lead the National Health Service to be treated as a sacred cow, it is questionable whether it is sensible to fence off a fifth of the budget in this way. Of course, there will be cuts in the NHS: the so-called 'efficiency savings' will see to that.
But isn't it time to have a more fundamental debate about how we deliver health care that gets beyond complaining about the number of administrators?
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