Wednesday, 20 October 2010

On the Spending Review

Some views on Gideon’s Spending Review statement. I’ve ignored statements repeated from the June Budget and areas where others are far better placed to comment than me e.g. pensions.

(Gideon) Today’s the day when Britain steps back from the brink.

(Me) The brink of what? And at what point were we supposedly close to the edge?

When we confront the bills from a decade of debt.

This is factually wrong. There has not been a decade of (public) debt as Labour ran a surplus in the early years of the  last decade. If by a decade of debt he means rising private debt then 1) he should have made this clear and not left the heavy implication that he was talking about the Government; 2) remind us what he was saying about this pre-crisis (he was of course committed to matching Labour's spending plans) and 3) inform us what his prescription is for high household debt – we  can only assume it is to be dealt with through high unemployment and increasing economic insecurity. I bet it's not rising real wages.

We are going to bring the years of ever-rising borrowing to an end. We are going to ensure, like every solvent household in the country:

  • that what we buy, we can afford;
  • that the bills we incur, we have the income to meet;
  • and that we do not saddle our children with the interest on the interest on the interest of the debts we were not ourselves prepared to pay.

Save me mammy! I need a strong, strong drink. How many times do we have to endure this brazen household budget crap. If you can be bothered reading another discussion on this matter you will find one here and here.

Tackling this budget deficit is unavoidable.

Nobody denies this is the case – it is a question of how and when you go about it; stripping demand from a fragile economy, when unemployment is high, there is a strong risk of deflation and interest rates are up against the zero bound is not an evidenced based way of reducing a deficit. It really isn’t.

The decisions about how we do it are not. There are choices.

Thank you Lord! 

And today we make them.

Ah well…..

Investment in the future rather than the bills of past failure. That is our choice. We have chosen to spend on the country’s most important priorities – the health care of our people, the education of our young, our nation’s security and the infrastructure that supports our economic growth.

Er…. the capital budget for Education is being cut by 60% over the SR period and the resource budget is being cut by 3.4%. The capital budget for health is being cut by 17% and the rise in the resource budget is 1.3%; insufficient given health faces higher inflation (due to the cost of drugs etc).

On transport infrastructure: the SR claims that spending on transport infrastructure will be higher at the end of the SR period than in 2005-06. But is it sufficient? Is the balance between road and rail appropriate given climate change targets? I think we’ll hear a lot more about this area over the coming days.

On science: the science Budget will remain static and, in the context of the SR, this is a good thing. However, still amounts to a 10% real terms cut over the SR period. Tim at TUC is noting that some key projects have not been explicitly protected in the SR.

We have chosen to cut the waste and reform the welfare system that our country can no longer afford.

What was that you said about ‘choices’ Gidders?

We have, at £109 billion pounds, the largest structural budget deficit in Europe.

Now let me see, I wrote something about this in a recent paper. Ah yes,

ConDem ministers make great play of the Office of Budget Responsibility’s estimate of the structural deficit.  Of course, the structural deficit is a ‘theoretical construct, relying heavily on contentious assumptions’. Only by changing the assumptions was the figure made worse than under labour. The OBR clearly states that the actual deficit is less than Alistair Darling estimated at the PBR 2009 and March 2010 Budget and the rate of growth higher. So the overall economic position is better than previously predicted, not worse. The focus on the structural deficit is therefore intended to obscure the success of more expansionary policy during the recession.”

Accepting the Chancellor’s assertion as true, it hardly equates to the UK having the worst fiscal position in Europe – and this is the impression he is trying to leave with his audience.

This at a time when the whole world is concerned about high deficits, and our economic stability depends on allaying those concerns.

If by ‘the world’ he means global financial markets, he is wrong. As the STUC has pointed out consistently (see here and here), markets consider a range of factors when determining whether a country is a good risk: stock of debt, maturity of debt, prospects for growth and so on. Two things are manifestly clear to anyone actually prepared to study the evidence 1) that markets have judged the UK as a good risk throughout the current crisis; and 2) markets are not rewarding austerity.

We are paying, at a rate of £120 million a day, £43 billion a year in debt interest. This at a time when we all know that that money would far better serve the needs of own citizens than those of the foreign creditors we borrow from.

Nominal figures only. Wonder why?

The IMF estimates that on current policies debt interest payments will rise from 1.6% of GDP in 2007 to 3.1% in 2014 (estimate was produced in November 2009 when the current year deficit was projected to be some £20bn more than eventually transpired). This represents a significant rise of around £15bn a year. However it must be placed in context: the average for advanced G20 nations is projected to be 3.5% of GDP in 2014; 4.5% in the US; in the UK the net interest payment share of GDP was above 3% in the 75 years between 1916 and 1991.

And also, WE GENERALLY DO NOT BORROW FROM FOREIGN CREDITORS. This is true in Greece and Ireland where around 80% of sovereign debt is held by foreign investors. In the UK around 80% of debt is held internally; by the Bank of England and you and me through the pension funds which hold our savings. 

And that is why last year the IMF warned this country to accelerate the reduction in the deficit. That is why the OECD, the Governor of the Bank of England, the CBI all agreed with them.

I’ve written about the IMF here. It is important to stress that the IMF has been thoroughly inconsistent on the matter as has the OECD: one minute calling for deep and rapid austerity and highlighting the dangers the next. In any case their record on macroeconomic management is so desperately poor that they beg to be ignored.

The action we have taken since May has taken Britain out of the financial danger zone - the immediate reductions to in-year spending to buy us a breathing space in the sovereign debt storm - The emergency Budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near record lows. Our country’s credit rating was affirmed

Evidence please Gidders? We were not in the danger zone and had plentiful breathing space (at least another 50% of ‘fiscal space’ according to the IMF). Read Martin Wolf, the FT’s Chief Economic commentator,

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.

The creation of an independent Office for Budget Responsibility to bring honesty back to official forecasts

Well maybe, just maybe, under Chote – but the OBR was a disaster under Budd. Surely no-one can claim otherwise?

But I made it clear that spending reductions rather than tax rises needed to make up the bulk of the consolidation. That is what the leading international evidence suggested worked best.

Lazy Gidders, you fail to cite this evidence. And you do not consider the relevance of this ‘evidence’ to our current situation i.e. arguing that spending cuts worked for Canada in the 1990s is irrelevant. Totally.

I’ll cite some evidence of my own. In their paper, ‘The Boom not the Slump: the right time for fiscal austerity’ Arjun Jayadev and Mike Konczal debunk the evidence used to promote the ‘contractionary is expansionary’ argument. They find that:

  • Countries historically do not cut their deficits in a slump, instead addressing these problems during a non-recessionary time;
  • When countries cut in a slump, it often results in lower growth and/or higher debt-to-GDP ratios. In very few circumstances are countries able to successfully cut during a slump, and this happens only when either interest rates and/or exchange rates fall sharply;
  • There is no episode in which a country facing the same circumstances as the United States (recent recession, low interest rates, high unemployment) has cut its deficit and succeeded in reducing its debt through growth;
  • There is little evidence provided by Alesina and Ardgana [who had published an influential paper used to support the growth through austerity agenda] that cutting the federal deficit in the short-term, under the conditions the United States currently faces, would improve the country’s prospects. It may even make the United States’ situation worse.

It is worth noting that the conditions noted for the United States (recent recession, low interest rates, high unemployment) all exist in the UK at this time.

The House will note that current spending is rising not falling over this period.

So what? The depth of the cuts is revealed in your own SR document.

Debt interest payments will be lower by £1 billion in 2012, then £1.8 billion in 2013 and £3 billion in 2014 – a total of £5 billion over the course of this Spending Review.

You do not know this. If, as we strongly anticipate, unemployment continues to rise and revenues stagnate, the deficit will not fall – despite the cuts.

I can now tell the House that capital spending will be £51 billion next year, then £49 billion, then £46 billion, and £47 billion in 2014-15. This is about £2 billion a year higher than I set out in the Budget. Given the contractual obligations we inherited from the last Government, doing anything else would have meant cutting projects which would clearly enhance the economic infrastructure of this country.

DUH…as my 10 year old daughter would say.  Those troublesome contractual obligations eh?

In real terms, public spending will be at the same level as in 2008.

Won’t feel like it if you’re a benefit recipient will it. Meaningless anyway as Richard Murphy discusses here.

First, reform – that in every area where we make savings, we must leave no stone unturned in our search for waste and we must deliver changes necessary to make our public services fit for the modern age.

On this basis, reform of the financial sector must come first. For it was the banks which ‘wasted’ money on a gargantuan scale.

Second, fairness – that we are all in this together and all must make a contribution.

This is just provocative. I’ll have to leave a detailed discussion of the distributional analysis till another day.

There will be a focus on helping British companies win exports and secure jobs at home, and with the help of the UKTI we will attract significant overseas investment to our shores.

A ‘focus’? We continue to await the Coalition’s growth strategy.

There is nothing fair about running huge budget deficits, and burdening future generations with the debts we ourselves are not prepared to pay.

There is actually. In our letter to Gidders in advance of the SR we argued:

“The STUC argues that is also unfair to bequeath future generations a smaller less stable economy and a legacy of persistent long-term unemployment. Long-term youth unemployment is rising rapidly across Scotland. Research demonstrates very clearly that prolonged periods of unemployment while young badly affects future employment prospects. Scotland continues to pay the high social and economic costs of the recessions and labour market policies of the 1980s and 1990s”.

How ironic that it was the last Labour Prime Minister himself who once observed that the “public finances must be sustainable over the long term. If they are not then it is the poor ... that will suffer most.

He was wrong and so are you. But he did say long-term.

Mr Speaker, I completely understand the public’s anger that the banks that were so appalling regulated over the last decade, and whose near collapse wrought such damage on the economy, should now be contemplating paying high bonuses.

Gidders, please furnish me with your speeches, press notices etc arguing for tougher regulation of the banks during your time in opposition.

We neither want to let banks off making their fair contribution, nor do we want to drive them abroad.  Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services. Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be – not just in one year, but over a period of years.

In other words, we will continue to pander to the financial services lobby?

We have already decided – in the face of opposition from the previous government – to introduce a permanent levy on banks. The legislation will be published tomorrow.

I will await the detail before commenting.

We will also need to address the situation under the last government where the gap between the taxes owed and the taxes paid grew considerably. So in this Spending Review, while the HM Revenue and Customs budget will be expected to find resource savings of 15% through the better use of new technology, greater efficiency and better IT contracts – we will be spending £900 million more on targeting tax evasion and fraud. This additional £900 million is expected to help us collect a missing £7 billion in tax revenues.

This is wholly insufficient; emphasising that the ConDems are just not serious about the tax gap.

That does not mean we are letting the health department off the need to drive forward real reform and savings from waste and inefficiency. Productivity in the health service fell steadily over the last ten years, and that must not continue.

It fell because more people were employed to provide higher quality personal services. I’m going to blog separately on public sector productivity and the guff that is routinely spouted on the matter very soon.
By restoring macroeconomic stability we have brought certainty to businesses.

No you haven’t. From the Bank of England’s Agents’ summary of business conditions October 2010 published today:

  • ‘Private sector employment intentions had eased slightly after improving earlier in the year. Contacts remained very cautious about expanding the labour force’

  • ‘Credit conditions had continued to improve marginally for larger and less highly-leveraged contacts, but demand for credit remained weak’

  • ‘Housing market activity had stayed weak after the summer. House prices were expected to stabilise or fall slightly’

Businesses aren’t daft – they can see the cuts leading to a collapse in demand which will affect their markets.

By cutting business taxes we are giving business the freedom to compete.

Is he seriously saying that UK businesses have hitherto not been ‘free to compete’?! We're the 5th best country in the world in which to do business say the World bank.

And funny how someone who is so concerned about the deficit can be so complacent about reducing revenues.

Lower-priority programmes like Train to Gain will be abolished.

A low priority for you and your pal Vince Gidders but not for the workers it helped to upskill.

So today, even in these straightened times, we commit public capital funding of up to £1 billion to one of the world’s first commercial scale carbon capture and storage demonstration projects.

Wow. Genuinely good news. Would have been madness to end the competition but, well, he’s a wee bit mad isn’t he?

Yesterday, protestors scaled the Treasury urging us to proceed with our idea for a Green Investment Bank. We will go ahead. I have set aside in this Spending Review £1 billion of funding for the Bank, but I hope much more will be raised from the private sector and the proceeds of future government asset sales.

Holding fire on this till I see the detail.

The licence fee will be frozen for the next six years. This deal helps almost every family and is equivalent to a 16% saving in the BBC budget over the period, similar to the savings in other major cultural institutions.

It doesn’t help my family. We have no cable or satellite services and rely heavily on the BBC (CBBC and Cbeebies yeh!). The insignificant cash saving will not come close to offsetting the inevitable deterioration in quality.

Stephen Boyd - STUC

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