Nick Clegg’s doublethink on cuts

Clegg admits the cuts are having a “chilling effect” (but supports them anyway).

In today's Financial Times, Nick Clegg makes the startling admission that the coalition's spending cuts are having a "chilling psychological effect" on the public. Clegg's words put him at odds with George Osborne, who has consistently argued that the cuts will increase confidence and that excessive state spending is "crowding out" private investment.

As Anatole Kalestky pointed out in an important column in the Times (£) on Thursday, Osborne's views are based on the theory of Ricardian equivalence (propounded by the economist David Ricardo) – the belief that whether a government finances its spending through borrowing or taxation, the effect on demand is the same.

Kaletsky wrote:

In a paper written in 1820, Ricardo examined whether a government that went to war would be better off collecting £20m in taxes or borrowing the same amount at an interest rate of 5 per cent or £1m a year. "In point of economy, there is no real difference," he concluded. "For £20m in one payment and £1m per annum for ever . . . are precisely of the same value.

Osborne and other anti-Keynesians have since exploited this theory to argue that the public treats government borrowing as "deferred taxation" and, therefore, spends more when the state spends less.

But as Kaletsky notes, this respone ignores Ricardo's explicit rejection of the doctrine. Immediately after the passage on the theoretical equivalence of state borrowing and taxation, he wrote: "But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly . . . It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1,000." In practice, human beings do not see borrowing as being comparable with taxation.

The disastrous final-quarter growth figures proved that the public is reducing, not increasing, its spending in response to the cuts. The widely predicted surge in consumer spending, as shoppers rushed to beat the New Year increase in VAT, never materialised. Yet in spite of all this, Clegg insists that the coalition will maintain its "fiscal stance". With the economy at renewed risk of a double-dip recession, he will have to perform many more intellectual contortions in the months to come.

George Eaton is political editor of the New Statesman.

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Why Theresa May won't exclude students from the net migration target

The Prime Minister believes the public would view the move as "a fix". 

In a letter to David Cameron shortly after the last general election, Philip Hammond demanded that students be excluded from the net migration target. The then foreign secretary, who was backed by George Osborne and Sajid Javid, wrote: "From a foreign policy point of view, Britain's role as a world class destination for international students is a highly significant element of our soft power offer. It's an issue that's consistently raised with me by our foreign counterparts." Universities and businesses have long argued that it is economically harmful to limit student numbers. But David Cameron, supported by Theresa May, refused to relent. 

Appearing before the Treasury select committee yesterday, Hammond reignited the issue. "As we approach the challenge of getting net migration figures down, it is in my view essential that we look at how we do this in a way that protects the vital interests of our economy," he said. He added that "It's not whether politicians think one thing or another, it's what the public believe and I think it would be useful to explore that quesrtion." A YouGov poll published earlier this year found that 57 per cent of the public support excluding students from the "tens of thousands" target.

Amber Rudd, the Home Secretary, has also pressured May to do so. But the Prime Minister not only rejected the proposal - she demanded a stricter regime. Rudd later announced in her conference speech that there would be "tougher rules for students on lower quality courses". 

The economic case for reform is that students aid growth. The political case is that it would make the net migration target (which has been missed for six years) easier to meet (long-term immigration for study was 164,000 in the most recent period). But in May's view, excluding students from the target would be regarded by the public as a "fix" and would harm the drive to reduce numbers. If an exemption is made for one group, others will inevitably demand similar treatment. 

Universities complain that their lobbying power has been reduced by the decision to transfer ministerial responsibility from the business department to education. Bill Rammell, the former higher education minister and the vice-chancellor of Bedfordshire, said in July: “We shouldn’t assume that Theresa May as prime minister will have the same restrictive view on overseas students that Theresa May the home secretary had”. Some Tory MPs hoped that the net migration target would be abolished altogether in a "Nixon goes to China" moment.

But rather than retreating, May has doubled-down. The Prime Minister regards permanently reduced migration as essential to her vision of a more ordered society. She believes the economic benefits of high immigration are both too negligible and too narrow. 

Her ambition is a forbidding one. Net migration has not been in the "tens of thousands" since 1997: when the EU had just 15 member states and the term "BRICS" had not even been coined. But as prime minister, May is determined to achieve what she could not as home secretary. 

George Eaton is political editor of the New Statesman.