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What Britain could learn from the mistakes of Reaganomics

Cutting spending so drastically while raising taxes can only lead to fewer jobs and an overvalued st

I was at the University of Exeter on 24 May to give a lecture on whether inflation or deflation is the greater threat (the answer is deflation, since you ask, and that is why the Bank of England mustn't raise interest rates any time soon). While there, I met up with my friend Steve Smith, who has transformed the university since becoming its vice-chancellor in 2002.

Steve, who also serves as president of Universities UK, the representative organisation for the country's universities, is a strong advocate of the use of "contextual data", such as a student's school or family background, in the admissions process. In an article in Times Higher Education last year, he quoted compelling evidence from the Sutton Trust: "Those educated at independent schools were 4 per cent less likely to achieve a First- or Upper-Second-class degree than otherwise similar students educated in state schools." Some at Oxford and Cambridge would do well to listen.

From Exeter, I travelled to London, where I got stuck in a traffic jam outside Buckingham Palace as a couple of hundred soldiers on horseback passed by, heading to a parade for Barack Obama. I was on my way to give a talk for the British Property Federation, whose other key­note speaker was the Business Secretary, Vince Cable. Before our talks, I had a brief but illuminating discussion with the Lib Dem minister.

I have to say I was impressed and agreed with many of the points he raised in his interview with Jason Cowley in last week's NS. Vince and I are both worried about deflation: that we may face a number of years of very slow growth, coupled with the continued danger of another major financial implosion. The big difference between us is that I don't share his view that the markets necessitated austerity on the scale, or at the speed, that the government chose.

Good riddance

I'm not alone. Obama, despite the friendly flipping of burgers and ping-pong matches during his visit to London, refused to endorse the coalition government's policy of slashing and burning the British economy. This was embarrassing for Downing Street, whose spinning that the US president was likely to do so had apparently annoyed the White House. That week, the Organisation for Economic Co-operation and Development (OECD), which the Chancellor, George Osborne, has frequently claimed supports his policies, lowered its growth forecast for the UK economy. Its chief economist, Pier Carlo Padoan, suggested in an interview that there is "scope for slowing the pace" of spending cuts, because growth in the UK economy has ground to a halt.

Meanwhile, the Office for National Statistics (ONS) left GDP growth in the first quarter of 2011 unrevised at 0.5 per cent and suggested that there were alarming weaknesses in both consumption and investment. Exports were a strong driver but it appears that even they are now slowing. Growth was also driven by a strong contribution from government final consumption expenditure, which rose 1 per cent in the first quarter. In consequence, according to the ONS, public-sector borrowing increased sharply in April to £10bn, compared to £7.3bn in April 2010. This is the highest public-sector borrowing figure for April on record. Various cabinet members reportedly expressed deep concern about the slowing economy at their weekly meeting on 24 May.

A more positive development was Andrew "Death" Sentance's departure from the Bank of England's Monetary Policy Committee (MPC), after ingloriously attending 56 meetings. His views have closely and negatively correlated with events. In February 2008, he argued: "An outright recession - in which economic activity falls year-on-year - is a remote risk for the UK economy at present." On 24 September 2008, days after the collapse of Lehman Brothers, he argued that there would be no recession.

His calls for a rise in interest rates to curb inflation have been entirely misplaced, as a rise would risk plummeting the UK economy back into recession, or worse. Cable emphasised in his NS interview that the UK does not have "an underlying inflation problem", so presumably he, too, is glad to be shot of Sentance. And so, it seems, are fellow MPC members: Adam Posen wrote in the Financial Times on 26 May that raising rates would be the wrong policy response, and Paul Fisher made similar comments in an interview in Edinburgh.

A great loss

I can reveal here for the first time that Chris Pissarides, professor of economics at the LSE, whom I have known for over 25 years, was interviewed by the Treasury to replace me on the MPC in 2009 but was rejected in favour of David Miles, formerly chief UK economist at Morgan Stanley. Subsequently, Pissarides, who has been critical of the government's austerity programme, won the 2010 Nobel Prize in Economic Sciences for his work on labour markets.

On 29 May, Pissarides told me that the recovery is obviously faltering but he doesn't believe we are headed for a double dip. Rather, he thinks that, with near-zero interest rates and quantitative easing (QE) having limited potential, fiscal policy involving the use of government spending and taxation has the best chance of speeding up the recovery. With this tool taken away, the Nobel laureate believes, recovery is dependent on the private sector picking up speed unaided and will, therefore, be anaemic for a long time.

His view remains, like mine, that there were never urgent debt problems in the UK before and there aren't any today. All that was needed, he says, "was a well-articulated policy of how the debt was going to be tackled when recovery became more robust". His preferred action now is postponement of fiscal contraction, com­bined with no change in monetary policy, including QE. He agrees with Larry Summers, former director of Obama's National Economic Council, that the idea of an "expansionary fiscal contraction" is oxymoronic. It reminds him, he told me, of an idea that appealed so much to Ronald Reagan: cut tax rates and the economy will be stimulated to the extent that tax revenue will rise. The result was a huge deficit. Similarly, Pissarides says, cutting government spending and raising taxes as the coalition is doing will lead to fewer jobs and sterling being overvalued, which hurts exporters. The pound stands at $1.64 compared to $1.45 a year ago.

Pity. It sounds as if Pissarides would have been a great replacement for me on the MPC.

David Blanchflower is NS economics editor 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 06 June 2011 issue of the New Statesman, Are we all doomed?

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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.