by Jonathan Todd
Ed Miliband’s speech leaves him better defined. George Osborne will be hoping the same doesn’t happen to him today. Definition is the last thing he needs at the moment. His strategy is clear: cut long and hard. It is his plan b that is anything but clear. Many of Miliband’s economic themes also remain to be fully unpacked. Perhaps his most consequential line on the state’s size was:
“If this government fails to deal with the deficit in this parliament, we are determined to do so”.
“Deal with” in the next parliament might mean the elimination of the deficit, as this is the government’s objective for this parliament. I’ve mused on the present status of Labour’s commitment to halve the deficit in this parliament, as has Ed Balls. This interpretation potentially enforces more aggressive deficit closure in the next parliament under a Labour government than we are prepared to support in this.
This is one of various potential strategies for addressing Labour’s enduring perception of profligacy:
First, the past: apologise for “over spending” in government. More contrition for particularly egregious spending, such NHS IT procurement, might help. But, if adopted wholesale, this seems likely to play into the hands of George Osborne’s narrative that Labour “over spending” caused the problem that he is now “fixing”.
Second, the present: this encompasses at least three sub-variations:
a) Strongly sticking to the Darling plan. No backing away from halving the deficit over four years.
b) The Darling plan with colour. Halve the deficit over four years and be more specific about the tax rises and cuts that this would involve.
c) Match Osborne’s tax and spend plans to seek to politically neutralise the deficit.
We may no longer feel, given economic conditions, that these paces of deficit reduction are feasible. Additionally, in the case of c) it undercuts our increasingly justified “too far, too fast” argument.
Third, the future: committing to eradicate the deficit in the next parliament, if this is what we mean by “dealing with”, seeks to convince on the basis of future good behaviour. So does locking ourselves into spending rules enforced by the OBR. Most judgments are, however, formed on the basis of deeds, not promises. Even the most striking of promises, such as a definite commitment to eliminate the deficit in the next parliament, is heavily discounted.
None of the past, present or future strategies are without their potential pitfalls. Yet what is most inadvisable, in my view, is the “do nothing” strategy that the Times (28 September) reports one former Cabinet member favouring.
“If there is another crisis, all we have to do is not mess up and the public will reject the coalition”.
We won’t remove the perception of wasteful spending unless we are seen to have changed. Perhaps a radical fusion of the past, present and future strategies could demonstrate this change. This would pick up on Anatole Kaletsky’s suggestion that:
“Labour … must argue that Britain needs a new model of mixed-economy capitalism … To do this convincingly, however, Labour must acknowledge that government should shrink in many areas where its activities are intrusive, unnecessary or unacceptably expensive, such as the provisions of pensions and healthcare, even as public responsibilities expand in other areas such as financial regulation, income redistribution, education, energy and environment”.
This breaks the past, present and future strategies down into sector-by-sector a la carte offerings. As part of this, for example, we continue to show remorse for the state’s role in finance being less extensive in the past than it would be under a future Labour government. This sector-by-sector approach doesn’t, however, remove the need for hard choices. Being prepared to be up-front about some areas of state shrinkage is needed to ensure that the totality of those areas where we advocate a bigger role for the state doesn’t simply come across as imprudently grandiose.
While the Kaletsky approach wouldn’t allow us to avoid tough choices, it brings the advantage of tying our deficit reduction strategy to a more vivid story about the state’s role. Which seems more discerning. “The predators or the producers”?
It is basic economics that public policy should incentivise productive behaviour (the producers) and disincentive rent-seeking behaviour (the predators). Which is why taxing unearned wealth gains makes more economic sense than taxing earned income. As the leading economist Roger Bootle has written:
“Successful economies are characterised by harnessing of individual effort to the creation of wealth, to the benefit of all. Unsuccessful ones are characterised by individual effort being devoted to the distribution of wealth away from others”.
The latter have followed from corrupt governments in Africa, militant trade unions in 1970s Britain and, more recently, a financial sector “too devoted to the distribution of the proceeds, rather than the financing of wealth creation”. Some Labourites may be attracted to the perceived morality of the predator/producer distinction, but Bootle is no moralist.
Nonetheless, working from this robust economic principle to workable and widely understood policy will be challenging. Until we have such policy, many businesses may fear that Labour sees them as predators, not producers. This policy and clearer strategy on the deficit are needed to build upon Miliband’s speech.
Jonathan Todd is Labour Uncut’s economic columnist.
Tags: Anatole Kaletsky, deficit, Jonathan Todd, Labour economic policy, Roger Bootle
As a home ower, like millions of other Britons, I want interest rates kept low.
If Labour has their way borrowing would go up and interest rates almost inevitably with it. I’d lose hundreds of pounds each month in mortgage payment increases (so less to spend on the high street) and across the UK home repossesions would surge.
Of course homeowners aren’t Labour’s main concern are they?
From the Kaletsky approach: “Labour must acknowledge that government should shrink in many areas where its activities are intrusive, unnecessary or unacceptably expensive, such as the provisions of pensions and healthcare”
“Acknowledging the need to shrink the NHS” = quite awesomely bad strategy.
“Deal with” in the next parliament might mean the elimination of the deficit, as this is the government’s objective for this parliament.
Sufficiently ambiguous to mean anything.
Total deficit?
Structural deficit?
You’re guess is as good as mine.
This is one of various potential strategies for addressing Labour’s enduring perception of profligacy:
Spin and spin. What does the appearance matter when it was the reality?
You’re an economist. People have handed over thousands of pounds in NI for their state pension. The state refused to acknowledge that it owes people their pension. The reason is simple. It can’t afford to pay it.
Then there is the question of value for money for that NI. It’s awful. A person on 25K, median wage, would have had a pension of 21K a year if their money had gone into the FTSE. Instead they have 5K, and that is being reduced by increasing the age at which you can receive it. Over 3/4 of people who are far from rich has been taken by governments. Far from being the risky option, the FTSE is the safe option. It’s governments that are risky.
It is basic economics that public policy should incentivise productive behaviour (the producers) and disincentive rent-seeking behaviour (the predators). Which is why taxing unearned wealth gains makes more economic sense than taxing earned income.
1. To extract the most rent, you need a government that gives you the money. Given free choice people won’t choose the rent seekers.
Which is why taxing unearned wealth gains makes more economic sense than taxing earned income.
Again, completely wrong.
There are two types of spending, illustrated as follows. Spend the money on a cinema ticket. The money has gone, and the gratification has gone. Spend the money on a machine tool that produces income, and its there for the long term.
However, you’re only going to do this if you get a return, and the return has to cover the cost of the risk. What happens if it goes tits up and you lose the lot. However, that is rent seeking. You’re delaying your spending now, for spending latter, by investing in something that produces an income. By your definition rent seeking since you aren’t working, other people are working for you. So you want to tax those who invest and live off the proceeds. That’s not good for any investment.
For example, I’ve an idea with some friends for a company and between us we are prepared to risk a lot of money. However, we won’t. The reason is that you as a government want 50% of the profits and none of the risks. It doesn’t add up, given it is risky, and we could lose all. If we win, you take the majority of the benefits.
So we’re not going to, or since I’m the only Brit, it goes offshore.
Being prepared to be up-front about some areas of state shrinkage is needed to ensure that the totality of those areas where we advocate a bigger role for the state doesn’t simply come across as imprudently grandiose.
So what is it going to take?
150 bn deficit, on a spend of 700 bn.
22% cuts across the board, and still taxing people. In otherwords, a 22% rise in the cost of 50% of the economy. Another 11% on inflation.
That’s assuming that any growth obtained by delaying the pain by borrowing carries on.
I don’t think you, or the Tories or Lib Dems have a choice. It’s been pushed too far.
So what’s going to happen? Well, you’ve seen part of the future with Incapacity. No more largess for the Frank Gallagher of this world, and collateral damage to others.
Next it will be the really big debts, Maddoff’ed off the books, pensions.
Means testing the state pension? Yep, a racing certainty.
Civil service pensions? Yep those too. Caps on council payments to their pension black holes? Again that’s on. After all, why should the tax payer have to pay 20,30, 40% extra for services they aren’t getting, and the people who received them didn’t pay for. Or if you like, why should children be born into state debt?
Not only was the economic argument poorly done in Ed’s speech.
But Ed (and Maurice) have barely scraped the surface of (and do not appear to understand) the fundamental economic argument.
@GuyM
You speculated on property (?) and now expect the tax payer to maintain your paper gains, or reduce your outgoings (why not the poor or public at large ?).
All Governments are obsessed with Homeowners. You were bailed out along with the Banks, it is how the Ponzi scheme works.
p.s.
Really going to hibernate now.
Sadly I have no idea who labour are working for it’s not me that’s for sure.
So I’m banned then. ok says about all I want of labour