Balls v Osborne: round one

Tomorrow’s growth figures will determine who takes an early lead in the cuts debate.

The release of the latest growth figures tomorrow will determine whether it is Ed Balls or George Osborne who takes an early lead in the defining grudge match of this parliament.

If, as expected, growth falls from 0.7 per cent in the third quarter to between just 0.2 per cent and 0.5 per cent, Balls's argument that early spending cuts choke off recovery, lead to higher unemployment and slow the pace of deficit reduction will begin to resonate with the public.

Osborne may have hubristically declared that the "plan is working" but, owing to the time lag in fiscal policy, much of the growth we've seen so far has been due to the last Labour government's stimulus package and the Bank of England's ultra-loose monetary policy.

As the Times's Anatole Kaletsky, responding to impressive Q2 growth of 1.1 per cent, wrote in October (£):

The trouble is that monetary and fiscal policies take a long time to work their way through the economy – typically, one to two years. Yesterday's robust growth figures reflect last year's decisions by the Bank and the previous government. They tell us nothing, and indeed may mislead us, about how the new government's fiscal measures will interact with the Bank's monetary policies in the years ahead.

Balls can point to the fact that the deficit for 2009-2010 came in at £156.3bn (£21.7bn lower than the original Treasury forecast) as evidence that Labour's policy of "going for growth" was beginning to fill the hole in the public finances. The Tories may hope to use Balls's past predictions of a double-dip recession against him, but "things could be even worse" isn't much of an argument.

With inflation at 3.7 per cent, we can expect the spectre of stagflation to re-emerge if growth is as low as 0.4 per cent. Balls, a Harvard-trained economist, will be able to exploit this development in a way Alan Johnson simply could not. With unemployment also rising, Osborne will need a better riposte than "there is no alternative".

There should be plenty for Keynes's Rottweiler to get his teeth into tomorrow.

George Eaton is political editor of the New Statesman.

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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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