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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School funding: the £3bn problem creeping up on Theresa May

Parents are starting to notice the consequence of schools funding changes. And they're not happy. 

As speculation grew last Tuesday morning that Theresa May would imminently call a snap general election, Kevin Courtney, the general secretary of the National Union of Teachers, was furiously re-writing the speech he was due to deliver at the union’s conference at noon.

The resulting changes included a pledge to put school funding “at the centre” of the union’s campaigning in the run-up to 8 June. Alongside a call to arms for teachers, he also wrote a message for parents.

“I am talking to the activists in this hall, but I have a wider audience in mind,” Courtney told teachers in Cardiff.

He was, he said, also addressing the “hundreds of thousands of teachers who aren’t here and the millions of parents and children currently engaged in our schools and colleges” and who were ready to mobilise against funding cuts. 

Tapping up angry parents as a campaign resource is nothing new. But the growing disquiet among the wider public as the school funding crisis reaches breaking point means the parents’ voices are now a particularly powerful tool. One the government could do without in the run-up to polling day.

The figures are stark – the Institute for Fiscal Studies says real-terms spending is set to fall by 6.5 per cent by 2020 – that’s the steepest cut in school funds since the 1990s.

Schools must find savings of £3bn by 2019-20, according to the National Audit Office. That’s the average salary of around 100,000 teachers.

The schoolcuts.org.uk website - put together by the unions using government data – shows that 99 per cent of schools will have per-pupil funding cut, and there are concerns the final version of the government’s upcoming new formula for handing out cash to schools will hit those in cities even harder than first thought.

But it is the plight of individual schools that is really getting through to parents. School leaders are increasingly having to ask them for donations, while the curriculum on offer to their children narrows, with creative subjects often the first to go because they do not count towards the government’s accountability measures.

Support services are being cut too. - Stuart McLaughlin, from Bower Park Academy, told the education select committee that he faced having to axe support staff roles, including those of the school’s counsellor and first aid officer. These are things that parents notice.

The impact of the government’s decision not to protect school funding in the face of rising costs from salary increases, pension and national insurance rises and other pressures such as the apprenticeship levy is now very visible on the ground, and parents are increasingly worried.

To an organisation like the NUT, the maths is simple. Its 300,000+ members can shout pretty loudly, but millions of parents can shout louder. With the unions facing a battle on two fronts – grammar schools and funding – they are going to need all the help they can get.

This is why groups like Fair Funding for All Schools are increasingly important. While the complaints of teachers and union members are often – wrongly – dismissed as scaremongering, parents make up a huge chunk of the electorate, and were already starting to organise before an election was even announced.

Jo Yurky, a mum of two from Haringey and founder of Fair Funding for All Schools, told the NUT conference last week that she was confused when she heard the head of her local secondary talk about needing to increase class sizes. She thought funding was protected, and had believed the government when it said it was spending a record amount on schools.

“Teachers and head teachers are trusted by parents – we leave our children in their care each day,” Yurky told teachers.

“They are speaking out publicly about their concerns out of desperation, because they are so worried about the financial situation in our schools. When headteachers speak, parents listen.”

Education funding is also a key campaign issue for Labour. Jeremy Corbyn has accused Theresa May’s government of breaking the 2015 manifesto commitment to protect the money following pupils into schools.

John McDonnell, the shadow chancellor, pledged last week to restore the role of the Local Education Authority and “fully-fund” schools, although the party will now have to explain in detail what this means in its upcoming manifesto (and where the money will come from).

However, this isn’t a partisan issue. Tory MPs Michael Fabricant, Tom Tugendhat, Maria Caulfield and James Duddridge are among those to have spoken out in parliament about cuts faced by schools in their constituencies under the proposed new school funding formula.

The government wasn’t due to publish its final funding plans until the summer anyway, but has rejected calls for it to bring the announcement forward to better inform voters, blaming pre-election purdah rules.

It is admirable to move cash around the system so it is more equitable for people in different places, but without injecting extra cash, ministers are simply moving inadequate levels of funding around, and children will lose out in the end.

It is no longer acceptable to parents, teachers, school leaders and children for the government to peddle its line that there is record funding going into schools. There are also record numbers of pupils in the system, so you’d hope that this would be the case.

Urgent action is needed to properly equip schools for the additional cost pressures they face, and if this doesn’t happen soon, Theresa May is going to see a lot more than just a few union activists attempting to block her road back to Downing Street.

 

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