Economics


Just a quick post: I’m wondering about two glaring contradictions in Tory thought right now that I just cannot understand. Why introduce a change to the child benefit system that will penalise one income households most, given that Tories have long believed that one parent (read: the mother) should stay at home and not work in order to bring up the kids? (more…)

Nick Clegg has decided to go on the offensive against the Institute for Fiscal Studies analysis which shows that, despite Coalition claims that ‘the broadest shoulders are bearing the greatest burden’ and that the Comprehensive Spending Review’s slash and burn of public services is ‘progressive and fair’, the poorest 10% of society will be hit the hardest. He claims that the IFS has failed to take into account the full package of measures as outlined in the Emergency Budget in June as well as the CSR. Would these be the measures which the IFS found, at the time, to be ‘clearly regressive’ taken on their own and only ‘progressive’ when taking into account the tax and benefit proposals of the departing Labour government?

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Some decent articles appeared in the run up to the long-awaited Comprehensive Spending Review (CSR) which collectively throw light on both the politics and economics of it all. First up, Jonathan Freedland in The Guardian, writing about how Labour really needs to take on the Coalition’s attempt to pin the blame on them for the ‘economic mess’, and that the deficit is all the fault of profligate Labour spending. According to the Budget 2007, the structural deficit stood at just 3% of GDP before the recession struck; now it is 11%. In other words, prior to the recession it was relatively low by historical standards – as Ed Balls pointed out earlier in the summer, Britain went into the recession with ‘the lowest net debt of any large G7 country’, and this is a matter of fact not interpretation. Indeed, using the Treasury’s figures, the accusation that Labour wildly overspent in office just does not add up: public spending during the previous period of Tory rule was higher in all but 4 of the 18 years they were in office than at any point during 1997-2007 (the four years in question being the boom years after the ‘Big Bang’ deregulation of the City, that period satirised by Harry Enfield’s ‘Loadsamoney’, 1988-1991).

This is the basis for the first of Freedland’s two killer points. If Labour’s public spending was so wildly out of control, why did Cameron’s Tories (back in his hug-a-hoodie, quality-of-life days) promise to match Labour’s spending plans almost pound for pound? The answer is that clearly it wasn’t. This means, of course, that the size of the deficit now is largely down to the recession and the fiscal stimulus package that prevented disaster turning into catastrophe. Without it, it is likely that recession would have turned into depression, but somehow the Coalition spin machine has successfully managed to make it appear that the medicine was the disease.

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This past week, both the Prime Minister and the Chancellor have taken to the airwaves to boast that the coalition government’s ‘tough but necessary’ action in tackling the deficit has pulled it out of the danger-zone in which it lay when they took office, at the mercy of the bond and currency markets who would not tolerate such levels of government borrowing any longer. On the Today programme on Monday, George Osborne claimed that as a result, Britain would be spared the fate of Greece and Ireland.

That comparison with Ireland followed the increasingly desperate news that the former Celtic Tiger is sinking further and further into the quicksand of a deflationary spiral; the more the Tiger lashes out, the further it sinks: further cuts in public spending will be undertaken in order to chase the tail of a deficit that is running out of control precisely because cutting government expenditure during a recession creates a ‘death spiral’, as the economist David Blanchflower calls it, in which the cuts put people out of work, which lowers aggregate demand, which lowers growth, which lowers tax revenues, which widens the deficit, which results in more cuts and so on. Ireland is clearly in that death spiral right now, so it is not surprising that the Chancellor tried to contrast its fate with that of the UK.

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So now we know the truth: the £6bn ‘efficiency savings’ the Tories promised before the election were calculated on the back of an envelope. It was clearly cooked up in the two weeks between the Budget and the announcement of the election, with the sole aim of giving the Tories some tactical room to attack Labour’s proposed rise in National Insurance contributions (aka ‘jobs tax’), whilst at the same time delivering a sleight of hand that would enable them to claim they were still serious about cutting the deficit without adverse consequences to ‘frontline’ public spending. Time and again during the leaders’ debates, when Gordon Brown accused the Tories of risking the recovery by cutting public expenditure this year, David Cameron responded by talking about ‘waste’ not ‘cuts’.

Well, the smoke has lifted and the lie is exposed. Whilst the Tories suggested that £1bn of savings could be found from efficiencies in government IT projects, the Treasury confirmed this week that the real figure would be £95 million – less than 10% of the figure claimed. Similarly the Tories suggested that £1bn of savings could be found by freezing civil service recruitment; the real figure will be £120 million, just over 10% of the saving claimed.

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