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.

A

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.

Steve Garry
Show Hide image

The footie is back. Three weeks in and what have we learned so far?

Barcleys, boots and big names... the Prem is back.

Another season, another reason for making whoopee cushions and giving them to Spurs fans to cheer them up during the long winter afternoons ahead. What have we learned so far?

Big names are vital. Just ask the manager of the Man United shop. The arrival of Schneiderlin and Schweinsteiger has done wonders for the sale of repro tops and they’ve run out of letters. Benedict Cumberbatch, please join Carlisle United. They’re desperate for some extra income.

Beards are still in. The whole Prem is bristling with them, the skinniest, weediest player convinced he’s Andrea Pirlo. Even my young friend and neighbour Ed Miliband has grown a beard, according to his holiday snaps. Sign him.

Boots Not always had my best specs on, but here and abroad I detect a new form of bootee creeping in – slightly higher on the ankle, not heavy-plated as in the old days but very light, probably made from the bums of newborn babies.

Barclays Still driving me mad. Now it’s screaming from the perimeter boards that it’s “Championing the true Spirit of the Game”. What the hell does that mean? Thank God this is its last season as proud sponsor of the Prem.

Pitches Some groundsmen have clearly been on the weeds. How else can you explain the Stoke pitch suddenly having concentric circles, while Southampton and Portsmouth have acquired tartan stripes? Go easy on the mowers, chaps. Footballers find it hard enough to pass in straight lines.

Strips Have you seen the Everton third kit top? Like a cheap market-stall T-shirt, but the colour, my dears, the colour is gorgeous – it’s Thames green. Yes, the very same we painted our front door back in the Seventies. The whole street copied, then le toot middle classes everywhere.

Scott Spedding Which international team do you think he plays for? I switched on the telly to find it was rugby, heard his name and thought, goodo, must be Scotland, come on, Scotland. Turned out to be the England-France game. Hmm, must be a member of that famous Cumbrian family, the Speddings from Mirehouse, where Tennyson imagined King Arthur’s Excalibur coming out the lake. Blow me, Scott Spedding turns out to be a Frenchman. Though he only acquired French citizenship last year, having been born and bred in South Africa. What’s in a name, eh?

Footballers are just so last season. Wayne Rooney and Harry Kane can’t score. The really good ones won’t come here – all we get is the crocks, the elderly, the bench-warmers, yet still we look to them to be our saviour. Oh my God, let’s hope we sign Falcao, he’s a genius, will make all the difference, so prayed all the Man United fans. Hold on: Chelsea fans. I’ve forgotten now where he went. They seek him here, they seek him there, is he alive or on the stairs, who feckin’ cares?

John Stones of Everton – brilliant season so far, now he is a genius, the solution to all of Chelsea’s problems, the heir to John Terry, captain of England for decades. Once he gets out of short trousers and learns to tie his own laces . . .

Managers are the real interest. So refreshing to have three young British managers in the Prem – Alex Neil at Norwich (34), Eddie Howe at Bournemouth (37) and that old hand at Swansea, Garry Monk, (36). Young Master Howe looks like a ball boy. Or a tea boy.

Mourinho is, of course, the main attraction. He has given us the best start to any of his seasons on this planet. Can you ever take your eyes off him? That handsome hooded look, that sarcastic sneer, the imperious hand in the air – and in his hair – all those languages, he’s so clearly brilliant, and yet, like many clever people, often lacking in common sense. How could he come down so heavily on Eva Carneiro, his Chelsea doctor? Just because you’re losing? Yes, José has been the best fun so far – plus Chelsea’s poor start. God, please don’t let him fall out with Abramovich. José, we need you.

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 27 August 2015 issue of the New Statesman, Isis and the new barbarism