The Danes' counter-example

Additional stimulus hasn't caused bond yields to rise in Denmark. They're in the EU and have their o

Denmark's new three-party coalition government has announced that the primary aim of its economic policy is to secure a balance between revenues and spending and create growth by bringing forward public investment. The new Danish prime minister, Helle Thorning-Schmidt, who is Neil Kinnock's daughter-in-law, unveiled her coalition cabinet on Monday and indicated that her government would take a radically different approach from the austerity measures being adopted by other European countries. The new Danish government apparently intends to spend ten billion Danish kroner to upgrade roads, railways and bicycle paths. The stimulus agenda also includes plans to provide temporary tax credits for companies that invest in R&D and machineries along with new technologies. It said it also aimed to carry out a tax reform that would significantly reduce taxes on wage incomes.

This is a very interesting counter-example to George Osborne's and David Cameron's claims that austerity is crucial to keep bond yields low. This is what Cameron said in the rapidly revised part of his party conference speech yesterday, that in a draft version that was circulated told people to save -- when he really meant he wanted them to spend.

When you're in a debt crisis, some of the normal things that government can do, to deal with a normal recession, like borrowing to cut taxes or increase spending -- these things won't work because they lead to more debt, which would make the crisis worse. Why? Because it risks higher interest rates, less confidence and the threat of even higher taxes in future. The only way out of a debt crisis is to deal with your debts. That's why households are paying down their credit card and store card bills. It means banks getting their books in order. And it means governments -- all over the world -- cutting spending and living within their means.

Cameron's speech -- even the corrected final version -- gets it precisely the wrong way round. The only way out of a debt crisis -- if by debt crisis we mean, as he says, a situation where households are desperately trying to pay down debt because on an individual level this is rational -- is for the government to step in and spend more, at least temporarily. For the government to join in and try to save more too, which he argues is logical, is disastrous. A first-year undergraduate course in macro-economics should have taught him that!

What has happened in Denmark -- which, just like the UK, is not in the euro but is a member of the European Union? It is a nice test case, because if Dave is right -- which he isn't -- then bond yields should have soared in Denmark, even on talk of injecting stimulus. They haven't. Here is a selection of yields on ten-year government bonds for Denmark and the UK over the past couple of months or so.

 
  Denmark UK
05/10/2011 2.005 2.354
30/09/2011 2.069 2.427
23/09/2011 1.932 2.363
09/09/2011 1.975 2.456
02/09/2011 2.204 2.641
19/08/2011 2.362 2.606
12/08/2011 2.573 2.753

 

One argument the coalition has made is that the US has lower yields because the dollar is a reserve currency, so their data isn't relevant: currently their yield is 1.888 per cent. But that does present the government with a further problem, because bond yields in Sweden, which is also in the EU but not in the euro, are 1.695 per cent. They are 2.135 per cent in Canada, which is also not a reserve currency, and a paltry 0.879 in Switzerland, which really does look like a place of safety.

Based on the evidence from Denmark, putting additional stimulus into the economy has not caused bond yields to rise and they remain below those in the UK. The Danes are a much better comparison country than the Greeks, the Portuguese, the Italians or the Spanish that don't have their own central bank and currency as the Danes do; just as we do.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.