You could be forgiven for thinking that the Chancellor Gideon George Osborne had drafted his conference speech with the sole intention of keeping us Better Way bloggers busy. I mean, where to start?!
Hoping that others better placed than me will cover issues around universality and benefits, I’ll concentrate on the following sections for now:
GO Quote 1 “Britain had one of the highest budget deficits in the world and no credible plan to reduce it. This at the very moment when fears of high budget deficits had plunged the entire European continent into crisis. For the first time in our history, the nation's credit rating was at risk. And adding to this toxic mix, was the fear that the hung parliament would lead to a weak government. Within fifty days we had restored confidence at home and abroad in Britain's ability to pay its way in the world with a bold emergency Budget”.
It is so very, very tiresome having to rebut this nonsense on a daily basis but rebut we must.
Prior to the election, markets did not believe that Britain had ‘no credible’ deficit reduction plan. Far from it; the markets had reacted with benign indifference to the 2008 Pre Budget Report (when the scale of the collapse in revenues first became apparent and when the Chancellor introduced a modest – much too modest – stimulus package), the March 2009 Budget, December 2009 PBR and March 2010 Budget. At the end of April, as the election campaign was at its most frenzied and uncertainty reaching a peak, markets were pricing the UK as very credit worthy indeed.
It is demonstrably false to claim, as the ConDem’s routinely do, that the UK was on the verge of a Greek style crisis. See STUC paper ‘Avoidable, Unfair and Regressive’ for the stats and explanation of why the UK is a very different case from Greece (and Ireland, and Portugal, and Spain).
You know, what is really curious here is that a proud market fundamentalist such as Gideon, should choose to ignore the price signals the market was sending. But there is method in his madness - price signals prior to the election confirm that markets regarded the UK as a safe haven.
GO Quote 2 “For look at Ireland, and Greece, and Portugal, and you will see that the dangers have not passed. Every day as Chancellor I see alerts telling me of risks around the world. That we meet here, in Britain, in an atmosphere of relative calm not raging crisis is a measure of what we have achieved together over these first five months. The world has confidence in the plans we have set out. Vigilant at all times we remain — but there is no panic, no daily dread of the bond market, no paralysing fear that our credit rating could be lost, no immediate danger of a deathly spiral of higher interest rates”.
Show me the way to go home. I’m tired and I want to go to bed. But we must continue to rebut. We must.
There was no panic. There was no sign of imminent panic. The bond market was calm. There was no prospect of a ‘deathly spiral’ of higher interest rates. Gilt yields were low and falling prior to the election.
Please do not take my word for it. Read Martin Wolf who is chief economics commentator at the Financial Times. He is not a socialist. But he is always worth reading:
“Markets have also been remarkably relaxed about funding these deficits: interest rates on index-linked gilts have been 1 per cent, or less, for more than a year; the yield on 10-year gilts has remained below pre-crisis levels and is now close to 3 per cent; and spreads over German bunds have been 1 percentage point, or less, throughout the crisis.
“The government argues that borrowing costs have been contained only because of its commitment to austerity. In fact, spreads over bunds have stabilised since February and fallen by just 0.2 percentage point since the election. This suggests that the coalition’s strong fiscal stance has brought modest credibility gains. What would have happened if Labour had won we cannot know.”
But we can guess. Given that they were ‘remarkably relaxed’ before the election, and that Labour had a (much too) ambitious deficit reduction plan in place, I think we can safely assume that the markets would once again have reacted with benign indifference to a Labour victory.
GO Quote 3: “Imagine, if I were to stand up in the House of Commons in two weeks time and say: I'm cancelling the deficit plan. I agree with Ed Miliband.Let's delay the tough decisions. Let's borrow more. Let's go on adding to our debt. Imagine if I said that. Now imagine what would follow. The market turmoil. The flight of investors. The dismay of business. The loss of confidence. The credit downgrade. The sharp rise in real interest rates. The extra debt interest. The lost jobs. The cancelled investment. The businesses destroyed. The recovery halted. The return of crippling economic instability. Britain back on the brink”.
Rebut, rebut we must continue to rebut.
Perhaps the reaction might be as dramatic as Gideon suggests if he simply stood up and cancelled the plan. On the other hand, what if he stood up and said something along the following lines?
‘I Gideon Osborne now accept that the economic recovery is extremely fragile and that current survey evidence points towards very low or possible negative growth in quarter 3 2010. There has been a sharp dip in business and consumer confidence since the emergency budget in June. There is no prospect of the private sector delivering employment growth to replace jobs losses in the public, private and voluntary sectors if I pursue the June plan. Indeed, if we continue with this plan we will ConDem the UK to years of high unemployment, stagnation and deflation.
‘Therefore, I renounce my June plan and postpone consolidation until next year. I will not place figures on future consolidation plans because I will now ensure that they are contingent on strong and stable growth. We will not continue to run deficits of 10-11% but equally we will not be content with high unemployment, low growth and low revenues. If necessary we will introduce another modest stimulus but this will be inevsted in areas that will boost long-run sustainable growth e..g. education and infrastructure’.
You get the idea. Would markets not deem such an approach more credible than the cuts of 25-40% across Govt departments currently proposed by Gidders? Implied in all his interventions is the belief that markets are rewarding austerity and punishing expansionary policy. This is the opposite of the truth.
GO Quote 4: “And let me take head on this completely false argument that delaying the cuts will somehow make them smaller and easier. The truth is exactly the reverse. Britain has a £109bn a year structural deficit. Let me tell you what a structural deficit is. It's the borrowing that doesn't go away as the economy grows, and we have £109bn of it. It's like with a credit card. The longer you leave it, the worse it gets. You pay more interest”.
My head is sore. Please I must sleep.
The structural deficit is a theoretical construct. Its size depends on the assumptions you make in calculating it. The only reason the structural deficit increased between the PBR in December 2009 and the June Budget is because the assumptions changed. What is abundantly clear is that the actual economic position had improved: unemployment was falling, revenues had increased above forecast as had growth.
And then we come onto the household budget model of the economy stuff so beloved of the ConDems and Thatcher before them. But here I lose all patience and hand you over to those who have covered this already.
GO Quote 5: “Here are two sides to this argument. On one side there is the IMF, the OECD, the credit rating agencies, the bond markets, the European Commission, the Confederation of British Industry, the Institute of Directors, the British Chambers of Commerce, the Governor of the Bank of England, most of British business, two of our great historic political parties, one of the Miliband brothers, Tony Blair, and the British people. On the other side is Ed Miliband and the trade union leaders who put him where he is. The national interest or the vested interests”.
Aha! Roused from my stupor of robotic rebuttals by the presentation of a lovely big open goal!
The IMF, OECD, EC, BoE, financial market insiders, ratings agencies (Holy Jaysus, he’s still citing ratings agencies), CBI, CoC....AYE WEE MAN, THAT’LL BE THE SAME CABAL WHICH ONLY THREE YEARS AGO WAS ARGUING THAT INNOVATION HAD REMOVED RISK FROM THE FINANCIAL SECTOR...WHO THOUGHT THAT DEREGULATED FINANCIAL CAPITALISM WOULD MAKE US ALL RICHER...WHO THOUGHT THAT THE SELF INTEREST OF INDIVIDUALS AND CORPORATIONS WOULD PROVIDE FOR MARKET STABILITY...JEEZ...
In any case, it’s not strictly true:
· OECD has been inconsistent – one minute praising austerity (in one report last spring they even suggested quick and substantial increases in interest rates!) the next fretting about falling demand;
· Yes, only last week the IMF praised the emergency budget plan but it has also published reports arguing that the UK is not the basket case of ConDem legend. It has also argued for postponing consolidation until next year. It has argued that ‘maintaining aggregate demand’ is the best remedy for high unemployment ;
· As outlined above, it is highly misleading to invoke the bond market in support of ConDem policy;
· Yes, Mervyn King supports the pace and scale of fiscal consolidation proposed by the ConDem’s but he has also called for a debate on the balance between tax rises and spending cuts; and,
· Most of British business – that will be those businesses not reliant on public contracts, or likely to be affected by lower demand or too bloody narrow minded to see the true nature of what’s coming?
Giddyman thinks the unions are a vested interest. Seems that the CBI and Chambers of Commerce are independent voices of reason with no axe to grind?
GO Quote 6: “Together, Vince and I have started to open Britain for business. Labour's jobs tax abolished. Regulations scrapped. Common sense brought to health and safety. National Insurance cut for any new business in our regions. Corporation tax cut next year, and the year after that, and the year after that – and the year after that”.
Over seven long years at the STUC I have endlessly rebutted the myth that UK businesses are over-taxed and over-regulated. In my innocence, I thought the banking crisis would make people reconsider the positive role of regulation in an advanced economy. Some hope. The UK is lightly regulated. Too lightly regulated; our system practically forces UK firms down low road competitive strategies. This is bad for workers, communities and the environment and it is also very bad for long-run sustainable growth.
Corporation tax? Well the proof of the pudding...but worth remembering that the effective rate on UK corporations is well below the headline rate. It is fantasy to argue that these cuts will unleash a wave of private sector investment of sufficient scale to compensate for stripping demand out the economy through cuts and regressive tax rises. If the corporation tax cuts achieve anything at all it will be to further increase the proportion of GDP extracted by the corporate elite.
Stephen Boyd
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