Show Hide image

Irish troubles do not bode well

Ireland is held out by George Osborne as the country with the right approach, but its GDP sank by 1.

Congratulations to Ed Miliband on becoming the new leader of the Labour Party at the last gasp - but there is no time to celebrate. He must get stuck in to sorting out a serious economic strategy to counter the cuts that are about to be imposed on the British people. David Cameron believes he will be able to persuade the public of the necessity of the cuts. I think not, old chap, once they realise what you are up to.

The economic data is again looking bad. The Confederation of British Industry has lowered its growth forecast because of the impending cuts. The minutes of the latest meeting of the Bank of England's Monetary Policy Committee - like those of the Federal Open Market Committee in the US, where jobless claims have jumped again - point to worries of further slowing. According to the Bank, the flow of net lending to UK businesses remained negative in July. Contacts of the Bank's regional agents noted that, while credit conditions were easing somewhat for larger businesses, they remained tight for smaller firms.

Mortgage lending fell again in August, suggesting that house prices are heading back down. The drop in the number of home loans approved during the month - down to 31,767 from 34,219 in July - marked a 16-month low, according to the British Bankers' Association. This confirmed the report from the Council of Mortgage Lenders that mortgage lending fell by 14 per cent, from £13.3bn in July to £11.4bn, the lowest August total in a decade.

Euro millions

The latest Markit UK Household Finance Index gave further cause for concern, showing that the finances of roughly 27 per cent of households worsened in the past month, while only 7 per cent improved. And UK households remain pessimistic about the future: 41 per cent expect a deterioration in their finances, compared to 23 per cent that believe things will improve. Continuing the trend over recent months, private-sector workers were less downbeat than those in the public sector, but at 40.7 the index for all households in September was well below the 50.0 "no change" level.

Markit data

More troubles loom across the eurozone. The new, flash Purchasing Managers' Indices (PMIs) for the region suggest that growth is slowing, especially in Germany. Then there is Ireland, held out by George Osborne as the country that had the right approach: slash public spending and all will be well. That's not exactly how it has turned out. A big shock to the deficit hawks was the news that Irish GDP fell by 1.2 per cent in the second quarter of 2010, after an increase of 2.2 per cent in the previous quarter. Output was still 14.2 per cent down since the beginning of 2008 - more than twice as large as the drop in UK output - and tax receipts are now only 65 per cent of what they were at the beginning of 2007. Yet the governor of the Bank of Ireland is demanding even deeper cuts.

It prompted me to consult Ireland's Central Statistics Office for data on how the cuts have hit ordinary people. Unemployment rose from 4 per cent in the fourth quarter of 2006 to 13.6 per cent in the second quarter of this year, and long-term unemployment is rising sharply. It is presumably not unrelated that, from 2008-2009, burglary (not aggravated) and theft from shops increased by 9 per cent and 3 per cent, respectively. A quarter of a million jobs have been lost, half of them in construction. It is unclear where any new jobs are going to come from.

The Irish government's borrowing costs have increased, not fallen, as a result of the austerity measures. On 24 September, the spread on Ireland's ten-year bonds over benchmark German bunds widened 12 basis points to 430 basis points, having risen 112 basis points over the past month. Spain, by contrast, has plans to cut much more slowly than the Irish and the spread on its debt now stands at 157 points.

In a speech in Dublin in November 2009, I warned that "moves to cut public spending or public-sector wages or employment deep in a recession are a mistake and may turn a recession into a depression", and that "my advice is to wait until you're out". Ireland is a very bad precedent for Osborne, who is ignoring the same advice. The IMF, which in the past week announced its support for the coalition's cuts, encouraged Ireland's slashing spree, too - and look what's happened there.

Brain drain

A good example of the threats posed by the cuts is in the funding for universities and scientific research. On 16 September, the Times Higher Education (THE) magazine produced its world university rankings, which heavily weight the quality of research and staff citations - the better you are, the more you are cited. Research by Dan Hamermesh at the University of Texas found the most important determinant of faculty salaries, and hence their quality, was the number of citations. All of the top five universities in the THE list (Harvard, CalTech, MIT, Stanford, Princeton), and 15 of the top 20, are in the US. Only three UK universities were in the top 20: Oxford and Cambridge were joint sixth and Imperial ninth. So Britain isn't doing well, even before the cuts.

University heads and the president of the Royal Society, Martin Rees, have warned of an academic brain drain. John Krebs, chair of the House of Lords science and technology committee, has written to the universities and science minister, David Willetts, to tell him that "there is a significant risk that a worsening differential in funding between the UK and other countries will damage the ability of UK universities to attract and retain high-quality researchers". But who cares that the best researchers leave and the quality of Britain's universities drops? Actually, we all should. Less scientific funding is likely to lower the country's economic competitiveness. I was among those who left the UK in the 1980s because of low academic salaries and poor research funding. Here we go again.

There will be many more stories like this over the coming months. Maybe Osborne will be for turning as the stark truth about the cuts starts to hit the voters. But I doubt it. Ed Miliband may be prime minister before you know it. Nice one.

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 04 October 2010 issue of the New Statesman, Licence to cut

Getty Images.
Show Hide image

Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.