Tag Archives: cuts

Cameron & Osborne: Pursuers of Contradictory, Superficial, Inadequate Policy

Or A Rant: “Why The Tories Make Me Mad”

This morning David Cameron gave a speech on the Tory perception of, and reaction to, the riots of last week. On Sunday, George Osborne in an interview stated his intent to remove the 50p top rate of income tax. Cameron explicitly denied a link between the riots and issues of poverty and social deprivation. Therefore, his policy proposals fall short of the mark and fail to engage with the deeper underlying issues. Osborne’s interview confirms that the Tories have not got their head around the fact that economic policy must reflect equity, as well as efficiency. Neither have recognised that their positions are inconsistent. On the one hand, Cameron pushes the importance of work to the fore, while Osborne continues to pursue policies which are sure to intensify and prolong our unemployment problem. Neither of their contradictory positions adequately engages with the real problems in UK society and judging recovery by reference to bond yields rather than the employment prospects and living conditions of normal people reveals a lack of concern for, and understanding of, the problems faced by many social groups in Britain.

Since the rioting and looting died down toward the end of last week, we have seen a flurry of explanations put forward for the chaos. I argued that it is lazy to blame the riots on The Cuts. I stand by this but don’t think I made it clear why this position is ‘lazy’. Blaming the chaos on current austerity measures deflects attention from the bigger, deeper problems which need to be dealt with.

A multiplicity of problems were ignited by opportunism and mob psychology to bring about the riots. Yet many of these problems have deprivation and lack of opportunity as a root cause. Cameron explicitly denied a link between the riots and poverty, “these riots were not about poverty”, preferring instead to put the focus on moral degradation. Although the riots may not have been intentionally bought about to express grievances about one’s material position, deprivation and lack of access to opportunity, combined with a society which places excessive value on material goods and wealth cannot be ignored as a salient contributory factor.

Cameron argues that linking the riots to poverty “insults the millions of people who, whatever the hardship, would never dream of making people suffer like this”. To say poverty, deprivation and lack of social mobility are relevant causal factors does not have to imply a one-to-one correspondence between them and looting. It also does not justify violent behaviour or have to ascribe a lack of agency to disadvantaged socioeconomic groups. Rather, it provides a context for the behaviour we have witnessed.

By failing to engage with these deeper seated problems which require us to seriously challenge the distribution of opportunity in society, Cameron’s policies will not fundamentally change Britain. They are cheap sticky plasters: inevitable to come unstuck, without even doing a good job in the first place. I quote from his speech today: “First and foremost, we need a security fight-back”. This prescription does not tackle the underlying problems. Why is there a need for such prominent policing? Why the sense of frustration and alienation? One cannot ignore the resentment created by being marginalised from real opportunity or the issues which arise when a good assessment of your life prospects is “Nil/Poor” or “Going Nowhere”. Cameron asks: “Is it any wonder that many people don’t feel they have a stake in their community?” but then goes on to explain this phenomenon by referring to Big Government and Health and Safety. Are you serious?

Cameron’s focus on welfare reform and the community provides an opportunity to link his remarks to the remarks and economic policy pursued by his Chancellor. “I want us to look at toughening up the conditions for those who are out of work and receiving benefits and speeding up our efforts to get all those who can work, back to work. Work is at the heart of a responsible society.” I agree with him that work and employment are central. But the language used to describe those on benefits is patronising and demeaning. The majority of people who are unemployed and on benefits do not want to be. Most people want to work. A major problem we have at present is that of job creation. So, surely economic policy which promotes growth and reduces unemployment should be a no-brainer for the Tories at the moment? Wait, NO?

Our economic recovery continues to be underwhelming. The Bank of England and OBR have continued to downgrade predictions of growth and unemployment remains stubbornly high. A moderation of the current austerity strategy is needed and tightening needs to involve more tax rises and gentler, more targeted spending cuts as I have argued previously. Therefore, I was open-mouthed at the news that George Osborne described the government’s debt reduction plan as “on track” and also intends to abolish the 50p tax rate amid claims that charging this higher rate of tax is not raising much in revenue and “there’s not much point in having taxes which are economically inefficient”. The recovery is on track? A tax cut….for the most advantaged in society now …NOW?

Osborne describes the recovery as on track because in his eyes the UK is currently a haven for international finance. Really? This is not clear. Only today Bloomberg commented that “Britain’s allure as a haven is crumbling as global investors desert sterling amid the lowest inflation adjusted bond yields on record and a faltering economy.” Doesn’t sound too rosy to me. Secondly, his comments illuminate a larger problem. Why is the success of policy not being judged according to its impact on unemployment? On people? Sure, interest rates and financial stability are VERY important but not as ends in themselves. We should care about them because we care about people. Our recovery should be judged according to unemployment, job creation and living conditions. If concern with these figures was at the heart of current macroeconomic policy, the government would see the urgency of a policy rethink.

Not only do we need a more gradualist approach. We also need to reduce the reliance on spending cuts and shift the pain towards those who can bear it. For economic and equity reasons. The 50p tax may not bring in a whole lot of revenue but that doesn’t mean abolishing it should top the policy agenda. Just quickly, why does a higher tax rate not necessarily lead to higher revenues? A rise in tax rates will not lead to a large rise in tax revenue if they are associated with a large substitution effect. Raising tax rates reduces our incentive to work. We get less so taking time off in favour of sweet leisure time becomes less costly. With the 50p tax rate what we’re actually worried about is people leaving the country to tax havens. If these incentives are very strong then not much extra tax revenue will be raked in because people will be working so much less.

However, I do not believe that abolishing the 50p tax rate is going to lead us to take in more revenue and the fact that this is at the top of the policy agenda sends an awful message to the majority of the UK’s population. Research suggests that the amount people work once they are actually working is not very sensitive to changing tax rates and this seems to be especially true for those affected by the 50p rate, assuming they stay in the country, considering the kind of ‘service contracts’ that characterise employment relations at the top. For those that decided to leave the country in response to the change in rates, I would be extremely surprised if they decided to come back to the UK in vast swathes in response to the policy reversal especially given the poor growth prospects that lie ahead. Furthermore, the fact that the Chancellor is even talking about this serves to further distance him and the government’s economic strategy from the UK public and those who need to be re-engaged with society. Why the lack of focus on improving job prospects and income for the many at the bottom?

So there, my rant on Why The Tories Make Me Mad. An unwillingness to address wider issues which require a more concerted effort to open up channels of opportunity and address economic inequality. Judging policy success according to the welfare of financiers. Policy inflexibility that will contribute to a more protracted recession. Mad.

Deficit Bias: Why We Need to Tie Politicians’ Hands….. Loosely

A couple of people contacted me about the problem of the (lack of) credibility of government promises to cut the debt in the future. I didn’t give this issue enough space. This post should rectify that.

There are good reasons for a government to intervene in the economy during hard times to play a stabilising role. In fact, I don’t know of a theory in which one can cut government spending and raise taxes during a recession and leave output and employment unaffected. Keynes argued that market economies find it difficult to escape deep recessions and that monetary policy could only provide limited push in helping get the economy back on track. For Keynesian economists, a fiscal stimulus in the form of either higher government spending or lower taxes is a good idea during a bad recession. Actually, they’d probably say it was more than just a good idea. In fact, until the whole ‘Greek debacle’ the US and UK governments and even the IMF at times suggested that governments should play a role in recovery.

So lets just accept for the moment that there are good reasons for the government to run a budget deficit during a recession to help smooth out the dip. Then why is it that all we’re hearing at the moment is ‘Cut Cut Cut’? Why the switch from the presumption in favour of fiscal stabilisation to ‘austerity is the ONLY way’? Especially when we hear institutions like the Office for Budget Responsibility (OBR) saying that the austerity measures in the emergency budget last year would increase the risk of a double dip recession. To understand this we need to explore the concept of deficit bias. This discussion will also illuminate the motivation for creating the Office for Budget Responsibility and why both Gordon Brown and the coalition set themselves some rules over fiscal policy.

Deficit bias is basically the idea that it is difficult and painful for the government to reduce debt levels but very easy for them to say that they will in the future. In a recession a government should want to run a budget deficit to help buffer the economy against the storm. Then when times are ‘good’, the government should act to reduce the deficit. The stabilising has been done then. However, in these good times, tax rises and spending cuts are going to remain unpopular. Politicians don’t want to turn round with a smile to their voters and say “Right now everyone, its time for those taxes rises!”. Much easier to just ignore the whole debt problem. This leads to rising debt to GDP ratios. We observe this in reality. For example, among OECD countries levels of debt relative to GDP roughly doubled in the 30 years leading up to the recession for no good reason.

From my first post, you should (hopefully!) know that very high debt levels are to be avoided. There are costs. Investors start getting hot under the collar. This is why there are calls for austerity measures now. If the government could promise to put in place measures to bring debt levels down once the economy is out of the woods then we wouldn’t see the same budget as was presented earlier this year. The government faces a commitment problem. It would be best for everyone if Os-terity Osborne committed to reducing the deficit in the future. But this commitment isn’t deemed credible. So, they say, we must reduce the deficit now. In the middle of the deepest recession since the 1930s. Brilliant. We need someway of tying the government’s hands so they do actually cut the debt in the future, thereby allowing them to help us out now.

Luckily for us there are ways to mitigate this commitment problem, allowing for less cut throat austerity measures right now. I believe that the UK government needs to slow down in its mission to reduce the deficit. I am basically calling for the government to put its hands up and say ‘look guys, I’m going to mainly cut later….only a bit now’. Setting up the OBR and putting in place the new fiscal rules helps the UK government solve its commitment problem, making a promise to get the debt under control when things get less crazy more believable.

The OBR is an independent forecasting body, giving predictions of future growth and employment, assessing the plausibility of the figures which lie behind the government’s plans and evaluating the likelihood of the government meeting its self-imposed targets. Although not under its mandate at the moment, there have been calls for the OBR to also comment on the desirability of plans for deficit reduction and the like. Setting the OBR up in itself sends quite a clear message to investors that the government is serious about fiscal discipline. I mean, its called the Office for Budget Responsibility! The government could use the fact that the OBR forecasts and figures are independently calculated to build a bit of wiggle room into policy. Austerity measures could be staggered and implemented conditional on the speed of recovery and there could be no worry that figures were cooked to let the government off the hook.

Further, the government set itself two fiscal targets when it came into power: (1) to balance the budget 5 years ahead and (2) to have net debt falling by 2015-16. As we saw with the last Labour government, the fact that rules are stated doesn’t mean that they will be followed (that credibility problem again) but the fact that the OBR independently assesses the likelihood of these targets being reached reduces that risk.

Therefore, it seems to me a little odd that we are following the ‘Only-Way-Is-Austerity’ strategy at the same time as setting up an independent body that should allow us to slow the pace of cuts.

Let me ask you now, have I missed something?!

The Cuts and The Riots: Not the Cause, Definitely Not Part of the Solution

Its plain lazy to blame the riots on The Cuts but they still present issues for the government’s austerity strategy.

The last few days have seen an unprecedented level of violence, looting and chaos on the streets of many UK cities. Trouble started on Saturday night when a peaceful protest against the police shooting of Mark Duggan turned violent after demonstrators were ignored and left outside the police station on Tottenham High Road. Since then looting, clashes with police and general violence has broken out across London and other UK cities. So far 768 people have been arrested in the capital, with hundreds more arrests being made around the country.

Links have been made between the violence and the austerity measures being implemented to bring down the UK budget deficit. For example, Ken Livingstone, the former London major, described the riots as a “revolt” against the cuts: “If you’re making massive cuts, there’s always the potential for this sort of revolt against that”. Internationally, commentary has also ascribed political motivations to the rioters, suggesting the violence and frustration can be understood as part of wider government resentment and anti-austerity feeling. See Ravi Somaiya in the New York Times as an example.

Blaming the riots on the cuts to public services and anti-austerity feeling is at best lazy. The factors leading to the chaos are many with complex interconnections and seeds sown far back in the past. Even citing the recent closures of local services, it seems unlikely that those kids looting JD Sports are also the one’s you’d find taking actively part in local youth programs. Rather than political riots, these are better described as some fucked up version of Supermarket Sweep.

But this doesn’t mean that the riots have nothing to tell us about modern Britain and the austerity strategy going forward. Although the riots themselves have not been undertaken to prove a particular political point, the behaviour witnessed over the last few days is that of the marginalised and disenfranchised. As criminologist, Professor John Pitts has said in the Guardian, “There is a social question to be asked about young people with nothing to lose.”

I agree that measures must be taken to close the deficit but this point alone does not justify the speed of the current tightenings nor the reliance on spending cuts. As I touch on in my first post, the economics points to the conclusion that the optimal UK strategy would involve more gradualism and a stonger focus on tax rises than the current coalition plans. I believe that current plans could slow the economic recovery, ultimately making it harder to get our finances in order, and create an environment for greater social unrest and unease. The government should revaluate its plans in the light of the riots and the UK’s continued lacklustre economic performance.

We need to slow down. The main argument for a ‘cold turkey’ approach to deficit reduction is to allay bond market concerns over the solvency of the economy, allowing interest rates to fall, stimulating the economy back to growth and prosperity. But interest rates have no where to fall right now and given all the craziness in the world at the moment, Keynesian warnings of the “paradox of thrift” appear justified. Today the Bank of England cut its UK growth forecast for 2011 down to 1.5% and UK output still remains below its level pre-crisis. I think it is unlikely and foolishly optimistic to expect the oft alluded to (less oft seen when its needed) efficient, lean, dynamic private sector to fill the gap left by cuts and thus expect that growth is going to remain slow and unemployment high for some while to come. You aren’t exactly going to create happy, healthy neighbourhoods in a climate of high unemployment, few prospects, limited social mobility with a government who doesn’t seem to care. Slowing the pace of cuts to better support the economy and stimulate job creation seems sensible to put it lightly.

Second, we need a more balanced strategy. Current plans are much more reliant on spending cuts than tax rises. Just considering the short run, economics suggests this isn’t the best as cuts are more likely to generate a large reduction in overall demand as tax rises may be smoothed to some extent (again see the end of my previous post). BUT this isn’t the only thing. The UK is an unequal society with limited social mobility. It is likely that many of those participating in the riots are marginalised from mainstream society and opportunity and are unlikely to have gained much in the boom years. However, low income groups will be hit hard by the welfare reform and cuts to public services which go along with deficit reduction. I’m not going to get into banker bashing (I don’t think that’s really helpful or appropriate) but an economic strategy which shifts pain towards those best able to take it is both fair and makes economic sense. The government can’t go on behaving as if its tagline is “Greed is good if and only if you’re in the top quintile of the income distribution”. Greed is a vice which brings out bad in each one of us and which capitalism doesn’t always channel into good outcomes. Greed played a role in sparking a whole host of deep underlying problems with UK society into the riots and its curtailment should play a key role in reducing the national debt.


UK Deficit 101: Explaining the Malady and Medicine

Oh hearing those fateful words: “Wait, you’re an economist! So what’s the deal on…..”.  I shudder at the memories. This blog is in response to a couple of people who’ve recently asked me to explain the background to some of … Continue reading