A Letter to the Guardian - Brown vs. Darling II?

This letter appeared in last week's Epsom Guardian:

Quite apart from the fact that they didn't have the courage of their convictions to actually sign their name (though I can probably have a stab at the author), I felt the letter warranted a reply. I wrote into the Guardian, and am hoping to have my letter printed tomorrow. For the purposes of space, I had to reduce my original argument by about half, so the longer version is included below.

Personally, I think it is extremely foolish for Labour to continue to frame their economic argument in the crass terms of 'cuts vs. investment', though I imagine those like Ed Balls will continue to do. Given Ed Miliband used his debut speech yesterday to state that the Opposition will not fight against cuts they think are necessary/right, it brings up an interesting point of conflict between the two. Balls' name is, of course, being widely touted for the Shadow Chancellorship. Surely Labour would not get themselves into another situation where the Leader is saying one thing, and the Shadow Chancellor is thinking something different?

Anyway - the letter:

I read with interest the anonymous contribution in your last issue, (‘Budget Will Put People Out of Work‘).

The letter, as with much of Labour’s reaction to the Emergency Budget, seems to be based on the fallacy – in part put forward by a recent Institute of Fiscal Studies report - that cuts in the public sector will automatically lead to vast, lasting unemployment. A closed argument that fails to take account of the Coalition’s welfare and business policies; the emphasis placed on getting people off benefits and back into the workplace, and on rebalancing our economy.

This economic recovery will be one fostered within the private sector, and to ignore this forms a circular argument that implies the public sector is the only possible workplace in this country. Given the grossly swollen public sector that they inherited, with its accompanying pension liabilities to the tune of £1 trillion, not included in any Labour deficit projections, shifting the balance away from the public sector would seem sensible, and crass attacks such as this are unhelpful.

The argument also seems to fly in the face of the figures. The UK’s GDP grew by 1.2 per cent in the last quarter. The additional cuts announced by the Coalition that your writer finds so unpalatable amount to 0.1 per cent of GDP by quarter. Cutting in this way is not a cut in economic revival, it is merely a cut in the size of the State. A European Commission study on defecit reduction found that out of 74 consolidations, economic growth accelerated in 43 cases. You need only look at the examples of Finland and Sweden to see the benefits of growth in this way.

However, this private sector recovery will not succeed if, as your writer alleges, the Government is ‘pulling the plug’ on business. I think a local example will serve to oppose this. When the local franchise of Puccino’s risked going out of business due to rent increases, it was the Coalition’s rate cuts that ensured it could keep trading. Cuts in business rates to small and large businesses alike are offering real support whilst the recovery gets underway.

In a week when the IMF has said the Government’s plans for defecit reduction are ‘strong, credible and essential’; in a month when Moody’s Investors Service has endorsed George Osborne and stated that not sticking to his plans could affect our AAA credit rating; in a Conference season where Alistair Darling comes out in favour of a strong deficit reduction plan, it seems a nonsense to view the economic measures currently being taken by the Coalition as ‘reckless’. What this country needed after thirteen years of fiscal profligacy and staggering beurocracy was a Government prepared to take the tough decisions in order to ensure economic revival. In the Coalition government, I feel we have it.

James Tarbit
Deputy Chairman, Political
Epsom and Ewell Conservative Future

P.S. There is one thing the writer and I can agree on, however; their analysis of why ‘most people join the Tory party’ – because they wish a smaller state. After thirteen years of beurocratic interference with front-line services and degradation of civil liberties, I think many people would sympathise!

Paleolithic politics

I have watched the grandstanding from the TUC over the past few days with a sense of both sadness and deja vu.

I fully understand the right of individuals to petition their employers for improvements in circumstance and pay. When, however, Bob Crow can stand at the lectern and call for a campaign of 'civil disobedience' in the face of cuts that all Parties agreed were necessary to differing degrees, and garner support from the floor, then something is deeply wrong.

Yesterday, Mark Serwotka - head of the PCS Union - called for not only a moratorium on public sector job cuts, but even an increase in public sector funding to lift us out of recession. Failing to see that it will be the private sector - in particular small/medium enterprise within this sector - that will most likely provide the growth we so need, misses the point entirely and risks a further decline into deficit and debt.

The most glaring hole in the Unionist argument has been posed very effectively by City Unslicker - what would they do instead? In the face of almost unilateral agreement on the necessity of spending cuts - Labour's plan was to halve the deficit within four years - how would they ensure their aims?

The Unions obviously feel that the time has come to show their hand. It remains to be seen whether the result is similar to that of 1974, where industrial action had the result of bringing down the Government, or of the early 1980s, where the Unions' power was crushed by a government organised and determined enough to face them down.

Balls to Keynes

One of the fascinating elements of the current Labour Leadership campaign has been watching the various candidates make their pitches for what the Coalition Government is doing wrong, and what they would do differently. Much has been made of the spending cuts that Cameron, Clegg et al. have instigated this year, and the risks it could cause in terms of a double-dip recession. None of the candidates, however, have gone quite as far as Ed Balls. In an article for the Guardian today, Balls continued to press forward with the notion that 'any' cuts are wrong. According to Ed, even Labour's plans to halve the deficit in 4 years were foolish.

Balls' article is founded solidly in the Keynesian economic mould with its (effective) critique of past recessionary spending constraints in the 1930s and 1980s. I would argue, though, that the whole-sale deployment of a Keynesian model which he seems to call for in his the final paragraphs of his article brings a risk equally as significant as the return to recession he sees as the danger with the Coalition's plans.

For a start, it is unclear as to whether Keynes ever envisaged his concepts being applied to public finances in quite such a parlous state as the UK currently faces. Pulling interest rates down and increasing government investment on infrastructure might bring about eventual economic recovery through Keynes' multiplier effect, but at what short and mid-term cost in the current climate? Previous fiscal stimuli deployed by the Brown Government created an anaemic recovery at best and the danger with advocating further spending, or markedly restrained cuts, is that the interest rates on leveraging current debt become unmanageable. It is all very well for Ed Balls to dismiss the UK falling prey to the same issues which affected Greece, but how can he know for sure? How can anyone in fact?

Indeed, the Keynesian spending multiplier only works when the additional liquidity placed in the market is spent on consumption goods. i.e. When individuals spend the money they have saved/gained, this drives demand and increases employment. Perhaps one of the reasons the recovery engendered by the recent fiscal stimulus was so weak is that in the current climate this simply isn’t something close to tax-payers’ hearts in the UK, particularly when the current financial crisis came out of individual debt caused by people living beyond their means. As President Bartlett had it in the West Wing, upon hearing that his own aide had spent an advance tax rebate on paying down debt:

"Would a trip to Banana Republic have killed you?"

It is also interesting to note that Labour's use of the Keynesian model has been imbalanced. Increased government investment in a down-turn is one half of the model. The other, however, is putting up taxes and cutting government outlay during a boom to suppress inflation. Tax rises there certainly were, but rather than constricting the rate of spending Gordon Brown as Chancellor seemed happy to continually increase it. Part of this can be explained by the political necessity of redressing years of Conservative prudence/underspend (call it what you will) on the NHS and Education, but it seems to have gone much further than that with the result that both the RPI and CPI rates of inflation have been on the up since 2001.

At the end of the day, it is clear that political ideology is at the heart of any economic argument, whether Keynesian or Classical/neo-classical. Labour prefer to advocate the Keynesian view of higher taxes during a boom and high government spending during a bust as it fits best with an economy largely controlled by the government itself. The Conservatives argue for a more Classical economic view, as this works best under the much smaller government they strive for. In his article, Balls side-steps the fact that Government spending is still set to rise during this Parliament. He merely points out that there are constraints being placed in areas that he finds unpalatable. Rooting his economic arguments in politics makes good sense where he has to differentiate himself from other senior Labour figures in the Leadership elections. It does, however, blunt the intellectual thrust of his argument and increases the likelihood that it can be dismissed as political points scoring.