Thursday, July 29, 2010

Labour Campaign for Deeper Cuts

Yes you read that right. With the Labour leadership contenders still in deficit denial. With Ed Balls blaming Darling for losing the election over his (limited) honesty in admitting the extent of cuts that would be necessary, it is worth reminding ourselves what borrowing means.

The longer we take to balance the budget, the more money is borrowed on the way, and the bigger the national debt we end up with. A bigger national debt means more spending on interest instead of public services. So if your policy leads to a bigger debt than the other lot, the in the long run you are the attacker not the defender of public services.

Now this is an "all other things being equal" kind of argument. A bigger debt might be worth suffering if it came with a sustained boost in economic growth. But growth was already 1.1% in the last quarter. To practise deficit denial today is not to argue for a fiscal stimulus during a recession, but for heavy borrowing through much of the economic cycle.

The tragedy is the New Labour came to power in 1997 on a manifesto of fiscal prudence in the face of a Conservative government that was borrowing during boom times. (Borrowing heavily we might have said, but peanuts compared to today's borrowing.) It was a good policy, and a tragedy that they forgot it after a term and a half.

Now Labour expect another government to take the hit of raising taxes to pay for their splurge of public spending. Any other government would be within its rights to cancel the lot rather than raise taxes - and an ideologically small state government would cancel it all, and some, and cut taxes. That isn't happening. Taxes are going up so that some of the unpaid for spending can be maintained, and by 2015 there will still be higher spending than there was in the Blair years. 

What's more after decades of flip flopping between Labour stealth taxes on everyone (particularly the poor), and Tory tax cuts for the better off, we are finally seeing movement on the personal allowance, shifting a little of the burden away from low earners. Labour never did anything like that. Remeber the 10p tax rate? However much the Labour leadership candidates froth about public services and progressive values, we know them by their deeds.


MatGB said...

Hmm, I don't disagree with you, but there is a counterpoint:

"if your policy leads to a bigger debt than the other lot, the in the long run you are the attacker not the defender of public services"

You allude to this slightly in the next paragraph, but if the extra spending as recovery kicks in then boosts the economy creating much faster growth, then in real terms the value of the debt is reduced substantially.

I a person on £10K PA borrows £5K to set up a business, and that borrowing allows them to improve their income to, say £25K, then their level of debt has gone from 50% of their income to 20% of their income. Most of the massive growth in spending over the last 13 years came from increased tax revenues from growth.

Bring growth back quickly, then you can pare down the deficit simply by using the increased revenues, etc.

This is something, with their "household budget" crap that some Tories simply don't seem to grasp. But LAbour seem, in opposition, to be refusing to grasp the scale of the problem.

I think the truth is somewhere in between, we argued the Tories down from massive cuts to slightly-less-than-massive cuts (with £1bn of the £6bn being reinvested elsewhere, etc), but I don't know where the right line to draw is.

I'm certain that we're a lot closer to it than Labour were planning, but it's probable that we're still going slightly too far. Don't know though.

And, importantly, impossible to know. Counterfactuals are grand.

Still, in 4.5 years, if Osborne does a Lawson style electioneering budget, we'll know he was right. Which sorta scares me...

Joe Otten said...

I take the point about the household budget crap. If this were a household budget we'd pretty much have to balance the books today, and have a plan for paying off the debt. As it is we have only a plan to balance the books and will never pay off the debt.

Governments can sustain some borrowing over the cycle - and Brown's Golden Rule was (only) a little stricter than necessary - because growth will keep the value of that debt as a proportion of GDP in check. The trouble is we are borrowing way way more than that amount. Increasing the national debt by (off the top of my head) 20% per year. No realistic amount of growth would keep this debt in check.

And given that such debts are never paid off this borrowing represents a permanent addition to the interest burden, i.e. to the taxes that don't get spent on services.

And the economy is growing - not as fast as we would like, but when is it? Wanting faster growth doesn't justify borrowing for fiscal stimulus even when there isn't a structural deficit, never mind an enormous one.

Yet the context here is that the government will still be borrowing to spend enormous amounts of money, this year, the next, and the year after.