In: Uncategorized12 Jun 2012
This is the main text for my latest Fund Strategy cover story. Boxes to follow later in the week.
Those who are football fans will be familiar with the term ’handbags’. For those who are not, it refers to a confrontation in which there are lots of flailing limbs, possibly some shouting, but little physical contact.
That would also be a good characterisation of the debate about British economic policy. It would be easy to get the impression that there is a principled disagreement between supporters of growth and austerity. Both sides are happy to present it that way. Only it is a grossly misleading description.
In reality, the difference between the two sides is much less than first appears. The main difference is on the exact speed at which stimulus should be withdrawn. It is a debate about timing, rather than fundamental principles. ’Growth’ in this context refers to a short-term stimulus while ’austerity’ refers to a half-hearted attempt to cut public spending.
Underlying this discussion, there is also a disagreement over whether this is a normal cyclical downturn, as Labour assumes, or a more fundamental debt crisis. In this debate too the difference is more one of emphasis than fundamental principles. Conservatives accept there is a cyclical element while Labour agrees there is a debt problem.
If it was only a game, the superficial character of the discussion would not matter. But people’s livelihoods and living standards are at stake. Rather than starting to grapple with the fundamental challenges facing the economy, the politicians are, in effect, simply shouting and spitting at each other.
This article will examine the shortcomings of the economic debate in Britain. It will start by examining the criticisms that the Conservatives and Labour level against each other. Next it will go on to argue that, despite initial appearances, both parties have much more in common than is generally assumed. Finally, it will examine an important but rarely discussed question: the key factors that are left out of the economic debate.
For the sake of simplicity, it will focus on the Conservatives and Labour. That should not be taken to mean the Liberal Democrats do not play a significant role in devising economic policy.
At first glance, it is hard to resist the conclusion that there are huge differences of principle between the Conservatives and Labour on the economy. This is partly a question of style rather than substance. In the House of Commons, for instance, each side takes its turn to attack while the other guffaws in response.
Politicians often also prefer to attack their opponents in front of the media than to discuss their own record. Any other course of action is often seen as a sign of weakness. Often such exchanges involve the trading of insults. Ed Balls, the shadow chancellor, is the arch-exponent of this game, regularly accusing the Tories of being “reckless”, “out of touch” and “unfair”. His favourite insult of all is probably the use of the label “ideological” or even “deeply ideological”. This is meant to send the message that the government is more concerned about its abstract ideas than practical policies.
All of the above should be taken more as the political equivalent of swearwords than genuine criticism. More serious is the charge that the government are “growth deniers”. By this, Balls means that the coalition should continue to maintain an economic stimulus rather than remove it prematurely.
In contrast, the Conservatives have since last autumn scaled back direct attacks on Labour’s economic record. This is not in response to any change of principle but because polling has indicated that many voters dislike it.
Instead, government attacks tend to be more indirect and subliminal. The implicit message is that the opposition is largely responsible for Britain’s economic plight because it let debt levels get out of hand. It is also subtly suggested that Labour’s softness on the deficit threatens to undermine Britain’s credibility on the financial markets.
George Osborne, the chancellor, has also accused Labour of being “deficit deniers”. The suggestion is that they fail to recognise the importance of reducing the deficit to Britain’s economic future.
This, in outline, is the main basis for the belief that there are substantial differences on economic policy between the two parties. But probe further and the gap between the two sides appears much more narrow.
For a start, Labour is always anxious to insist that it is keen to reduce the deficit and to cut public spending. For instance, its 2010 election manifesto contained a commitment to halve the deficit over the subsequent four years. This was to be achieved through economic growth, “fair taxes” and cuts to what it called “lower priority spending”.
The manifesto was insistent that a future Labour government would be prepared to make what it called “tough choices” on spending. These included “efficiency savings”, cutting government overheads, putting a cap on public sector pay and selling assets.
Where there was a difference in emphasis, it was on the timing of deficit reduction. The manifesto stated that “once the recovery is secure, we will rapidly reduce the budget deficit”.
So it is clear that Labour was not opposed to deficit reduction or spending cuts in principle. It was simply a little more cautious about the speed of implementation. In any case, the notion of a recovery being secure is inherently flexible.
It is also, of course, easier to be critical in opposition than when in government. It is likely, although it is impossible to say for sure, that Labour would have tightened its deficit plans still further if it had been elected.
In any case, the line pursued in the election in broad terms is still the one pursued today. For instance, Balls argued in a speech to the Fabian Society in January 2012: “We have never denied that a plan is needed to get the deficit down, and that it would mean tough decisions on tax and public spending. Before the election, I set out £1 billion of cuts to education.”
If Labour is guilty of hyping its differences with the government, the Tories have grossly overstated how far they have moved towards achieving their objectives. It is easy to get the impression that the Conservatives have slashed public spending and debt levels. But this is a long way from the reality.
Take the government’s own figures from the budget in March. The only key area where it seems to have remotely succeeded is in reducing the deficit from 11.1% of GDP in 2009-10 to 8.3% of GDP in 2010-11.
But even this apparent success in moving towards its goals is not as great as it seems. In November 2011, the chancellor was forced to concede the government would miss its target of closing the structural deficit by parliament’s end. The reduction has also been achieved by slashing public sector investment rather than by reducing spending, let alone by increasing growth.
Its performance by its own metrics has, in their own terms, been appalling. Despite all the hype about cutting debt, its levels have risen and are set to increase further until 2014-15.
Perhaps most surprisingly, total levels of public spending have hardly fallen at all. Since peaking at about 47.5% of GDP in 2009-10, the level of total managed expenditure fell to an estimated 45.8% in 2011-12 (and is forecast to reach 40.5%, all being well, by 2015-16. In other words, even if the government succeeds in its objective, the economy will be a world away from a minimal state.
Fraser Nelson, the editor of the Spectator magazine, was slated by many last year for observing that the level of spending cuts had been “embarrassingly small”. Yet looking at the facts, and disregarding whether cuts are desirable or not, it is hard to disagree with this conclusion.
This does not mean, nor did Nelson claim, that there are no cuts happening anywhere. Public spending can be divided into two equal parts. Departmental spending is being reduced. However, such cuts are being roughly offset by rises in annual managed expenditure, including such areas as interest repayments and benefits payments. It is also true, as mentioned above, that public investment is being slashed.
Conservative policy, then, is much closer to Labour’s than might first appear. The government poses as being willing to slash state spending boldly but is, in reality, acting timidly. The opposition presents itself as an opponent of cuts but its real difference is over timing.
Strip out the rhetoric and the two parties advocate a strikingly similar set of policies. Both say they want growth, as long as it is stable, and an economic rebalancing. Both want to improve infrastructure, strengthen exports, improve bank regulation and promote a greener economy. Both see education as playing an important role in boosting the skills of the workforce.
When significant differences threaten to appear, they often disappear quickly. For example, when the Beecroft report on employment law, commissioned by the Department for Business, suggested making hiring and firing easier, the government seemed to back away from it.
It would be easy to make the mistake of assuming that the closeness of the two parties on economic policy could potentially be positive: if only the two sides would stop bickering, they could work together to promote a recovery.
The problem with such a conclusion is that the policies of both parties are fundamentally flawed. They both fail to tackle, or even recognise, the key challenges facing any economic revival. Both sides also embody extremely limited and conditional conceptions of what constitutes economic progress.
It is striking how much both sides of the discussion focus on the consumption side of the economy and how little they discuss production. Labour supporters typically assume the crisis is primarily the result of lack of demand. Once the cycle turns and confidence returns, recovery should be secure.
Conservatives, on the other hand, give more priority to the scale of debt: reduce the debt burden and recovery will be underway.
The debate therefore focuses on the precise extent of state intervention. Labour demands a continuing stimulus while even avid free marketeers place more emphasis on reducing the overall tax burden.
If, however, the problem is rooted in the productive economy then the required solution is rather different. The challenge is to promote an economic restructuring which will create the basis for a new round of investment and durable growth.
This lack of a strong growth dynamic is not new. It can only be understood as a trend that goes back at least as far as the 1980s and in some respects further.
Successive governments have, in their own way, permanently stimulated the economy for three decades. Interest rates have been kept artificially low and public spending high.
From this perspective, the debt mountain is a symptom, rather than a cause, of a more fundamental crisis. Debt levels have risen as a result of desperate attempts to shore up flagging economic activity.
Simply reducing spending or curbing debt levels will not bring a recovery. A genuine economic takeover would require substantial investment in new areas of production and the shutting down or scaling back of weaker areas of economic activity.
Achieving such an objective would require a fundamentally different mindset than that apparent in any of the main parties at present. In addition to their blindness to the importance of production, they tend to be exceedingly cautious about any plans.
A clue to this ultra-cautious attitude is the importance all the main parties attach to economic stability. Above all, they are anxious to distance themselves from the possibility of volatility.
But such an attitude fails to recognise that economic instability is sometimes positive. It is the means through which new rounds of investment can be achieved. For example, the 1950s and 1960s were typically more volatile than the recent economic period. Expansions were certainly stronger and contractions were often more pronounced. Yet on average, economic growth was faster than that achieved even before the onset of crisis in 2008.
Strong economic growth is only likely to be achieved by those who reject the idea that economic growth must be subject to limits. This is an outlook I have previously referred to as “growth scepticism”. Typically, its advocates support growth in principle but insist that it must be subject to numerous caveats.
So a growth sceptic might argue that building, say, a power station might be welcome in principle but it must be subject to strict environmental constraints. In practice, this might mean that it will never end up getting built or the process might be drawn out by lengthy delays. Another possibility is for the project to be scaled back.
The possibility that the economic benefits of a power station could hugely outweigh any environmental costs is given little weight. Neither is the possibility that a more affluent society is typically better able to clean up any environmental damage.
Often this ultra-cautious approach favoured by politicians is obscured by their love of hype. All the main parties claim to support infrastructure projects, yet the government has slashed public investment. The very thing that, if properly targeted, could help generate a recovery is undermined.
In addition, proposals made by both the Tories and Labour are often much less ambitious than the hype suggests. The discussion of high speed rail in recent years is a good example.
In March 2010, following a year of preparatory studies, the Labour government announced its support for a high-speed rail network linking London and Scotland. It would apparently be an ambitious investment in high technology infrastructure. It was labelled High Speed 2 (HS2), with the first high speed train being the Channel Tunnel Rail Link (HS1).
Yet on closer examination, construction was not due to start until 2017. The first stage, linking London and Birmingham, would not be completed until 2026. A few months after the new coalition government came into office, it too announced support for HS2. Anyone following the debate casually could easily have assumed it was a new initiative.
More recently, Andrew Adonis, who was transport minister in the last Labour government, has criticised the government for moving slowly on the project. Although he has a point, he failed to acknowledge that his government’s plans were extremely cautious in the first place.
In a way, the sad saga of HS2 sums up what is wrong with Britain’s economic debate. It would be easy to draw the mistaken conclusion that there is a great gap between the two sides when in reality they are close. Both are also willing to hype a project that, if it happens at all, would likely take many years to get built.
In the meantime, Britain suffers from a chronically poor infrastructure and the public becomes ever more cynical of politicians.
It is high time for a genuine clash of ideas over economic policy, rather than the ’handbags’ beloved of today’s politicians.
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