Ducking the question

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Last week, the Institute for Government published a ‘helpful’ paper setting out the difficulties which independence would bring for Scotland or Wales. Well, ‘helpful’ to unionists who were just looking for a headline figure with which to attack the independence cause. In fairness, the detail of the report does accept that after independence Wales and Scotland might choose different patterns of spending which would affect the calculations and thus the headline figure. And there is some useful analysis of the different pattern of revenues raised by different taxes in the constituent parts of the UK. But the headline figure on which the unionists have seized is very clearly drawn from a number of key assumptions:

·        That the independent administrations continue with the same patterns of taxation and expenditure as at present

·        That the estimates of tax raised and expenditure undertaken are largely correct

·        That fiscal deficits are generally a bad thing and that having a higher budget deficit as a proportion of GDP than the UK currently operates is ‘unsustainable’

·        That independence brings no other economic benefits

·        That the newly ‘independent’ countries continue to use sterling rather than establish their own currencies (not stated, but implied)

It’s easy to see why anyone would use those assumptions as a starting point, because there are at least some known or almost-known figures to use as a basis, but whether precisely aping the current UK’s priorities and approaches really counts as a meaningful form of ‘independence’ is a question which doesn’t really get asked. And starting from those assumptions predetermines the outcome: if the assumptions are all valid it’s hard to argue with the headline conclusion. The question, though, is whether (or to what extent) those assumptions are a valid basis for drawing conclusions about an independent Wales as opposed to a devolved Wales.

There are plenty of examples of English / UK priorities which an independent Wales might choose not to copy. Nuclear weaponry is one of the most obvious examples: the headline conclusion that Wales is unviable without tax increases or spending cuts includes the implicit assumption that an independent Wales would continue to pay for England’s Trident replacement programme. Those who claim Wales is unviable without receiving fiscal transfers from England are, in effect, telling us that an independent Wales couldn’t afford to pay 5% of the cost of England’s nuclear weapons unless England ‘generously’ gave us the money first. “Why on earth would we want to?” is a much more appropriate response than “This proves we need English money”. To generalise the point: we are being told that we can’t afford to pay England for things we neither want nor need unless England gives us the money first. It’s impossible to disagree with that, but it doesn’t do much to advance the state of human knowledge.

It is impossible for anyone to produce an accurate analysis of the fiscal position of an independent Wales, not least because that depends more on the policies adopted by the newly-independent state than on the fact of independence itself. A Labour-run Wales would not be the same as a Tory-run Wales, or a Plaid-run Wales – and the fiscal impact of those different perspectives would only increase over time. (It’s worth noting that the same applies to the UK – no government has shown that it can even accurately predict the fiscal impact of its own policies, let alone those of other parties.) It follows that anyone who claims, with absolute certainty, that Wales would be a basket-case economy – or, alternatively, that it would immediately soar to the top of the world’s rich league – is talking nonsense. They simply cannot know. What we can analyse, with the benefit of hindsight, is the experience of other countries which have become independent and followed their own paths. Unsurprisingly, it’s an overwhelmingly positive picture. What the unionists need to tell us (but can’t) is why they believe that Wales and Scotland are somehow uniquely unable to follow so many other countries of similar size which have become so successful. Using a set of obviously invalid assumptions to predict the future is a woefully inadequate response.

Abject drivel is too kind a description

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In the light of the Chancellor’s statement earlier this week, there has been a lot of coverage of the scale of the UK’s national debt, with speculation about how and when it is to be repaid. The media have aided and abetted the government’s ideological nonsense about ‘unsustainable’ levels of debt, and the BBC have unquestioningly parroted the same line. Chris Dillow takes the BBC’s political editor, Laura Kuenssberg to task for her claim that the UK’s credit card is “absolutely maxxed out”, describing it, entirely reasonably, as “the most abject drivel”, before wondering “how can any sentient being utter something so stupid”, and going on to explain why it is so wrong. And Professor Richard Murphy also has a useful short video explaining why government debt is not like a mortgage or credit card.

The BBC compounds its error in this article which purports to ‘explain’ the debt and its consequences, which includes the statement that “This year the Bank [of England] is buying £450bn worth of bonds, which makes it much easier for the government to borrow money”. The problem with that statement is not that it is inaccurate, but that it is only half the story, and it’s the missing half which is important. Anyone who really wanted to understand and explain what was happening here would go on to ask the obvious supplementary question – ‘so where does the BoE get the money to buy those bonds?’. The answer is that it simply creates that money, magicking it into existence by pressing a few keys on a computer at the behest of the government. I understand that it’s counterintuitive to believe that money can just be created at the press of a button, but it is the reality of a fiat currency like sterling. As the Bank is a wholly owned subsidiary of the government, money owed by the government to the BoE is effectively money owed to itself.

As a result of the programme of QE which started with the financial crash in 2008 and has been stepped up during the pandemic, the government now ‘owes’ some £875 billion – or 40% of the total national debt – to itself. It’s nothing more than a book-keeping nicety to describe this as being, in any meaningful sense, ‘debt’. Yet the allure of the comparison with a household’s credit card is so strong, so all-pervasive, that people are willing to swallow it hook, line, and sinker – and tolerate the pain which the government plans to impose on the least well-off in society to repay the debt to itself. ‘Abject drivel’ is far too kind a description for the BBC’s coverage. It would also be an utterly inappropriate label for the claim by politicians that the debt is ‘unsustainable’. Whilst the journalists might merely be suffering from ignorance or a lack of awareness, the politicians are guilty of deliberately misleading in order to promote their own view of the role of the state and the interests of the wealthiest. They must not be allowed to get away with it.

Time to stop believing the lies

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The latest (was it the eighth since November?) budget from the Chancellor was a tame and inadequate effort – like many others, I suspect he’ll be back for his ninth, tenth and eleventh efforts within the month when it becomes clear just how much of an unemployment disaster is facing us. The tame and inadequate nature hasn’t stopped the fans of austerity – who believe, in essence, that the poorest should be the ones to pay for everything, by cutting services, pensions and benefits – who are at it already, saying that all this money will have to be paid back at some point. The IFS were at it yesterday saying that the debt will take decades to repay, and the warnings about pensions and services were delivered in sombre tones by the chief spokespersons for the government, otherwise known as BBC reporters.

I actually think that ‘decades’ is exceedingly optimistic – centuries would be closer to the mark. But here’s the thing – it really doesn’t matter. It’s true that the government has ‘borrowed’ a lot of extra cash as a result of the pandemic, but it’s ‘borrowed’ that money from itself. The Bank of England has simply magicked the money into existence (under the instructions of the Treasury which owns 100% of the Bank), placed it into the government’s accounts with a few deft keystrokes, and set up a loan account which nominally needs repayment at some future date. The Bank can continue to magic money into existence as long as, to simplify somewhat, one basic condition is met: there are sufficient spare resources in the economy such that inflation does not result. With potentially 6-9 million likely to be unemployed within a few months, resource shortage is the least of the worries.

Those who demand a timescale for repayment of the deficit argue that it’s currently at ‘too high’ a proportion of GDP – but there is no agreed definition of how high is too high. And there can’t be, because that limit is not an absolute one, it depends on a whole range of factors, all of which are variable. As far as I’m aware, no-one argues that the Japanese deficit is unsustainably high. It’s certainly higher than many would like, but it’s been above 100% of GDP for the last 20 years and is currently approaching 200%. No-one is panicking about that. The UK reaching 100% may also be higher than many would like (although it’s actually a lot lower if we don’t count the magic money which the government ‘owes’ itself) but there’s nothing especially sinister about 100%, other than being a nice round number. It’s ideology, not economics, which demands that the least well-off suffer to reduce the debt as a proportion of GDP – ideology based on protecting the interests of the owners of capital first and foremost.

There’s been another lie associated with the deficit in recent days too, when the PM said that it was “the might of the UK treasury” which set up the furlough scheme and distributed cash to all parts of the UK economy. It was intended as a rebuke to the Scots, implying that they could not have afforded it themselves, and as though the money that they have created belongs exclusively to the government which is generously sharing it with other parts of the UK. (Well, some of it, at least – those parts which aren’t simply being doled out to cronies.) It’s utter nonsense, as one might expect in relation to anything issuing forth from the Johnson word mincing machine.

It’s true, of course, that a larger economy can generate more financial resources at a time of crisis than can a smaller economy; but it’s also true that a smaller economy needs fewer resources as well. Asking whether an independent Scotland (and the same applies to Wales) could afford to create enough money to meet its own needs is a silly question – asserting that it can’t is assuming that Scotland would somehow be unique amongst all other states in the world. In fairness, however, I don’t think that’s the assumption that Johnson and his gang are making – they are actually making a rather different one, which is that England is uniquely able to do things which no-one else can do. In that exceptionalist mindset, evidence to the contrary doesn’t count, and since we can learn nothing by looking at what anyone else does, we can simply assert that they can’t do it. It’s a message which works only so long as the Scots (and the Welsh) are stupid enough to fall for it. Like austerity, which also only works because people have fallen for the ‘household budget’ analogy.

They want us to believe that they are maxing out the credit card so we don’t spot that they are actually maxing out their own credibility. It’s proving less and less effective in Scotland – it’s about time that we started to catch up.

Ideology succumbs to viral infection

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One of the emerging themes of the current crisis is the way in which the Tories are abandoning past positions one after another as reality shows that they were never as necessary as had been claimed.

In his first budget last week, the Chancellor abandoned all pretence that there was ever any necessity to plan for a balanced budget within a specified time scale – or, indeed, ever.  It was always an ideological choice.

In his second budget yesterday, he abandoned the claim that ‘there is no money’, demonstrating instead that there’s as much money as we need.  (And it’s a pretty safe prediction that he’ll do that on an even greater scale in his third budget, which will probably be delivered within a week when the flaws in yesterday's become more obvious.)  

He also abandoned another ideological pretence that was used to rubbish Labour’s nationalisation plans in the recent election, even if he didn’t put it in such blunt terms.  There is a great deal wrong with his plans to make £330 billion available for loans to businesses, even if there were a thought-through process for applying, which there isn’t.  (Prof Richard Murphy explains in detail here why it would be illegal under company law and the Insolvency Act for companies to borrow money when they are already, or are about to become, technically insolvent.)  The Chancellor claims that this money makes no difference to the government’s total debt because the expenditure is balanced in the accounts by an ‘asset’ in the form of debt to the government by the companies which are expected to repay any sums loaned.  The wonders of double-entry book-keeping!  They argued during the election that a Labour government could not afford to nationalise any large companies (and I leave to one side here the question of whether that is actually desirable; I’m purely looking at the political economics) because it would increase the national debt.  In truth, of course, any ‘debt’ incurred to buy companies would be matched by an ‘asset’ and would therefore make no difference to the overall total debt – as the Tories have now effectively admitted.  The main difference between the two is that Labour’s plans would have involved real, tangible assets to balance the expenditure, whilst the Tories’ plans involve a whole pile of notional debt, much of which would never be repaid.

And then there’s the appeal, entirely correct and justifiable, by the government for shoppers to be less selfish and to think of others, especially the most vulnerable.  But this is the party which – aided and abetted by ‘New’ Labour, it should be said – has been telling us for the last four decades that ‘the markets’ will solve all problems, that individual actions in pursuit of individual interests are what drive the economy, and that, dare I say it, ‘there is no such thing as society’.  It turns out that, in a crisis, co-operation and collectivism make for a more resilient and kinder society than competition and individualism.  Who'd have guessed it?

I suspect that current events are something after which ‘normal’ will look very different from what ‘normal’ looked like just a few short weeks ago.  The same is true of ideology – as long as we all remember the lessons learnt.  It might be a crisis which is exposing the failure of an ideology, but it was failing anyway, just less obviously.  We can hope to minimise the number of human fatalities caused by coronavirus but let no-one grieve for the ideology to which it is also delivering a series of, hopefully fatal, blows.

A simple fiscal rule

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I mentioned yesterday the way in which party manifestos have been criticised by various think tanks over their tax and spending proposals.  It has unfortunately become widely, but erroneously, accepted that government spending is like household spending, and that governments should only spend money which they have first raised through taxation.  For the last few elections, all three of the main UK parties have taken this as being close to gospel and criticised each other for any apparent mismatches, elevating the elimination of the surplus to almost a fetish.  It’s been strange, though, that although it’s the Tories who have pushed this approach most, it is the Tories who also, in practice, have regularly ignored this ‘requirement’, pushing the date at which the budget is balanced ever further into the future, whilst Labour have, rather foolishly, allowed their own economic policies to be defined by this crude and unnecessary approach.  The Tories set a trap and Labour fell for it – maybe not so strange after all, then.

Things look different in this election – the rhetoric about ‘fully-costed’ manifestos is still there, but it all seems half-hearted given that the Tories have thrown their own rules to one side and decided to simply spend more.  Only the Lib Dems are still really hung up about the mad demand that the budget should be balanced, leading them to propose what is probably the stupidest economic policy ever put forward by a major UK party, that the government should run a permanent surplus on its current expenditure budget, regardless of the circumstances at the time.  Richard Murphy sets out some pretty trenchant views on the proposal here, and has a nice graphic from Deficit Owls asking why politicians want to push people into debt here.

There is, and never has been, any need to keep the government’s spending in balance; it is the economy as a whole which needs to be in balance, bearing in mind the various sectors.  The concept of sectoral balances is explained well here with a particularly good graphic, but in essence, a permanent public sector surplus requires a permanent deficit elsewhere, and that essentially means businesses and individuals in the private sector.  Anyone arguing for a public sector surplus needs to be able to explain why a private sector deficit is a good idea, and that’s not an explanation that I’ve heard to date.

All the parties are keen on having, and being seen to have, a set of ‘fiscal rules’, but in practice these are largely ignored.  They’re just window-dressing as an alternative to trying to explain why things don’t work that way.  In reality, the only fiscal rule any government needs is one that says it will do what it considers appropriate in the circumstances which exist at the time.  That’s not much of a rule at all, but any other rule is just a means of trying to hide the fact that government spending is more a matter of ideology than economics.

Trashing government economic policy

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Since Cameron was first elected in 2010, the orthodox economic policy of the Conservatives has been that the budget deficit must be first eliminated and then turned into a surplus so that the national debt can be repaid.  This is one of the few things on which they have been entirely consistent from the outset – the only changes to the policy have been in relation to the timescale.  The glorious days of surplus are continually pushed further and further into the future.  The Labour Party, partly out of fear of being branded financially irresponsible, but mostly because they suffer from the same version of economic dogma as the Tories, have supported the same aim of deficit reduction differing only at the margins on issues such as the balance between tax rises and spending cuts.  They share the same key aim of deficit reduction as the Tories.

Whilst there is a sensible argument to be had about what the appropriate level of deficit (and debt) should be in relation to GDP, and about the timescale over which any change in that ratio should occur, the underlying assumption (that the government should aim to ‘balance the books’) is, and always has been, complete nonsense.  As history shows, a budget deficit is the norm, and depending on the rates of growth, interest and inflation, a continuing deficit is entirely sustainable.  Indeed, since (as all accountants will realise) the net level of borrowing in the economy must effectively be zero, a public surplus can only be financed by debt elsewhere.  And it is noticeable that, as the public deficit reduces, household debt is – as one would expect – increasing.  What looks to the government like debt appears to those of us with pension funds to be investment, and there is still a queue of people lining up to lend their money to a government which is increasingly unwilling to take it.

The deficit fetishism of Tory and Labour alike is what leads to the policy of so-called ‘austerity’, and, as ever, it is those at the bottom in economic terms who suffer most, whilst those at the top are able to protect themselves or even further enrich themselves.  It isn’t the only possible approach, no matter how many times they argue that ‘there is no alternative’.  In an attempt to regain the momentum which his leadership campaign has so carelessly thrown away, Boris Johnson has this week suggested what is presented as an alternative approach, namely to slash taxation drastically.  He doesn’t say, of course, how he would pay for this, but his comparison with the Trump tax cuts in America at least suggests that he is supporting a huge increase in public debt.  If that’s what he really proposes, then it really does trash the policy which he and his party have been supporting for the last 8 years.

Whether it would work or not is another question entirely.  For some the jury is still out; the US economy may appear to be booming, but the extent to which that is down to the tax cuts is arguable at the least.  What we do know is that corporations and the wealthy have benefited tremendously.  It’s a policy which treats ‘trickle-down’ – the idea that if the wealthy have more money, then everyone else will also benefit eventually – as an article of faith rather than depending on any evidence of wider benefits.  It does, though, benefit the likes of those who advocate such a policy and those who move in their immediate circles; they have a large personal incentive to be true believers.

But, if reducing the deficit quickly and immediately is not the absolute priority as which it’s been painted, there are other ways of managing the economy.  Portugal is an interesting case in point.  Instead of following a policy of cutting spending, the Portuguese government has chosen to follow a policy of investing more in public infrastructure.  Not only has it boosted the Portuguese economy, it has also provided another route to deficit reduction as well as reducing inequality and promoting economic growth.  Those who consider all state spending to be inherently a bad thing start with an ideological perspective which blinds them to the possibility.  But state investment can, ultimately, generate more in benefits and revenue than it costs.

It’s a lesson that I don’t expect the Tories to ever be able to learn, and even Labour seem to be struggling with it.  There is also another lesson here for Labour in particular: Portugal’s membership of the EU hasn’t prevented them from following an alternative path.  The EU’s rulebook does not preclude the sort of state action which they have taken, yet the belief in some Labour circles that the EU places such constraints on member states is what leads them to support Brexit.  It’s an idea which is as divorced from reality as deficit fetishism itself.

It's about politics, not finance

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The news of a huge boost to NHS spending is something to be welcomed for two reasons.  The first is that it is clearly badly-needed.  The NHS has been struggling for years, and at least part of the problem has been caused by government spending restrictions.  It’s not just a question of money, though, and simply diverting an arbitrarily-agreed extra lump of cash won’t necessarily be any sort of panacea, given that the sum has been arrived at more through political calculation than from any assessment of actual need.

But in some ways, the second reason for welcoming the extra cash is the more important, because it is the implicit recognition that so-called ‘austerity’ is – and always was – a political choice, not a financial necessity.  Nothing fundamental has changed in the UK economy – indeed, if anything, the economy has weakened since ‘austerity’ was introduced; yet suddenly the government declares that it can somehow find an extra £20bn a year for England with corresponding increases for the devolved administrations.  The simple truth is that if they can do this now they could have done it last year, or the year before – or indeed at any time since being elected.

The Prime Minister claims, of course, that this is the redirection of what she calls the ‘Brexit dividend’.  The idea that any such dividend exists has been well and truly debunked many times, including by an MP from her own party who described the claim, quite rightly, as ‘tosh’; and even if there were any such dividend, it would not become available until after the period in which the spending is to be increased.  She was, unsurprisingly, vague about where the money will actually come from, not because she doesn’t know, but because she doesn’t want to admit it.  It will inevitably come from a combination which involves taxation, borrowing and, of course, the ‘magic money tree’ which she knows exists but whose existence she continues to deny.  The same methods used for all government spending, in fact.

It’s not yet an explicit admission, but it’s certainly an implicit one – the government are publicly recognising that we can have the health service that we need; it’s solely a matter of political will.  Or, perhaps, in the Tory case, of political fear of the consequences of not doing something.

Policy, not money, is the main problem with the NHS

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One recent response to the problems of the NHS has been the call for an extra penny on tax to provide more funding.  I don’t doubt that many will find this an attractive idea, and it’s certainly one way of ‘selling’ a tax increase, but I’m not convinced.  An extra 1p on all rates of income tax would raise an estimated extra £5.5 billion a year, or around 3.5% of the total health spend.  That certainly looks like a lot of money (although a cynic like me would point out that it is less than a third of the bonus which the NHS was allegedly going to get from Brexit: that infamous and largely imaginary £350 million a week works out at £18.2 billion a year).

However, I’m dubious about the idea of hypothecated taxation, particularly when the hypothecated tax in question only funds an ‘increase’ in spending.  I don’t trust governments to use the extra cash in the way that those supporting such a tax increase would prefer beyond the first year.  It would be very difficult to prove that the whole of the money raised by the extra penny was actually being used on the NHS, given that the bulk of NHS spend would still be coming from ‘other’ taxes, and the amount of that spend will vary.  And with a total budget of around £147 billion, it doesn’t take many years of a stagnant base budget for the ‘extra’ £5 billion to disappear, even if inflation remains very low.  I’m also not convinced that the problems with the NHS are as simple as a need for extra money (which is not to say that extra money isn’t required).  There are other policy issues as well.

But my main reason for disliking this proposal is that it reinforces and perpetuates the myth that the problem with public services is that the government doesn’t have enough money to meet the needs of citizens.  The prime constraint on the amount of money provided to the NHS by the government isn’t affordability, it is policies and priorities. For all the fine words uttered by ministers about the NHS being a national treasure and ever so close to their hearts, their actions don’t match those words; they choose to follow a policy of reducing overall expenditure rather than one of providing necessary services.  The obsession with balancing the budget is based on ideology, not economics.  And the fact that it isn’t a necessary policy objective is underlined by the continued ‘adjustment’ (i.e. deferral) to the timescale for achieving it.  We can fund a proper health service if we want to, without gimmicky proposals like this one.

The losers will still lose

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I’m sure that I have more than a vague memory that in the last two UK general elections the winning party told us that eliminating the deficit was absolutely essential and that the sky would fall in if we didn’t.  Something along those lines anyway.  After the first of those elections, they told us it would have to be done by the end of that parliament, and their then best mates the Lib Dems agreed with them, albeit whilst quibbling about some of the details.  And after the second of those elections, they told us it would have to be done by the end of this parliament, and that it would be a lot easier without needing to have those little quibbles with their now former best mates.

Yesterday, they told us that actually, that wasn’t necessary either, and it doesn’t matter if the target isn’t achieved in this parliament – indeed, it doesn’t even matter if there’s no longer any particular target date.  Inevitably, they are blaming – in part, at least – Brexit, the argument being that a change of circumstances leads to a change of policy.  The funny thing is, though, that I don’t remember them saying in either of those two elections that there was any dependency on any particular set of circumstances or events; the need was both pressing and absolute. 

Those of us who suggested that this was all much more to do with ideology than economics were dismissed as spendthrifts, and the media – particularly the BBC – did its bit to support what was then the orthodox position by hostile questioning of any politician who had no plan to eliminate the deficit.  Labour, as usual, caved in to that pressure and agreed that the deficit needed to be eliminated, arguing only about the timescale and method.

But what yesterday confirmed is what some were saying all along.  Firstly, the deficit isn’t something which exists in splendid isolation regardless of economic circumstances – its existence and size inevitably vary over time depending on the point in the economic cycle.  It was always economic madness to seek to eliminate it at a time when the economy was weak.  And secondly, the government’s finances are not like those of a household.  Within limits, it really is possible to run a deficit more or less indefinitely, depending on a range of factors including the rate of economic growth and the rate of inflation.  I can understand why that ‘feels’ wrong to so many people, but ‘feeling’ wrong doesn’t make it actually wrong.

Blaming Brexit is something of a soft option, allowing the government a fig leaf to cover a policy U-turn.  But it’s only a partial U-turn, in the sense that whilst policy towards running a deficit has changed, policy on who should benefit from government actions – and who should pay the costs – still looks remarkably consistent with that of the previous government.  On that score, only the rhetoric has changed.

Trashing the (recent) past

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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.

Truth, proof, and piffle

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The Government Expenditure and Revenue Wales 2016 report produced by the Wales Governance Centre makes for interesting reading and is a valuable contribution to discussion about the fiscal position of Wales.  There’s a lot of detail in it and a few general reservations, and I’ll return to some of both of those categories in the coming days.  But overall, I’m glad that someone has committed the time and effort to doing this work.

The document was always going to be misinterpreted, and deliberately so, by those with an agenda.  WalesOnline gave us the screaming headline “The five figures that show how indebted Wales would be as an independent country”, which is precisely what the report does not tell us.  The report makes no attempt whatsoever to predict what the situation of an independent Wales would be; indeed, as far as I can see, it makes no mention of the question at all.  The closest that a rational reader could get to a statement like the headline would be to say that if we make the following four assumptions:

·         Wales had become independent at some time prior to 2014/2015

·         All the estimates of the apportionment of income and expenditure set out in the paper turned out to be correct

·         Independence changed nothing

·         The ‘independent’ Welsh government decided to keep to the same taxation and spending decisions as the then UK government

then Wales would have had a budget deficit (not at all the same thing as being ‘indebted’, by the way) of close to £15 billion in 2014/2015.  The first assumption is patently untrue, the second may or may not be true, the third is extremely unlikely to be true, and the fourth is plain daft.  Still, why let mere facts interfere with a good headline?

There was no surprise at all in the way that some Labour politicians pounced on the report claiming that it ‘proves’ that Wales cannot be independent.  The report proves no such thing, but one has only to look at the awful figures themselves to realise that Labour’s grasp of economics is shaky to say the least.  I could equally claim that the report ‘proves’ how badly Wales is served by the current arrangements, but in truth I’m not sure that it ‘proves’ that either.  There are too many factors and assumptions involved to jump to such simplistic conclusions. 

But insofar as any figures looking at what has happened in the past can act as evidence for either of those hypotheses, it is inevitably the case that figures from the past are more likely to tell us something about the effects of what has been done in the past than about what might happen under a different scenario in the future.  So I think my claim would be the more accurate – or perhaps merely less inaccurate – of the two.  But arguing the toss over those two hypotheses is akin to arguing about the number of angels dancing on a pinhead – an interesting diversion, but not adding a great deal to the sum of human knowledge.  On the other hand, I suppose that ‘adding to human knowledge’ is not exactly the prime function of Labour politicians, especially when there’s an election in the offing.

I was taken aback a little by the reaction of the Tories’ Assembly leader, though.  Faced with a headline telling us that there is a very, very, very big gap between taxes raised and money being spent, his response has been to argue for reducing the rate of income tax and thereby making the gap even larger.  His faith in the power of a penny off tax to turn round an economy is touching, even if more than a little lacking in evidence.  Perhaps there were just too many noughts at the end of the number for him to cope with.

Half a step forward

Tweet It was foolish in the extreme for Labour ever to have accepted one of the silliest ideas ever to emerge from the Chancellor.  Passing a law which seeks to – but according to convention cannot – bind the hands of future governments and oblige them to eliminate the budget deficit in a set timetable creates more problems than it solves.  It’s about politics, not economics – both playing to the gallery and seeking to reaffirm and reinforce the grossly over-simplistic message about budget deficits being an inherently bad thing.

The Shadow Chancellor is quite rightly embarrassed about his U-turn – it is after all a hole which he dug for himself.  But how much of a U-turn is it really?  Superficially, it’s a question of saying one thing one week and the opposite the following week, but he doesn’t really seem to have changed his mind much on the substance at all.

In reality, he’s still signed up the deficit fetishism which has come to afflict politicians and parties – his disagreement with the Tories isn’t over whether deficits are bad and should be eliminated, it’s only about how and in what timescale.  He has completely accepted the underlying premise – and many in his party have also accepted the Tory arguments on timescales and methods as well.

The economics is much more complex than the politics.  As long as real interest rates remain negative, borrowing money makes eminent sense – the government will, in effect, have to pay back less than it borrows.  Deficit fetishism also overlooks another important factor – at the moment, people are queueing up to lend money to the government.  What would they do if the government simply stopped borrowing?  The economy doesn’t start and end with the government and the public sector, but political debate seems to assume that that part of the economy can somehow be considered in isolation, independent of what’s happening elsewhere.

Seeing through the politics of the silly suggestion for a new law is one thing – a step forward of sorts.  But they’re still not seeing through the politics of the deficit itself.

Jumping into traps

Tweet In what is billed as an attempt to convince electors that Labour can be trusted with their money, the party’s Shadow Chancellor has agreed to sign up to the Tories’ proposed ‘law’ mandating a budget surplus.  At headline level, the idea that any Government should legislate to tie its own hands regardless of the economic circumstances succeeds only in convincing me that they’re even more clueless about economics that I’d previously thought.

The devil, of course, is in the detail, and the Shadow Chancellor went on to say that the government should ‘aim’ to run a surplus ‘in normal times’ ‘if the economic circumstances allow’.  Any one of those caveats undermines the proposed law; taken together they render it utterly meaningless.

It leaves us with a tough choice – we can either believe that he’s intelligent enough to know that the exercise is thus a completely pointless one, in which case we have to conclude that he thinks we’re all too stupid to reach the same conclusion, or else we can believe that he really thinks that the proposed law is worthwhile, in which case electing him as Chancellor would be a dangerous move, to say the least.

I’ll give him the benefit of the doubt and assume that the former is more likely.  The Tories know that the proposed law is economic nonsense; it’s about politics not economics.  They’ll find as many caveats and exclusions as Labour in practice.  But the aim of the law is to reinforce the ideological stricture about budgets and spending; to shift the Overton window of debate in their direction.  And instead of attempting to put an alternative view, Labour has not so much fallen for the trap as taken an enthusiastic running jump into it.

Assisting the enemy

Tweet There will be as many theories about what caused the election result last Thursday as there are people analysing it.  Most of us will see those things which confirm our own preconceptions, and give rather less weight to those which suggest the opposite.  In reality, there will have been almost as many causes as there were people casting their votes.  Voting is in essence an individual action, prompted by a range of factors including image and emotion as well as policy, tradition and self interest.

Personally, one of my own preconceptions is that elections ought to be about different views of the world, and making a choice between them – first and foremost about policies and programmes rather than personalities and image.  I’m realistic enough to recognise, however, that detailed analysis of policies and programmes is something that only a minority of voters do.  And many voters discount all promises on the basis that they have little expectation that they’ll be honoured anyway.

With that caveat – i.e. that policies are only one small factor in the outcome – I’ll return to last Wednesday’s post about deficit elimination.  In this election, we were faced with a range of parties, all telling us that it was essential to eliminate the deficit, but with only one of them arguing that it needed to be done rapidly and resolutely.  I can’t help wondering whether the fact that the other parties all conceded the basic case for a balanced budget, and then tried to argue for doing it differently or more slowly, didn’t end up helping the Tories overall (except in Scotland, which was obviously a special case). 

When they’re all saying that ‘x’ needs to be done, why wouldn’t people who are convinced by that argument back the one party that says it really is going to do ‘x’?  The case for not needing to do it was never really put at all.

Conceding the narrative

Tweet Amongst the more useful things that I’ve learned over the years are that that which is obvious isn’t necessarily true, and that that which is true isn’t necessarily obvious.  Assuming the obvious to be true is a common mistake, but in this election the failure to challenge the ‘truth’ of the obvious has allowed the Tories to frame the debate and win the argument on economic narratives.  To describe that as disappointing is an understatement.

When it comes to the budget deficit, all three of the main UK parties are committed to the view that it needs to be eliminated; any disagreement is solely about the method by which that is achieved and the timing.  Even the self-styled ‘anti-austerity’ parties, despite calling for an increase in borrowing to fund infrastructure in the short term, seem to have bought into the ‘truth’ of the ‘obvious’ need to eliminate the deficit.  In her piece for the Western Mail on Saturday, Plaid’s leader said “The Party of Wales wants to see the fiscal deficit eliminated”, going on to argue that it just doesn’t have to be done so quickly.

Deficit elimination as a necessity is a narrative which the Tories, aided by their friends in the media, have set, and which has gone unchallenged.  It is, after all ‘obvious’ that a government cannot run a deficit forever.  But is it true?

As the chart on this page shows, deficits have been the norm over a very lengthy period.  Where there have been surpluses, they’ve been short-lived and very much smaller than the deficits.  The simple conclusion is that countries are not like households; the budget really doesn’t have to be balanced, even over the long term.  Governments really can run deficits more or less indefinitely if they choose, however counter-intuitive that may seem.  And because it’s so counter-intuitive, it’s a point which simply hasn’t been made effectively during the election campaign.

The extent to which it’s possible to run a deficit indefinitely depends on a number of factors, most notable perhaps inflation and the level of economic growth, although it’s important to remember the importance of international comparisons as well – relative security of funds is more relevant than absolute security.  That’s why a more useful measure than the existence of a deficit per se is the relationship between that deficit and the overall size of the economy over time. 

If they’d all talked about ‘reducing’ the deficit, rather than eliminating it, I’d be a good deal less critical, because there probably is an upper limit to the size of the deficit.  However, I don’t know what that limit is, even if I suspect that the UK got closer to it than was wise.  But here’s the thing – neither does anyone else know what that limit is. 

For sure, any number of different economists will tell you with apparent certitude what the limit is, and justify setting it at that level by reference to all sorts of economic theories based on what’s happened in the past.  But none of them can be, whatever they may say, certain.  In effect, governments can go on borrowing until people won’t lend them money any more – not a sensible thing to do, but the only way anyone will ever know what the limit is.  Everything else said about the deficit is simply opinion, not fact.

One of the few things which are certain is that the existence of a deficit per se is not a problem – which is precisely the opposite of what all the politicians are telling us.  It’s clear enough why the Tories are telling us the reverse of the truth.  Using the ‘obvious’ comparisons with household debt or ‘maxing out the credit card’ provides them with the cover they need for an ideologically based desire to shrink the state and further redistribute power and wealth from the many to the few.  What’s a good deal less clear is why the rest of them have allowed the Tories to get away with this unchallenged.

Blatant bribery

Tweet The UK Government’s new Pensioners’ Bonds seem to be popular amongst those pensioners who can afford to buy them.  There seems little doubt that the whole of the £10bn issue will be sold, and a million or more pensioners will be very happy with the above-average return on their investment.  There are, though, two sides to any investment.  As anyone who’s ever had anything to do with accounting will realise, one person’s savings are another person’s debt.  And in this case, the debt is the government’s – and therefore ultimately ours.

What has been presented as ‘selling’ £10bn worth of bonds to pensioners is in effect borrowing £10bn from pensioners.  There’s nothing wrong with that of course; governments borrow all the time, and most of their money is borrowed from citizens.  As an alternative to simply taking our money away in taxes, paying us a guaranteed rate of interest to loan them money is not without its attractions to many.

There are, however, two special factors about this particular bond issue.

The first is the generous rate of interest.  A government which has spent most of the past five years telling us that we must cut the deficit because continued borrowing commits the taxpayers to paying interest in future has decided, in effect, to pay over the odds to borrow £10bn which it could easily have borrowed on the bond markets at a lower rate of interest.

And the second is that it has restricted access to this generous rate of interest to a small section of the population, namely those pensioners who have spare cash to invest.  To put it another way, they have decided to commit all those of us who pay tax to paying interest at above the going rate to the most well-off pensioners. 

I don’t know how anyone can see this as anything other than a blatant bribe to a targeted section of the population – wealthier pensioners – in advance of the UK General Election in May.  And a bribe paid for by the rest of us at that – which is spun as a safe and well-rewarded investment to help our elderly.

But there’s another little lesson that we should learn as well.  When they say that we can’t afford to go on borrowing because of the future interest payments, what they actually mean is that we can afford to borrow as long as it helps them to win an election.  The worst of it is that it might actually work, and the irony is that many of those benefiting are probably amongst those whose support for cutting borrowing is strongest.

It's about politics, not economics

Tweet Later today, the Chancellor will make his autumn statement.  There’s plenty of speculation about what will be in it, along with a great deal of pre-announcing as the government tries to maximise the impact of the good news bits.  There seems little doubt that his message will be, in essence, that the current account deficit has not gone down as planned, but that there’s money available for some gimmicky giveaways and re-announcements.

He will, of course, blame factors beyond his control for the first part, and claim all the credit for the second.  (Whilst his coalition partners will claim that the second is all down to their moderating influence)

The real announcement is the one that he won’t make, which is that he’s known all along that current account deficit reduction is not as important as he told us it was.  In fact, it hardly matters at all.

In that sense, the Tories have pulled off a political master stroke.  They’ve succeeded in persuading the media and the other parties to obsess endlessly about how to reduce the deficit, whilst they carry on running one.  They’ve used the excuse of the deficit to mount an ideologically motivated attack on the welfare state, and managed to get the main opposition parties to commit to continuing largely the same policies.  Even if they lose, they win.  And we let them.

Weak Wales

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I may not like some of the comments made by Gerry Holtham in his evidence to the House of Lords, as reported yesterday, but it is hard to disagree with those relating to the economic situation of Wales, even if some of his comments about Welsh, Gaelic and the Highland Clearances seem to be somewhat outside his usual sphere of expertise.

The Welsh economy is indeed a great deal weaker than that of Scotland, and we do indeed have a problem with a deficit budget.  And we certainly don’t have any oil – well, none that has been proven yet anyway.  He may even be right that the departure of Scotland will not improve the prospects for a renegotiation of Barnett, although that is more political opinion than financial analysis.

He’s very blunt about Wales’ negotiating position; we have no cards to play, so can expect nothing.  And his line that we’ll get what we’ve always got, “which is nothing”, is similar to a point made by many in their critique of the current relationship of Wales with the UK.

With all of that I can, more or less, agree.  I’m not so convinced about the conclusions drawn on the basis of the analysis however – mostly because they offer no constructive way forward.  They seem to assume that this is the way things are, this is they way they’ve always been, and this is the way that they’ll always be.  It’s a depressing prospect.

It would be too easy simply to blame the current set-up for Wales’ position.  Of course the situation in which we find ourselves is a result of the policies followed over a lengthy period.  It isn’t, though, that those policies were designed to do Wales down; it’s more that policies which only look at the bottom line for the UK as a whole have allowed the variation in prosperity to remain and grow.  It’s a result of policy, not an intention of policy, although that’s little consolation to those on the wrong end of the policies concerned.

The question is how we bring about change, and simply carrying on as at present seems to be the least likely way of doing that.  Apparently, despite popular belief, it was not Einstein who said that “The definition of insanity is doing the same thing over and over but expecting different results”, but the misattribution takes nothing away from the relevance of the quote.  It doesn’t necessarily mean that doing something different will bring a different result, of course; but surely doing something different at least deserves some consideration from the sane.

Greater autonomy for Wales carries no guarantee of a solution for Wales’ economic problems, but not having that autonomy seems almost to guarantee that we will be forever seeking mitigation of effect rather than solution.  My conclusion has long been that taking responsibility for our own future has to be a better alternative than waiting for someone else to do something – at the very least, it gives us the focus on the problem which is currently lacking. 

Double-edged deficits

Tweet As well as reporting on the latest opinion poll, Friday’s Western Mail had a leader column on the subject of Welsh independence.  It included the following paragraph:

“There are strong economic arguments against independence.  No serious economist has yet published a convincing case on how a nation which spends more than it raises in tax could adapt to going it alone in a world heading towards more interdependence not less.”

I’ve rarely read such nonsense.  As far as I’m aware, no ‘serious economist’ has ever argued that a country which is ‘spending more than it raises in taxes’ is therefore unable to enjoy the same degree of independence as any other country.  It’s simply not true.  Indeed, if it were true, then the UK, the USA, and any number of other countries would have to be added to the list of failed states.

Lots of countries spend more than they raise in taxes, and some do so year after year after year.  Running a deficit per se does not make Wales unviable, any more than it makes the UK or the US unviable.

The issue for Wales isn’t the fact of a deficit; it’s the size and duration of that deficit.  But even then, there are no hard and fast rules.  The proportion of GDP which the national debt represents doesn’t have some magic number below which all is well and above which states fail.  Nor is there any set period beyond which a debt cannot continue.  These things are matters of judgement; judgement by the government setting tax and spending levels, and judgement by those lending the money as to the likelihood of them getting it back.

But more importantly, is the fact that Wales has a high current account deficit which is persistent over the long term an argument against independence, or is it an argument for?  At first sight, it’s very easy to see it as an argument against, but that’s a simplistic response.  The questions we should be asking are: “What is the means by which we bring tax and spending into balance, and what is the decision-making structure most likely to achieve that?”

In theory, the argument that the best way out is through membership of a larger union where the government actively follows redistributive policies, and ensures that GDP is more equal across the ‘regions’ is a powerful one.  It is, I think, the argument which supporters of the union are trying to make, albeit not very well.  The reason that they’re not very good at making the argument is obvious - in practice, it just hasn’t happened, and still isn’t happening.  The theory is at odds with the practice.

Without an effective redistributive economic policy, all Wales gains from the union in financial terms is a handout; and all we can ever do is ask for a bigger one.  That simply is not where I want to see Wales, and I don’t understand why anyone else would.  I’m convinced that the best way (even if not the only way) of getting Wales’ GDP to the level it needs to be to bring taxes and spending into line is by taking the decisions ourselves, here in Wales.

The much-vaunted deficit is a double-edged sword – for me, the fact that current structures and approaches are not reducing it is a reason to support change, not oppose it.  A government solely focused on Wales stands a better chance of taking the right decisions for Wales than one for which Wales is peripheral.  If supporters of the UK want to use economic arguments, they’ll need to do better than this.

Sharing expenditure around

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This report in yesterday’s Western Mail covered some research carried out by the SNP which suggested that, on a per capita basis, Wales is ‘losing out’ on billions of pounds of military expenditure each year, compared to other areas of the UK.  Military spending is an issue which used to be higher on the nationalist agenda, largely because it was an obvious area where an independent Wales could make sizable cuts, and use the savings either to offset Wales’ deficit, or else spend the money on other things.

In recent years, many nationalists have seemed almost afraid of dealing with the question of armed forces and Independence.  Indeed, one of my anonymous friends left a comment on another post a couple of weeks back, which coupled a suggestion that any discussion of Welsh Independence needed to consider the question of military forces with a hint perhaps that it was a subject which was being avoided.

There’s some truth in that, sadly.  For my part, it’s not so much a wish to avoid the subject as a result of spending more time on issues which are more immediate and which interest me more.  But I am, and always have been, willing to discuss any aspect of the Independence question; it’s the only way of increasing understanding of, and support for, that option.

I’d accept though that many do avoid discussing it at all.  Partly it’s because of a strong pacifist tendency running through nationalist thinking; partly it’s down to the same lack of confidence in the case for independence which leads some to avoid the whole subject, never mind its consequences; and partly it’s a fear of appearing to be in some way anti-British, and/or deterring potential voters.

But any rounded view of the implications of Welsh Independence has to consider what that means for defence.  And given that it has been a long-standing contention amongst nationalists that Wales would spend a great deal less on defence than the UK government spends, it’s also an important element of the economics of independence.

On spending, this table of military expenditure is interesting.  Whilst the UK spends around 2.7% of GDP on military activity (and has the fourth largest military budget in absolute terms worldwide), a small country such as Ireland spends only 0.6% of its GDP.  In parallel with that, of course, Ireland has a much more limited set of objectives (summarised here) for its military.

Every country faces different circumstances, and there will always be objections from some to any comparisons, but it seems to me that an independent Wales would have military objectives much more similar in nature to those of the Republic of Ireland than to those of the UK – and that expenditure levels would tend to follow that approach.  Why would that not be the case?

Debate around ‘defence’ at a UK level seems to broadly accept the status quo as a starting point, with the effect that the UK is trying to behave as though it were still a major power on the world stage.  France, another post-imperial power, has a similar outlook, and spends around 2.5% of its GDP on its military.  The comparison with Germany – at 1.4% - is instructive; and it’s notable that Germany is the large European country with the least pretension to being a world military power.

History (to say nothing of the wars of the past) plays a role in these attitudes of course; but that same history encourages some governments to want to see their role and importance as being greater than it really is.  And they then seek the military muscle to back that up.  It has long seemed to me that the UK Government’s attitude – regardless of party - has never really adapted to the loss of empire.

It was surprising last year to hear some nationalists arguing that Wales should have its ‘fair share’ of military expenditure; it was a complete reversal of positions taken in the past.  The superficial logic of that position is clear, since the GDP of those areas where the money is spent benefits from military expenditure. But I’m glad that that has not been the response to yesterday’s story.  It’s a fair share of total expenditure which we need, not a fair share of each individual budget line, and simply moving military expenditure to Wales in the interests of ‘fairness’ isn’t the best way either of achieving that aim or of preparing Wales to take more responsibility for her own future. 

What we really need is not to divert more military expenditure to Wales, but to be able to take advantage of the 2%+ of GDP which would be freed up for other purposes.  It’s a not insignificant part of the potential Independence dividend.