Tuesday, 6 October 2009

The 'c' word

In response to a comment on a recent post, I said that it disturbs me how quickly the political debate has moved from whether cuts in public expenditure are necessary to a simplistic demand that each party should identify its own list of cuts. In a specifically Welsh context, it suggests that we have already given up on two major battles, and I don't understand why people expect us simply to roll over like that without a fight.

The first battle is to ensure that cuts are made to major UK projects before turning to the services on which Welsh households depend. Trident, the new Royal Navy supercarriers, and ID cards are all examples which spring immediately to mind.

The second is the battle for a fair funding formula, under which Wales would get back part of the millions that we currently lose under the discredited Barnett formula.

But, looking more fundamentally than that, are massive cuts in public expenditure really as inevitable as the media and the London parties seem to be assuming? And if they're not, how has one particular view on the 'right' size for public expenditure come to dominate debate so rapidly?

There is, of course, no debate that there is currently a huge excess of expenditure over income in the public sector, and that that cannot go on indefinitely. But it is a big leap from agreeing that to agreeing that we need large cuts, or that we need them now. In reality, there are at least three separate elements to the budget shortfall, and in deciding how to achieve a balanced budget, we need to look at all of these in context.

The first is that there is a cyclical element. At a time of recession, government expenditure on benefits – particularly those such as JSA – rises, whilst at the same time tax revenues – income tax, company taxes – fall. Provided that there is an equivalent surplus during the 'good' parts of the cycle, this part of the deficit is not necessarily a problem, and should not, of itself, lead to a need to make cuts. It is entirely sensible to be borrowing at one point of the cycle and repaying at another.

The second is that there is a large 'one-off' element, in the shape of the billions used to bail out the banks after the collapse of the financial sector. How much of a problem this is depends really on what assumptions we make about how much of it we get back. Since much of it was used to purchase equity, then there is at least a chance that, at some stage, the government will be able to recover all or part of it by selling that equity if the share price should recover.

There's a political question, of course, as to whether the government should deliberately decide to retain all or part of its stake in some or all banks. The bottom line is that, in setting budgets and deciding on cuts, there is a judgement call to be made on the extent to which this money is gone forever and the extent to which it is a blip, albeit a very large one, to be covered by borrowing; and without being clear on that judgement call, using this expenditure to justify cuts is a bit of political sleight of hand.

And the third is the extent to which Government spending, even in the good times, has exceeded the income from taxation. This is where the real debate should be concentrating, but I have to admit that at present the size of this element is about as clear as mud to me, because it's confused by political point-scoring.

The Tories, of course, look simply at the grand total and claim that Labour have massively overspent; but that is a political rather than an economic judgement. It suits their agenda to portray Labour as profligate, and to quote the largest credible figure for the debt. Politically, they are pretty much hard-wired to see all public expenditure as being evil, even if in some cases it's a necessary evil. Labour on the other hand claim that they have 'invested' in improved public services, and spent twelve years trying to make up for the underspending of the Tory years.

I have more sympathy with the Labour viewpoint; but it tells me nothing about the affordability of that investment. They seem now to be admitting themselves that they have spent more than they could really afford based on taxation income; but my conclusion is that the gap is rather less than the Tories are claiming. Both parties have a vested interest in presenting the figures in ways that suit them; but that isn't necessarily conducive to constructive debate.

And, looking at the other side of the balance sheet, there is still a question of whether and to what extent any resultant deficit should be made up by public expenditure cuts or by increased taxation. Superficially, the evidence shows that people will support cutting public expenditure rather than increasing taxes at a general level; but the support doesn't necessarily turn out the same way if certain specific cuts are compared with certain specific tax increases.

What does seem increasingly certain is that whether the next government is led by Brown or Cameron, the block allocation to the National Assembly will be cut, and the One Wales government will be expected to reduce its expenditure to match. The size of that cut will vary according to the colour of the government, and until we know which changes to English public expenditure will have a Barnett consequential, any figure will include a significant element of guesswork.

It highlights, yet again, the problem with the way in which Wales is funded and the need for a proper parliament with fiscal powers, where we can take responsibility for the income side of the balance sheet as well as the expenditure side.

Against that background, demands that I, or Plaid, start spelling out a detailed programme of cuts is simply asking us to work to the Tory agenda. Our proper role at this stage is to defend the interests of Wales, not to spell out how we would implement the London parties' programmes.

Update: Hat tip to Change of Personnel for this link. I am not alone in challenging why so many are falling into the trap of accepting the Tory line.

10 comments:

Sweet and Tender Hooligan said...

An excellent and well thought out post.

The only part I take issue with is this;

"Against that background, demands that I, or Plaid, start spelling out a detailed programme of cuts is simply asking us to work to the Tory agenda. "

I dont agree, the public are very keen to understand how the Government is going to reign in debt. There is a feeling by many that spending has exploded, yet there is still a huge lag in the positive effects of that spending, leading to a weariness of 'investment'.

It is housewife economics to understand that when you have money to pay back, you have to go without things. Why the WAG should be immune from that is not really fleshed out in your post?

The funding issue is a national disgrace, agreed, but to shy away from telling people who we will seek to save money will back fire.

It is not about merely offering cuts, but about priorities. That is the different tack that needs to be taken - saying 'we will protect/increase such and such' is just as important as 'we will cut'.

John Dixon said...

Marcus,

I'm sure that you'll be less than entirely surprised if I continue to disagree with you on that. We can look at things at two levels - UK first, and then Wales.

At a UK level, there are some items of government expenditure which I regard as unnecessary whether affordable or not; and I've referred to some of those.

I've also said that I accept in principle that government expenditure is too high in relation to government income, and the balance between the two needs to change.

BUT, there are three decisions which need to be taken first. They are:

a) By how much do we need to close the gap? It is oversimplistic to say that there's a £175 billion shortfall which has to be plugged.

b) Over what timescale do we need to do the rebalancing? It does not have to be overnight.

c) To what extent do we close the gap by cutting expenditure ('cuts') and to what extent do we close it by increasing income ('tax rises')?

Whilst all three of these are clearly informed by one's view on economics, they are all, first and foremost, political decisions. The Tories (and the media) have very successfully managed to avoid discussion of these, and concentrate discussion on what must be cut now. That discussion effectively accepts the Tories' core assumptions in response to all three questions. What I am saying is that their assumptions in all three cases are open to challenge and debate; and if we simply start spelling out what we will cut, we are allowing them to go unchallenged.

At a Wales level, the One Wales government will face a budget cut imposed from London - a budget cut made on the basis of those Tory assumptions. The Government is already working on how it will divvy up the funds allocated to it by London in order to live within its budget; it has no choice. But to say, pro-actively, 'we can live without this' or 'we can live without that' is pretty close to saying that we don't need all the money anyway. So we should start by challenging the amount allocated, and the basis on which that has been decided.

Sweet and Tender Hooligan said...

Hi John,

Thanks for the response.

Look, I totally agree with your prescription for reducing the UK spend on the projects you outlined, the length of 'repayment' and the nature of how we deal with the deficit.

I merely argued that real terms cuts in the amount of money spent by the Government will have to be reduced, in Wales as in the UK. Although we both extol the virtues of not being part of the UK system, the reality is we are within it, and the public are of the view currently that we remain in it. Our enemies will paint this as 'Plaid blaming London', which despite it being false will be made with force.

There is a danger we dont have our cake and eat it. I mean, does Wales have a higher proportion of people receiving JSA than other parts of the UK? Is the money offered to Angelsey Aluminium 'welsh' money or 'uk' money? We do have to be balanced about this.

It is an oft used quote about socialism being the language of priorities, but it is rather relevant. The unfairness of the funding arrangement is a issue we must tackle with aplomb, but in the current climate, it is often a paralell issue, particularly with voters - tory narrative or not.

Anonymous said...

John, I'm with Marcus on this one.

Cameron has taken a bold move today announcing the pension age is to be raised earlier than expected. That could easily have gone wrong. But my bet is that people will think it's a brave and sensible point.

I take your point, but Plaid need to be saying some tough things. People just switch off when you talk of Trident, ID cards, Barnett etc. They know we can't deliver on pensions in the short term but they need mood music. They need to believe that yes, 1 - Plaid's policies wouldn't have got us into this mess in the first place but 2 - that can be trusted with their money and will not be weak and fluffy and offer more freebies and gimmicks.

I'm not sure Plaid have noticed the tectonic plates which are shifting. We've been right in our opposition to an economy built on house prices and the City etc but we need to be seen and heard and demonstrate that as well as making sure it won't happen again that we will spend a WAG budget sensibly.

Macsen

John Dixon said...

Marcus and Macsen,

One way or another, you both seem to be saying, and I hope that I interpret you correctly, that the 'mood' is changing; that people are expecting cuts in public spending and services, and that Plaid should join in that trend by spelling out a series of proposals of our own for cuts.

Up to a point, I agree with you about the 'mood' (or 'tectonic plates' as Macsen put it) changing, but we need to think about how and why it's changing; and we need to consider whether we respond by 'going with the flow' or whether we respond by challenging the basis of the change.

If I may draw a parallel, there was a similar apparent mood change in the late 1970's, when the Tories seemed to have won the argument about the public sector. They then spent 18 years trying to destroy it. If we allow them to win the argument again, there's a real danger that history will repeat itself.

There's a serious debate to be had about the extent to which the media leads or follows public opinion. When it comes to influencing voting intention, I suspect that it follows more than leads; but when it comes to the issue of public spending, I suspect that it has rather more influence - because the way the issue is reported comes across as news rather than opinion. It follows that we shouldn't necessarily assume that the agenda as reported by the media has the full support of the electorate - particularly the most vulnerable sections.

There is little doubt that 'Middle England' is moving to the Tories on a large scale. To what extent they also accept the Tories' argument about the public sector is more arguable, but I'm prepared to accept that the Tories are winning the argument in that sector of the population of the UK.

But 'Middle England' does not determine the outcome of elections in Wales. Our people are much more heavily dependent on the public sector. There is little doubt that the Tories will do better in Wales than they have done for some time; but I'm not convinced that they're winning the argument here in the same way.

They will however win the argument if those of us who should be challenging their assumptions fail to do so, and simply follow their agenda instead.

Be absolutely clear about this - although presented as a 'necessary balancing of the budget', the real Tory agenda is the same old agenda we've seen before: reduce the size of the public sector in order to reduce taxes, particularly the most progressive taxes, for their own natural support base.

Insofar as the 'mood' is changing, I really don't believe that people yet understand where this is leading.

Spirit of BME said...

Can I say something different - briefly I hope.The English Debt that will fall on Wales has not yet been defined.Things could deterorate if China stops buying US debt or OPEC demands a new reserve currency and drops the dollar.
The English parties must be thinking that the next election may not be the one to win ,as the new government will have to go ballistic on spending cuts and taxation- see what has happened in Latvia and Ireland- its not pay freeze but 10-15% cuts plus higher taxation for all.
If there is only a 20 seat margin between the largest party ,with the decisions to be made this could emplode any party and a "Loyal Opposition" could tear the relm apart.Betty Battenburg could well ask for a government of Unity for a set period of two years ,as she has to hand something over to Chuck and his son Billy.
As you know I left the Tory Party and joined Blaid many years ago and as a conservative I would have some points of difference in your post e.g.( but not exclusily) the first 2 points you make are not for the Welsh people to decide they are for the English Parlament.When it comes to "Welsh householder" you have to remember that they voted to be a part of England and as a consequence will get hammered.As a member of Blaid I hold no brief of sympathy for the Union or its good governance as many of the Friends of England (FOE) do in the Blaid, where in fact they could do a better job in any of the English parties, as Plaid is not kitted out for such a task. Plaid should remind the Welsh people of the real choice they have and stop talking about issues they have no power to control.

Illtyd Luke said...

I'm minded to side with John in this interesting debate. We shouldn't be sucked in to the UK level debate and the UK's spending priorities. The risk is that the British parties are deciding the terrain of the battle ground if you like, and we are walking into it.

I'd like to instead see some projections of what we could do to the Welsh economy to make fiscal and political independence more or less 'viable', including looking at the budgets of comparable small nations and the sources from which they derive their income.

A Change of Personnel said...

this is worth a read John, it puts the budget deficit into historic context and shows that within living memory the Government's debt ratio was 150% much more than it is a present.

http://www.ft.com/cms/s/0/4679c2be-aed0-11de-96d7-00144feabdc0.html?nclick_check=1

John Dixon said...

Illtyd,

Thanks for the support. I agree that the real economic problem which we should be discussing is about the low level of GDP per head in Wales; dealing with that is the key to the future size and nature of the public sector.

Change of Personnel,

Many thanks for the link. I hadn't read that piece. It's another challenge to the idea that massive cuts are necessary now.

Sweet and Tender Hooligan said...

Great stuff all round guys, food for thought.