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The economy has been at the heart of the general election campaign. Gordon Brown emphasises the need to support jobs and denounces Conservative plans to cut public spending by £6 billion this year as risking tipping the economy back into recession. David Cameron extols the benefit of making a start on deficit reduction in 2010/11 so that national insurance contributions do not have to rise in April 2011. And Nick Clegg calls for an increase in the personal tax threshold to £10,000 as a demonstration of the ‘fairness’ that is needed if the public are going to support tough measures on reducing the fiscal deficit.
But, as the Institute for Fiscal Studies (IFS) has made clear, all three main political parties have left more unsaid than said. In a detailed analysis of their plans, the IFS concludes that the Conservatives have not specified where £52.4 billion of deficit reduction would come from, Labour £44.1 billion and the Liberal Democrats £34.5 billion. It also said that ‘Labour and the Liberal Democrats would need to deliver the deepest sustained cut to spending on public services since the four years from April 1976 to March 1980’ while ‘the Conservative plans imply cuts to spending on public services that have not been delivered over any five-year period since the Second World War’.
Labour, the Conservatives and the Liberal Democrats have, simply, all been too afraid of the electoral consequences of spelling out where public spending will be cut and which taxes will increase after the election. All saw how the Tories’ ratings dipped in the opinion polls after their flirtation with ‘Age of Austerity’ rhetoric late last year and have concluded that, in a tight election, they cannot afford to tell the public the truth. Instead, they have, predictably, chosen to emphasise spending commitments (e.g. to the National Health Service), tax reductions (e.g. for married couples) or other positive stories (e.g. abolishing university tuition fees).
As a result, there has been far too much debate about whether it is a good idea to cut public spending by an additional £6 billion in 2010/11 and far too little about where up to £60 billion of cuts will come from in subsequent years.
In truth, the argument about the £6 billion of cuts was fought to a stalemate even before the election was called. Some economists say that it would take demand out of the economy at a time when the recovery was fragile; others suggested it would boost confidence and, thus, private spending. Whichever side is right – and I side with those who think cutting spending now is an unnecessary risk - the far more important issue is the make-up of the bigger spending cuts and tax increases that will inevitably follow.
This is not just a question of a democratic deficit – how can the electorate choose which party it wants to govern for the next five years if none of the parties will reveal its approach to the biggest issue that will face the government in the next parliament?
It is a problem for the parties too. Whether the election results in a majority Conservative Government, a minority Conservative Government or some sort of coalition or partnership (which, two days before the polls open, seem to be the three possible outcomes), the next government will have to implement unpopular measures on taxation and public spending, not just in its first few months in office but in every one of the next four or five years. And it will have to do so without having secured the support of the public for those measures. This will make it extremely unpopular. Indeed, Mervyn King, Governor of the Bank of England, is reported to think whichever party wins this election will not subsequently win another one for a generation.
Economists will recognise this situation as a classic game theory problem. If all the parties had cooperated and agreed to be totally open and honest about their spending and tax plans before the election, then the winner would be in a better position to implement its plans in the next parliament. But there was no such cooperation and no single party was willing to break ranks and be the first to set out its plans, for fear that the other two would not follow its lead and that it would lose support. Consequently, none acted and the result is a sub-optimal outcome for all concerned.
The consequence of this failure will haunt the next government every time it announces a tax increase or a cut in spending on public services.
This piece was first published on Left Foot Forward
Tony Dolphin
The Sunday Times this week published the latest list of the collective wealth of the 1,000 multimillionaires in Britain which has climbed to £335.5 billion, up £77.265 billion on 2009. Despite the global economic downturn this represents 29.9% growth on last year – the biggest rise in the 22-year history of the Rich List.
Quite apart from the fact that this is yet another indication that those ‘architects’ of the economic crisis have also been its beneficiaries, this level of growth is completely unsustainable by almost any standards. It does, though, suggest a rather tempting solution to the political parties’ collective headache over the public deficit.
By our calculations, just 20% of the combined wealth of the Rich List would be sufficient to fund the entire public deficit for 2010-2011. In political party terms, just half of last year’s growth could plug the hole in Liberal Democrat plans; a 25% share of the richest hundred’s combined wealth of £182bn would fund Labour’s shortfall; and if this year’s 53 billionaires (rising from 43 last year) could stump up £53bn between them, that would plug the Conservatives' plans.
Of course, if it was done through taxation there would be cries of foul and flight – although interestingly the Sunday Times this year plays down such cries as threats rather than realities – but it would be worth the anoraks running some sums.
But in these unprecedented times, what if the Rich List 2010 somehow clubbed together and in an act of monumental generosity simply gave a small part of their wealth away? For the many millions facing as yet unknown austerity in our schools, hospitals and communities, it might make a difference that would go down in the annals of history far more than any investment in a trophy football team or quantity of private jets. And for the richest thousand? They probably wouldn’t even notice.
Ed Cox
How public spending is spread around the UK is generating great interest, after David Cameron identified areas like Northern Ireland and the North East as having a public sector that is ‘too big’. Is he right? Well, sort of.
Much of the coverage has been based on figures that show the public sector constitutes up to 70 per cent of the economy in some parts of the country. These are quite shocking figures, but they deserve closer inspection.
Treasury figures published last week reveal that spending per head is spread unevenly around the country. Areas like Northern Ireland, Wales, Scotland, the North East and the North West of England receive above average levels of public spending per head, while regions like the South East and East of England receive less than the UK average. Surprisingly for some, these figures also reveal that is it actually London that receives the most public spending per head – 15% above the UK average.
Mostly what this shows us is which parts of the UK have the highest levels of social and economic need, as a large proportion of this spend is made up of ‘social protection’– i.e. benefits and the state pension. This spending is entitlements-based, and responsive to need, so if the number of claimants of Jobseeker’s Allowance in an area increases, so too does social protection spending.
So why didn’t David Cameron flag London’s public sector as too large? The figures he used looked at the sector as a proportion of GDP, rather than public spending per head. The City of London’s economic success (much of it the result of people commuting in from surrounding regions) disguises the size of public sector spending when the figures are viewed in this way.
Cameron did also make the argument that the private sector needs to be larger in the Northern regions, Wales and Northern Ireland, which is the right way to think about the issue. It is not so much that the public sector is 'too big' but that the private sector is 'too small'. You could argue that without public sector employment the situation could be even worse in some parts of the UK.
We all know cuts are coming and they have to be made, but it is vital that economic geography is factored into the thinking as the size of the public sector is reduced. Otherwise, there is a risk that swinging cuts could have a particularly negative effect where social and economic need is already high.
Katie Schmuecker
The Liberal Democrats’ surge in the opinion polls has led to increased interest in their policies. One area of focus in this week’s leaders’ debate on international affairs is likely to be Europe, including the issue of UK membership of the euro.
The Liberal Democrats are rather more enthusiastic abut this prospect than the other two main parties. The Conservatives are opposed in principle and Labour has put forward a set of conditions that effectively allow them to shelve the issue indefinitely. But the Liberal Democrat manifesto says: ‘We believe that it is in Britain’s long-term interest to be part of the euro. But Britain should only join when the economic conditions are right, and in the present economic situation, they are not. Britain should join the euro only if that decision were supported by the people of Britain in a referendum.’
Putting aside the remote likelihood of a ‘yes’ vote in a referendum and concentrating on the economic issues, when might the conditions be right?
One argument put forward by the antis is that the depreciation of sterling since the beginning of the financial collapse has helped limit the impact on the UK economy (in contrast to, say, Greece). There is an element of truth in this argument but, although sterling fell by 24 per cent against the euro in 2008, the effect on the economy, in terms of stronger exports and weaker imports, appears to have been modest. Furthermore, although sterling is now 10 per cent higher against the euro compared to the end of 2008, it could be argued that the best time to join the euro is immediately after a sharp fall in sterling, so that any gains in competitiveness are ‘locked in’.
But joining the European Monetary Union does not just mean adopting the euro: we’d also share a common monetary policy, and in particular a common short-term interest rate, with other members. That would not be a problem at the current time. Interest rates are rock bottom in the UK and Europe. Indeed, there could be benefits from the UK joining the euro now, in the form of lower long-term interest rates.
But it might be a problem in the long term. When economic conditions return to something approaching normality, the UK authorities will be desperate to avoid, among other things, a renewed spurt in house prices and surge in mortgage lending. Setting interest rates at an appropriate level will be one means of achieving this aim. But that option would not be available if interest rates in the UK were being set by the European Central Bank based on economic conditions across the whole of the euro-area.
Ironically, joining the euro in the present economic situation would probably have little effect on the UK economy; the risk of such a move would only become apparent in the long term.
Tony Dolphin
In an article in today's Guardian David Cameron proposes establishing a fair pay review into pay inequality in the public sector and asking it ‘to consider how to introduce a pay multiple so that no public sector worker can earn over 20 times more than the lowest paid person in their organisation’.
Putting aside the vagueness of the language – Prime Ministers have to make decisions, not pass them over to a review to consider and I’m left wondering what would happen if the review refused to contemplate the idea? – this is a proposal with some merit.
But why limit it to the public sector? David Cameron argues that a pay multiple would ‘help tackle unfair pay policies’ and ‘improve cohesion and morale’. Shouldn’t unfair pay policies be tackled in the private sector too? Wouldn’t improved cohesion and morale in the private sector help the economy recover more strongly from recession?
Whatever the result of the general election, the next government will expect senior public sector workers to behave more like their counterparts in the private sector. They will be expected to deliver the ‘efficiency savings’ that both the main parties hope will prove to be a painless way of reducing the budget deficit (they won’t, but that’s a different story). They will be charged with lifting productivity growth in the public sector into line with productivity growth in the private sector.
So why not treat senior workers in the public and private sectors the same. Forget the review. Just stop anyone in any organisation earning more than 20 times the pay of the lowest paid person in their organisation. According to David Cameron, ‘Some of our most successful private sector companies operate a pay multiple’. Let’s try it out on all of them.
Tony Dolphin
The announcement yesterday that Gordon Brown will miss Obama’s nuclear summit is yet another indication of how domestic is trumping foreign policy in this election.
A domestic bias isn’t really surprising of course. In the scrabble for votes politicians focus – naturally – on obvious vote winners; and the electorate focus – naturally – on what happens in their own backyards.
But this concentration on the domestic feels extreme compared even to past electoral battles. Whereas in the past Iraq, the Gleneagles commitments or the need for an ‘ethical foreign policy’ figured large, in 2010 only two ‘foreign’ policy issues are attracting even a marginal degree of attention – Trident and Afghanistan. And crucially, though each encompasses a set of complex considerations, they have been reduced in electoral sloganeering to a simple domestic core, ‘can we afford it?’ (Trident), and ‘how many Brits will die?’ (Afghanistan). (Indeed, the extent to which Afghanistan is now being seen solely through the lens of soldiers’ deaths – ignoring issues of British security, Afghan security, cost, the future of international cooperation, the ‘war on drugs’ and numerous other issues – has become so extreme that even the Army is complaining).
There are two worrying aspects to this trend. First, it seems likely that we are focusing so much on the domestic because things here in the UK seem so bad. When the economy has looked rosy, when we have felt confident about our place in the world – indeed, at times of ‘Cool Britainnia’ – it has been easy to consider events beyond our borders. But when things look rough, when we have to cut a deficit, find jobs for our young people and try to find a way to make our banks work for us, there is a tendency to hunker down. In other words, this isn’t just an electoral trend. Dealing with the deficit and reorganising our economy is a major task which seems likely to preoccupy the next government, whoever is in power.
Even if we have our fingers in our ears, the tree falling in Afghanistan, or the US, or Europe, or China, still makes a sound. In fact, as ippr’s National Security Commission made clear it’s a sound we can less and less afford to ignore. President Obama is calling a summit to try to limit the growing spread of nuclear weapons – a terrifying prospect for the UK. Why do we not see it as a priority? And this is just one of many challenges (including climate change, poverty, terrorism and banking regulation) in our interdependent world that require us all to act together. Let’s start by listening.
Laura Chappell
Anyone watching Newsnight this Wednesday would be forgiven for thinking that the entire debate about immigration comes down to numbers. Whatever people’s concerns about migration – be it the impact on the economy, public services or community cohesion – the answer from politicians is always the same: adjust the number of immigrants coming to the UK. Schools can’t cope with all the Polish kids? Stop letting so many Poles in. Pakistani immigrants aren’t integrating? Let fewer in to the country. The economy needs more skilled workers? Adjust the points system to let them in.
There is a danger with this approach that it assumes the only thing immigration policy can do is alter the number of migrants entering the country. But a lot happens once a migrant has crossed the border, too. Greater state support for settlement can improve integration and help tackle many of the problems people are concerned about. Schools can’t cope with all the Polish kids? Provide the schools with teaching assistants to help them cope. Pakistani immigrants aren’t integrating? Fund and support outreach workers to help them learn English and establish roots in the community.
I’m slightly bemused that while politicians are keen to point to Canada’s immigration system as a model way to control the number of immigrants arriving, they neglect to mention the fact that Canada also invests a great deal in supporting immigrants to settle in, and that their government endorses an official model of multiculturalism. Dedicated translation services, English language tuition, education programmes, information diffusion, citizenship instruction, employment programmes and social welfare policies are all part of the tool kit used. The evidence is that if you invest early in helping migrants to settle in to their new country, then you stave off many of the problems and tensions faced further down the line. It might just be more important to solving these problems than limiting the numbers you let cross the border in the first place.
Jonathan Clifton
In his speech on the economy yesterday the Prime Minister underlined the need for a fair economy, with growth that will ‘preserve and expand the jobs – and lift the standards of life – of the British people.’
But a fair economy is not simply about restoring growth. Brown’s progressive goals are dependent on how the rewards of growth are distributed. Several high profile reports have recently revealed that strong growth in the decade before the financial crisis failed to address the acute inequality – geographic, social and economic – embedded in British society.
So, after the bust, how will Brown’s recovery fare on fairness?
Efforts to tackle inequality have typically focused on reducing poverty – a noble aim, but it offers limited mileage without parallel endeavours to redistribute the vast wealth at the top. Brown is therefore right to limit top earners with wage freezes for senior public sector workers – a measure first advocated by the Conservative Party.
But while the public sector may hope to set an example, Brown remains silent on wage inequality in the private sector – an indication, perhaps, of the persistent belief that high wages drive entrepreneurialism.
Over a fifth of UK workers are low paid – and millions more are stuck in poor quality, insecure jobs. The rewards of the boom years passed these workers by. The rise of the knowledge economy led to new highly skilled and highly paid jobs, while the low skilled sector consisted increasingly of poor quality jobs in the service economy. Social mobility has remained stagnant for decades, partly as a consequence of this polarisation between lovely and lousy jobs.
Yet the strategy announced yesterday does not rise to this challenge. It reiterates promises from January’s growth strategy to invest in high quality infrastructure and scientific innovation. These measures may well create jobs of the future, and high skill industries will surely secure UK growth and a strong position in global trade. But the Government has offered no policies to improve the quality of employment at the bottom or tackle the low pay that persists in many industries.
Tess Lanning, Researcher, ippr
The latest UK trade figures were awaited more eagerly than usual. Exports are seen as crucial to the UK’s economic recovery and the main political parties are all eager to present themselves as having the best policies for the sector.
Figures released on 9 March show the UK’s trade deficit in goods widened to £8.0 billion in January from £7.0 billion in December. This was mainly the result of a 6.0 per cent fall in export volumes (excluding oil and erratic items).
This will come as a blow to those looking to the export sector to strengthen the UK economy’s recovery from recession. Sterling’s effective exchange rate fell by 25 per cent in 2008; this was supposed to make UK industry more competitive and boost overseas sales of British goods. So far, there is little evidence that this is happening.
The January data are probably a blip – trade data are among the most erratic of all data releases. More worrying is the underlying trend, which shows only modest growth in export volumes over the last year. Of course, this is due in no small part to the weakness of demand in the UK’s main export markets, particularly in the rest of Europe, and it should be that export growth will improve once Europe’s economic recovery picks up speed.
There are also some grounds for optimism in the latest business surveys. The Bank of England’s agents’ report and the CBI’s survey of manufacturing both show a steady improvement in optimism about the outlook for exports in recent months. However, the Bank of England does note that some companies are taking advantage of sterling’s weakness to push up profit margins, rather than allowing it to feed through into enhanced competitiveness. Depending what happens to these higher profits, this probably means some of the potential benefits of sterling’s fall - in terms of more exports, more output and more jobs - are being lost.
Tony Dolphin, senior economist, ippr
Figures showing the UK economy grew by 0.3% in the final quarter of 2009, rather than by 0.1% as previously estimated, are little help to either of the two main political parties in making the case for their economic policies ahead of the election.
Labour will be relieved that the economy has emerged from recession but reluctant to make too much of the stronger growth. In particular, they will be aware that growth in the first quarter of 2010 could disappoint due to the bad weather we have been experiencing and the likelihood that the increase in the main rate of VAT from 15 to 17.5% in January led to some spending being brought forward into the final months of 2009. And the first estimate of Q1 GDP will be published on 23rd April – probably right in the middle of the election campaign. Labour are also keen to emphasise that the fragility of the economic recovery makes it unwise to cut government borrowing by more than set out in last year’s Pre-Budget Report.
The Conservatives have stressed that they would take the health of the economy into account when deciding the scale of any spending cuts and tax increases to be included in the budget measures they hope to introduce within 50 days of winning a general election. But, as George Osborne made clear again in his Mais Lecture on 24 February, they would take steps to bring government borrowing down faster in 2010/11 than set out in the current Government’s plans. Whatever the economic rationale behind such a move, for this to seem like a sensible course of action the economy needs to be growing at something more than a snail’s pace.
So, while very low – or even zero – growth in the first quarter of 2010 would be bad news for Labour, it will be hard for the Conservatives to capitalise because it also throws into question one of their key economic policies. Perhaps the Liberal democrats would be the beneficiaries – not regarded as responsible for the recession and not advocates of early cuts in government borrowing.
Tony Dolphin, senior economist, ippr
The economy has been at the heart of the general election campaign. Gordon Brown emphasises the need to support jobs and denounces Conservative plans to cut public spending by £6 billion this year as risking tipping the economy back into recession. David Cameron extols the benefit of making a start on deficit reduction in 2010/11 so that national insurance contributions do not have to rise in April 2011. And Nick Clegg calls for an increase in the personal tax threshold to £10,000 as a demonstration of the ‘fairness’ that is needed if the public are going to support tough measures on reducing the fiscal deficit.
