Monday, 4 July 2016

Trashing the (recent) past

It seems like only yesterday that Cameron and Osborne were telling us that cutting the deficit was an absolute priority, and that we really had no choice.  The rest of the Cabinet duly fell into line, parroting the same phrases on a daily basis.  I don’t remember this imperative being predicated on any particular set of economic or political circumstances; indeed, they even wanted to make it a legally binding requirement on future governments.
Within days of the referendum, the date by which this absolute imperative has to be achieved had been postponed, and now we learn that the Chancellor is planning to cut the government’s income by slashing Corporation Tax (although who knows whether he’ll still be in post long enough to implement the change?).
In the meantime, Stephen Crabb, one of those colleagues who have sat around the Cabinet table with him and duly repeated the mantra about needing to reduce the deficit, has proposed borrowing an extra £20 billion a year for five years – increasing the national debt by £100 billion – to fund infrastructure projects if he is elected as party leader and prime minister.
I don’t actually disagree with the Crabb proposal at all; and in principle, I don’t disagree with cutting Corporation Tax either (my reservations are to do with whether there are adequate controls to make sure that the monies saved are reinvested in expansion and job creation rather than taken out as higher salaries and dividends; something which isn’t at all straightforward to achieve).  The point is, though, that the way in which they can so easily backtrack confirms what some of us have said all along – deficit reduction is an ideological imperative, not an economic one.
There is not, and never has been, a problem with government borrowing, and there is not, and never has been, a magic number at which point borrowing becomes unsustainable.  Sensible pragmatic economic policy borrows when rates are low; it is ideology which dictates that borrowing is inherently bad.  National budgets are not like household budgets.  I’d like to believe that they’ll stop spouting nonsense about repairing roofs while the sun shines or maxing out the national credit card, but that might be a bit too much to expect.  We’ll have to settle for the tacit admission that they were just plain wrong all along.


Anonymous said...

You are right, there is absolutely no problem in borrowing money if you are responsible for printing it too. The only problem comes when you have to pay it back. But that's okay, you can just print some more.

But this sort of thing does have consequences. And, especially so if no other major countries in the world are doing likewise. Permanent and persistent currency devaluation.

Just prior to BREXIT it took a little over 70 pence to buy one Euro. Post BREXIT it takes over 84 pence. But as Harold Wilson said, "It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."

One has to wonder why every country isn't at it. Perhaps it's because it hits the poorest in society first and hardest.

Anonymous said...

Who says austerity is over, with UK debt reaching 100% of GDP, the billions wiped of the FTSE and banks almost certain to move to Frankfurt, Dublin etc to stay in the EU, who or what is going to make up the tax shortfall for HM Treasury?

No one has a clue what the UK economy will look like in 2 years after negotiation or how badly the damage from Brexit will be. All we know is that Wales will suffer even more than it is already because of a chronic lack of leadership.

And what does London become without the finance centre, a tourist museum?

John Dixon said...

Anon 14:10 - The ability of governments to borrow has no direct relationship with their ability to print money, and it's oversimplistic to conflate the two. As long as people are queueing up to lend the moeny at very low interest rates, it makes eminent sense to borrow to invest. Paying it back isn't necessarily the problem as which you paint it; it depends on a range of factors including the level of economic growth and inflation.

"One has to wonder why every country isn't at it" - take a closer look; many of them are. Let me repeat: austerity and debt reduction are ideological drivers, not economic ones. I'm not sure what you believe "hits the poorest in society first and foremost", but I think the answer to that question is austerity, not borrowing.

Anon 15:53 - I entirely agree that "no one has a clue what the UK economy will look like in two years" although I'm not sure that that would not also be true without Brexit. It's true of course that the speculators and gamblers have caused huge swings in the stock markets and the exchange markets as they try to leverage some profit out of Brexit - but I don't think that immediate short term volatility tells us anything about the long term effect. It will take time for things to settle down - and perhaps they won't settle down until the final terms are clear - but eventually a new 'norm' will emerge. And nobody currently knows what that level will be.

Anonymous said...

I think you would be wise to remember that devaluation imports inflation. And imported inflation can't be controlled by anything other than relative currency values. It's a great shame that these days we make almost nothing. But we assemble a great deal using components manufactured in other parts of the world, all of which need importing!

Look at Spain. In former times Spain would have devalued its currency to get out of its economic woes. Ireland and Portugal too. But these countries no longer have the ability to devalue. The EURO forces them tough it out, to get their economies back in shape by other means .... by improving productivity, by cost cutting and the by search high and low for inherent efficiencies.

Of course it has been painful, particularly on the poor and the young. But there haven't been mass protests, governments haven't been brought down, democracy has prevailed. And now unemployment figures are coming down, real wages are rising and the future appears much brighter. But it's a lesson every citizen will never forget. And a repeat of such profligacy is unlikely this generation. Just ask the Greeks.

Now compare this with happening here in the UK. No lessons have been learnt, no improvements or adjustments to the economy have been made, everything and everyone is trying to get back to how it was before. Indeed, with more government spending in the offing we might even say 'better than how it was before'. But that's devaluation for you. It's a continuing game of ups and downs on a downward slope.

The problem is it leaves us all poorer and it leaves the poor very much poorer. And jobless. But that okay, they've only got one vote too!

John Dixon said...


You're building a very large edifice on a very small foundation here; you've either misunderstood or chosen to ignore the point that I was making. That was, very simply, that austerity and deficit reduction are not economic imperatives, they are choices. In the case of Osborne and Cameron, they're choices based on ideology, and then presented as axiomatic necessity. But, as we've seen since the referendum, they are in fact optional.

Now, neither I nor anyone else (as far as I'm aware) is suggesting that borrowing without limit regardless of the circumstances is a sensible economic strategy; what I am saying is that whether, when, and how much we should borrow is ultimately a judgement call. There are no definitive answers to any of those questions, but some politicians assert that there are. I don't know what the limits on borrowing are - but then, whatever they may say, neither does anyone else. Only when we accept that lack of certainty can we have a sensible debate about economic policy. You seem to be amongst those who claim to know with certainty what happens.