Cameron goes off the rails

The PM's patronising demand for families to clear their debts is bad economics and terrible politics

Leave aside the economics for now, David Cameron's call for households to clear their debts is terrible politics. In his speech at the Conservative conference today, he will say:

"The only way out of a debt crisis is to deal with your debts. That means households - all of us - paying off the credit card and store card bills."

At a time when voters are facing the biggest fall in living standards since the 1920s (owing to a combination of rising prices, falling wages, lower benefits and higher taxes), Cameron's demand is hideously patronising. It is a perfect example of what the novelist Joyce Carey once described as a "tumbril remark" - the sort of statement seemingly designed to ignite class war. Marie Antoinette's infamous (and likely apocryphal) riposte to the news that the poor were suffering due to bread shortages ("let them eat cake") is the most celebrated historical example.

Now, Cameron, a man who has had never had a money worry in his life, insists that the poor must repay their debts, as if, up to this point, they had merely chosen not to do so. I cannot recall a less sensitive or more thoughtless remark from a serving Prime Minister.

But worse, Cameron's comments confirm that he has no grasp of basic economics. If we are to avoid an economic death spiral, we need people to spend, not save. Keynes's paradox of thrift explains why. The more people save, the more they reduce aggregate demand, thus further reducing (and eventually destroying) economic growth. They will be individually wise but collectively foolish. If no one spends (because they're paying off their debts) then businesses can't grow and unemployment willl soar. The paradox is that if everyone saves then savings eventually become worthless.

The final and greatest irony is that Cameron is leading a government whose own policies are increasing household debt. The Office for Budget Responsibility forecasts that household debt will rise from £1,560bn in 2010 to £2,126bn in 2015 (or from an average of £58,000 to an average of £77,309. NB: the figures include mortgages), largely due to higher inflation (encouraged by Osborne's VAT rise) but also due to "the reductions in social security payments announced in the October Spending Review, which act to reduce household disposable income". In other words, George Osborne's decision to take an axe to the welfare state is helping to fuel the household debt bubble.

No one denies that household debt is too high. Indeed, UK households are more indebted than those of any other major economy. But if Cameron wants to address this problem he should have said something about the fact that 11 million low-to-middle earners have seen no rise in their real income since 2003. People borrowed to maintain their living standards as wages stagnated. Cameron's blunt demand for households to repay their debts suggests a man who not only can't solve the problem but doesn't even understand it. Today, we have seen the clearest indication yet that he is unfit to govern this country.

George Eaton is political editor of the New Statesman.

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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR