Fraser Nelson’s voodoo economics

The claim that the cuts are neither "deep" nor "harsh" does not bear scrutiny.

Spectator editor, Fraser Nelson, set sail for his summer holiday in Sweden yesterday with an extraordinary piece for his Coffee House blog. His article claims to show that the coalition's cuts are neither "deep" nor "harsh" and that they are nearly identical to those proposed by Alistair Darling. It could not be further from the truth.

Nelson's key conceit is to base all his figures on Total Managed Expenditure (TME), which include automatic stabilisers such as unemployment benefits and debt interest. In the long run, everyone should want these to come down but there is no easy way to do this in the short run while unemployment hovers around 7.7 per cent and debt is increasing.

A far better measure of the pace and scale of the cuts is to look at Departmental Expenditure Limits where the bulk of the cuts are taking place. This is the government's discretionary spending and includes a real terms squeeze for the education budget and crippling cuts for many departments such as the 25 per cent facing the Home Office or 27 per cent for local government spending. As we all know, this has resulted in cuts to Education Maintenance Allowances, police numbers, affordable housing and many other local services.

The Treasury's own figures show that the government is planning £95 billion of spending cuts between now and 2015-16. This pain has only just started with £22 billion planned in 2011-12 and much more to come in future years. The impact of these cuts is profound. The Chartered Institute for Personnel and Development have said that the cuts will result in 1.6 million lost jobs across the economy. While it is true that Alistair Darling's cuts would have caused plenty of their own pain Labour was proposing a more modest £51 billion by 2014-15. In other words, for every £8 of coalition cuts, Labour would have cut £5.

Nelson goes on to claim that Osborne's cuts are less severe than those of Denis Healey in the 1970s. Again, he does this using TME figures rather than looking at DELs. Thankfully, the independent Institute for Fiscal Studies made precisely this distinction in their post-Budget analysis. The graph below shows what public spending looks like when those non-discretionary items are taken out.


The IFS analysis shows in their own words the "longest, and deepest sustained, period of cuts to public service spending since (at least) WW2"". It is also worth noting that under Denis Healey in 1977-78, inflation was rampant and volatile meaning that the public spending settlement (which was set in cash terms) could result in either a real terms cut or rise depending on the level of inflation that year.

In a later point, Nelson seeks to show that Britain's fiscal consolidation is small by comparison to a range of international comparisons. His examples simply don't stack up since they are either from mid-1990s when small open economies like Sweden, Finland and Ireland were able to offset their spending cuts with export-led growth due to global buoyant demand. Or they are countries from the box marked "basket case". Does even Nelson really want us to emulate Ireland or Greece in cutting until the pips squeak, the eyes bulge, and the country stands on the brink of economic collapse?

Nelson goes on to claim that inflation is the "real villain". Again, there is a contrast with the 1970s. At that time, there was a wage-price spiral meaning that - although bad for the macroeconomy and something we should be avoided at all costs - living standards were keeping pace with inflation. This time around, as Nelson's own graph shows, the squeeze on living standards is due primarily to stagnant wages. Indeed, the squeeze long precedes 2010 and - according to research released by the Resolution Foundation this week - goes back as far as 2003.

Core inflation - stripping out the impact of food and energy prices - actually dropped from 3.3 per cent to 2.8 per cent last month. And economists such as Gavyn Davies as well as politicians like Vince Cable are starting to call for additional quantitative easing. Nelson doesn't call explicitly for an interest rate hike to halt inflation but it would be madness if he did so. As Adam Posen of the Bank of England has said:

"The recent consumer price inflation rates above 4 per cent result from this year's value added tax increase and the recent energy price shock. Removing those factors, UK inflation has averaged 1.5 per cent over the past year - including any remaining effects of sterling's past decline. Of course, higher taxes and energy prices shrink British real incomes, but the monetary policy committee was right not to respond to them, and should not do so now."

As an adherent of "voodoo economics", Nelson, in his sixth point, seeks to lay blame for our economic woes on the 50p rate of tax, which affects only those earning over £12,500 per month. The experience of his favourite holiday destination, Sweden, alongside Denmark - where the tax take has risen since the 1960s with no impact on growth - shows that there is little evidence for this theory as Lane Kenworthy has shown in an exhaustive blog on the topic.

Today's growth figures are a wake up call and show that growth has been anaemic since September. Indeed, 2011 growth is likely to come in at less than half the level originally predicted by the Office of Budget Responsibility in June 2010. Fraser Nelson and his friend's remedy of tax cuts, more spending cuts, and interest rate hikes are a recipe from the discredited text books of the 1980s. Only a sensible approach which makes proper use of the available data can lead us out of this mess.

Will Straw is Associate Director at IPPR

Will Straw is Associate Director at IPPR.

Photo: Getty Images
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Bomb Isil? That's exactly what they want

The government appears not to answer the nature of its enemy, warns Maria Norris.

As MPs are set to vote on further airstrikes in Syria, it is difficult to shake off the feeling that the government does not fully appreciate the complexity of the problem Isil poses. Just a cursory glance at its magazine, the pronouncements of its leaders and its ideology reveals that Isil is desperate for Western bombs to fall out of the sky. As Martin Chulov argues, Isil is fighting a war it believes was preordained since the early days of Islam. Isil’s obsession with the city of Dabiq, in Northern Syria, stems from a hadith which prophesises that the ‘Crusader’ army will land in the city as a precursor to a final battle where Islam will emerge victorious. Dabiq is also the name of its magazine, which starts every issue with the same quote: "The spark has been lit here in Iraq, and its heat will continue to intensify -- by Allah's permission -- until it burns the crusader armies in Dabiq". Isil wants a war with the West. If we don’t negotiate with terrorists, then we also should not give them what they want.

Further, bombs are indiscriminate and will inevitably lead to the suffering of those trapped in Isil territories. Isil is counting on this suffering to swell their ranks. Civilian suffering from airstrikes only underline the narrative that the West is at war with Islam, which plays directly into Isil’s hands. And despite misleading headlines and the genuine government concern with individuals fleeing to Syria, Isis is supremely unpopular. It is no wonder that its magazine is filled with glossy adds begging people to move to its territories.  You cannot be a state without people. Terrorist attacks such as Paris thus have a two-pronged purpose: they provoke the West to respond with its military, and they act as a recruitment drive. The fact that fake Syrian passports were found around the sites of the Paris attacks is no coincidence as Isil are both seeking to stem the flow of refugees from its territories and hoping to provoke an Islamophobic backlash. They hope that, as more Muslims feel alienated in the West, more will join them, not just as fighters, but as the doctors, nurses and teachers it desperately needs.

In addition to this, airstrikes overlook the fact that Isil is a result of what Fawaz Gerges calls a severe, organic institutional crisis in the Middle East. In a lecture at the London School of Economics earlier this year, Gerges pointed out the dysfunction created when a region that is incredibly resource rich also is also deeply undemocratic, riddled with corruption, food insecurity, unemployment and poverty. This forms an institutional vacuum that is filled by non-state actors as the population does not trust its political structures. Further, the civil war in Syria is also the site of the toxic soup of Middle Eastern state dysfunction. Iran supports Assad, Saudi Arabia and the Gulf countries, fund anti-Shia groups in Syria. Throw in the Kurdish conflict, Turkey’s ambiguous position and Russian bombs, it is difficult to see how airstrikes will solve anything.

Finally, it is crucial that Isil is seen as a direct result of the Iraq war. The American-led invasion destroyed the institutions, giving the Shia majority power almost overnight, creating deep dissatisfaction in the Sunni regions of Iraq. On top of this thousands of foreign fighters flooded Iraq to fight the invaders, attracting disenfranchised and angry Sunnis. The result is that since 2003, Iraq has been embroiled in a sectarian civil war.  It is in civil war, inherently connected to the Iraq War, that you find the roots of Isil. As even the Prime Minister concedes that ground troops are necessary, albeit it regional ground troops with its own set of problems, it is important to consider what further monster can arise from the ashes of another ill-thought out military intervention in the Middle East.
We have had decades of military intervention in the Middle East with disastrous consequences. Airstrikes represent business as usual, when what we actually need is a radically new approach. Who is funding Isil? Who is buying its oil? How to curb Isil’s recruitment drives? What can be done about the refugees? How to end the conflict in Syria? What happens to Assad? These are questions hopefully being addressed in talks recently held in Vienna with Russian, Ira, the USA, France, Syria’s neighbours and the Gulf states. Airstrikes do not answer any of these questions. What airstrikes do is give Isil exactly what it is asking for. Surely this is reason enough not to bomb Syria. 

Maria W. Norris is a PhD candidate and a teacher at the London School of Economics and Political Science. Her PhD is on the UK counter-terrorism strategy since 9/11 and its relationship with identity. She tweets as @MariaWNorris.