Kelvin MacKenzie isn't a good macroeconomist

Transfers from rich areas to poor ones are really very useful for not screwing up the economy.

Former Sun editor Kelvin MacKenzie wrote a silly column yesterday. In it, he argued that "the middle class of London and the South East" are underserved by politicians, and called for a new political party which "believes that the striving classes in the South are overtaxed and overburdened".

It was, clearly, bunk. Charlie Hallam took most of it apart yesterday, pointing out that high pay is not the same as a large contribution to society, and that much of the boost London and the South East gets is merely entrenched advantage:

A start-up will find loans easier to obtain with a London address. Contacts are easier to make. Lobbying is easier. And there's that whole prejudice thing you don't have to deal with if you're based in the south.

The Economist's Daniel Knowles also points out that:

Every example he offers of London and the south being attacked takes the form of taxes on the rich—stamp duty for example—which also apply in the north. Meanwhile, the subsidy he says that the north gets is in the form of public spending: welfare benefits or social housing for example, which also apply in the south.

That is, far from wanting to fight for the South, MacKenzie is arguing for the rich of Britain and against the poor, wherever they actually are.

But there's a far simpler reason why MacKenzie is talking crap. The Telegraph's Ed West touched upon it in an otherwise faintly patronising post, writing:

Different parts of the economy require different economic policies, which is why the convergence of interest rates made the euro such a fundamentally bad idea for those countries on the fringe, such as Greece and Spain, since monetary policy would be set by people in Frankfurt and Brussels and therefore would be suited towards Frankfurt and Brussels. That’s a model that will work fine so long as the Greeks are prepared to live in perpetual poverty in the name of European solidarity, and that Germans are happy to pay the Greeks’ welfare bills.

The north and south of Britain are, by virtue of sharing the same currency, yoked to the same monetary policy. Short of some extraordinarily unorthodox economics – banknotes which catch fire south of Watford Gap? – that policy will be suboptimal for one or both areas of the country. Aggregate demand shocks rarely affect the nation uniformly, and so the Bank of England has to decide whether (say) inflation in the south is worth preventing a recession in the north.

But one way of lessening that impact is with common fiscal policy. That way, shocks in part of the country can be dealt with more quickly by transferring revenue from the healthy part to the struggling part. Which is, of course, exactly what MacKenzie was complaining about.

(It is worth noting that this analysis is roughly that which was relied on by every anti-Euro economist ever, who all feel very smug these days as Greece needs continual fiscal transfers just to stay in the economic bloc.)

The alternative – giving the north its own currency and monetary policy – may, I suppose, be what MacKenzie was angling for all along. It would certainly get those pesky Scousers out of his hair.

The North. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.