The view from the European Central Bank. Photo: Getty
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Robert Skidelsky: The welfare state did not cause the crash. So why is Osborne cutting it?

If a government has to cut its spending, it is much better to tax the rich than starve the poor.

The Institute for Fiscal Studies (IFS) has warned that there will need to be “colossal” cuts in public spending to balance the books by 2018-19 – at least £55bn extra. On 4 December, the day after the Chancellor’s Autumn Statement, the director of the IFS, Paul Johnson, said that it wasn’t for lack of effort that the deficit hasn’t fallen. Rather, it was “because the economy performed so poorly in the first half of the parliament, hitting revenues very hard”.

Very true – but what Johnson omitted to say was that the main reason the economy performed so poorly in the first half of the parliament was because George Osborne was busy cutting the deficit. He should have been expanding it!

This is something that expert commen­tators lack the guts to say because that would brand them as Keynesians. They may admit that fiscal consolidation has made eco­nomic recovery “more challenging”. But they don’t tell us why. This theoretical gap leaves them without a reputable story of why the economy behaved so poorly. They are in familiar “blown-off-course” territory.

Every possible event that might affect growth, however fleetingly, has been summoned in aid of explaining the failure of the economy to grow: the Greek crisis, the rising price of oil, the extra bank holiday on the Queen’s Diamond ­Jubilee and the closure of shops during the London Olympics, snow and floods – everything except the real reason, which is that a deficiency of ­private ­demand was not being offset by public-­sector investment.

The latest explanation of why the Chancellor has failed to meet his deficit targets concentrates on the nature of the labour market recovery. The government has congratulated itself on the fall in unemployment. We would expect falling unemployment to increase tax revenues and reduce public spending. However, this will not happen if government policy has created lots of new, mostly low-wage jobs whose holders pay no direct taxes and that must be propped up with benefits.

The catastrophic fall in productivity that we are now seeing was planted in the two and a half years of stagnation that followed the creation of the coalition in 2010. In October 2012, the Office for Budget Responsibility found that the economy had grown by only 0.9 per cent between Q1 of 2010 and Q2 of 2012, while its June 2010 forecast was 5.7 per cent growth over the same period. Subsequent upward revision has made these figures less dire but there is no doubt that Osborne and his advisers seriously underestimated the adverse effects of austerity on investment.

As is now increasingly recognised, this extended period of stagnation reduced the long-term growth rate of the economy through the destruction of both human skills and physical capital.

Despite his warning about the size of the cuts to come, Paul Johnson said that they could be achieved. He added, however, that they would require a “reimagining” (or, put another way, shrinking) of the state. Two questions arise. First, what effect will shrinking the state have on the economy? Second, what effect will it have on the polity?

On the first, Johnson seems to assume that the economy will go on growing at about 2.5 per cent a year, even as the deficit is being cut to zero. This is highly optimistic because the cutting is simultaneously reducing private incomes. It may be possible, by sufficiently heroic austerity, for a government to keep revenues for a time running ahead of cuts but at what level of GDP will the budget eventually be balanced? Certainly lower than it would have been without the cuts.

The cuts not only change the level of GDP but also its composition and, therefore, the relations between the state and its citizens. This point is recognised by Labour, which promises “fairer” cuts. If a government has to cut its spending, it is much better to tax the rich than starve the poor. However, this is alien to the spirit of cutting. The barely subliminal message of all austerity programmes is that the deficit has been caused by spiralling welfare payments to the poor, with the object of austerity ­being to “get them on their bikes” – like in the 1930s, when unemployment was consistently around or above 10 per cent.

We urgently need to have a proper debate about the role and size of the state. Prosperity does not demand that the state should spend 40 per cent-plus of national income as it does now, though justice may.

In the old days, people used to talk of a “trade-off” between efficiency and justice and some of those arguments may still be valid, though I am less and less persuaded that the private sector scores heavily over the public sector in efficiency. A financial system that allocates capital to itself and whose crash in 2008 left the population 15 per cent poorer than it would have been is hardly an advertisement for private-sector efficiency.

What is really indefensible is to cut the state for reasons of financial dogmatism, as though the size of the state – and especially the welfare state – were the cause of the slump. We need a cool discussion on the role of the state as owner and regulator in a market economy and in the light of the civic purposes that people set for themselves. It needs to be pointed out that these huge cuts imply serious losses to the quality of government services and the strength of the defence and police services.

I’m not sure which is worse: to bleed the economy with small cuts stretching many years ahead or to cut deeply now and hope for the best. What does seem clear is that politics will not allow the second and only a ­Labour government can avert the first.

This article first appeared in the 09 December 2014 issue of the New Statesman, How Isis hijacked the revolution

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When Theresa May speaks, why don’t we listen?

Not many Prime Ministers have to repeat themselves three times. 

Theresa May is the candidate of Brexit and market panic. She ascended to the highest office because, in the fraught weeks after Britain’s vote to leave the European Union, she represented a safe haven for nervous Conservative MPs, the dependable family mutual that remained open while all along the Conservative high street, her rivals were shutting up shop.

Her popularity, as revealed in high poll ratings outside Westminster, too, owes itself to the perception that she is a serious politician in serious times, happily installed atop the ship of state to guide it through the rocky waters of Brexit negotiations.

May’s premiership has been defined by market panics of a different kind, however. The first is in the currency markets, where sterling takes a tumble whenever she pronounces on Britain’s future relationship with the European Union, falling both after her conference speech on 2 October and after her start-of-the-year interview with Sophy Ridge on 8 January. The second is in the opinion pages, where May’s stock oscillates wildly from bullish to bearish.

In the first months of May’s government, she was hailed as an Anglo-Saxon counterpart to Angela Merkel: a solid centre-right Christian democrat who would usher in a decade of conservative hegemony. More recently, she has been compared to Gordon Brown because of her perceived indecisiveness and repeatedly accused of failing to spell out what, exactly, her government’s Brexit objectives are.

In a symbol of the splits on the right between the Brexiteers and Remainers, the Economist, that bible of free-market globalisation and usually a reliable tastemaker as far as Westminster groupthink is concerned, began 2017 by dubbing the Prime Minister “Theresa Maybe”. Though May’s Downing Street is less concerned with the minutiae of what goes on in the public press than David Cameron’s, the contention that she is indecisive was a source of frustration.

There is an element of truth in the claim that May still views the world through a “Home Office lens”. One senior minister complains that Downing Street considers the Ministry of Justice as a “rogue outpost” of May’s old stomping ground, rather than a fully fledged department with its own interests and perspectives.

Yet even the most authoritarian of home secretaries would struggle to secure a conviction against May on the charge of opacity as far as her Brexit approach is concerned. She has hit the same grace notes with the reliability of a professional musician: Brexit means freedom from the jurisdiction of the European Court of Justice and control over Britain’s borders, two objectives that can only be achieved as a result of Britain’s exit not only from the EU but also the single market. This was confirmed on 17 January in the Prime Minister’s Lancaster House speech in London.

David Cameron used to say that he would never have “a people”. Certainly, there is no Cameroon tendency in the country at large to match the generation of council house residents that became homeowners and lifelong Conservatives because of Margaret Thatcher and Right to Buy. However, there is, unquestionably, a Cameroon people or faction to be found at almost every rung of London’s financial services sector or at editorial meetings of the Economist, though it as at the Times and the Sun where the treatment of May is at its most noticably rougher than in the Cameron era. 

Michael Gove, her old rival, is not only employed as a columnist by the Times; he enjoys the confidence and admiration of Rupert Murdoch. That the Times secured the first British interview with Donald Trump was a coup for Murdoch, an old associate of the president-elect, and for Gove, who conducted it. It left May in the unlovely position of making history as the first prime minister to be scooped to a first meeting with a new American president by a sitting MP in modern times. It also attested to a source of frustration among May’s allies that she is, for all her undoubted popularity, still ignored or doubted by much of the right-wing establishment.

That condescension partly explains why her words are often listened to briefly, acted on hastily and swiftly forgotten, hence the pound’s cycle of falling when she makes an intervention on Brexit and rising shortly thereafter. The Lancaster House speech was designed to break this pattern. Downing Street briefed the most potent paragraphs at the weekend so that the markets could absorb what she would say before she said it.

As a result, the pound rallied as May delivered her speech, which contained a commitment to a transitional deal that would come into effect after Britain has left the EU. Some financiers believe this arrangement could become permanent, which once again demonstrates how much they underestimate May’s ability to enforce her will.

Being underestimated by Cameron’s people, in Westminster and the City, has the unintended effect of shoring up Theresa May’s position. A prolonged and sustained bout of panic would increase the pressure for a soft landing, but its absence makes it harder for Labour to oppose her effectively, although it has largely acquiesced to the Tory plan for Brexit, at least as far as membership of the single market is concerned. 

Yet for all the plaudits that the Prime Minister’s Lancaster House speech attracted, for all her undoubted popularity in the country, she is in the anomalous position of being a Conservative Prime Minister who has priorities on the European stage other than the preservation of the City of London and to whom Rupert Murdoch is not a natural ally.

As such, she may find that her deadlier enemies come from the right.

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