The crisis in the eurozone may bring the U-turn Britain needs

Ed Ball’s five-point plan for recovery contains sensible policies but is pretty timid — Osborne-lite

I was recently on a Bloomberg radio programme during which the host, Sara Eisen, provided updates every ten minutes or so on the probability that the market was giving to a Greek default. It rose steadily closer to 100 per cent through the hour.

The question now is not if Greece will default - it simply cannot afford to pay back its debts of roughly €350bn (£305bn) - but how much the necessary bailout will cost (a "haircut", or write-off, of 50 per cent of the debts seems inevitable) and what harm will have been inflicted on the world economy by the pathetic dithering of European policymakers.

I recall the president of the European Central Bank (ECB), Jean-Claude Trichet, saying, when Greece first stood on the verge of default, on 6 May last year, that the governing council had not even discussed a bailout. The best that can be hoped is that he was lying. All other explanations - in short, incompetence - are worse. The bailout was announced four days later, on 10 May.

At the time of writing, it is still all dither and no action. There is, at last, a growing prospect that the members of the ECB's governing council will vote to lower interest rates at their final meeting before Trichet steps down as president at the end of October and the Italian Mario Draghi takes over. It's an embarrassing policy reversal; they should never have been raised in the first place. Despite slowing growth, falling inflation and rising unemployment across the eurozone, the ECB has raised rates twice this year, just as it did at a critical moment in the financial crisis in October 2008.

Catastrophic risk

The rescue plan that is now being discussed - no longer just for Greece, but for the whole eurozone - apparently includes a large increase in the amount of lending to nations and their banks through the European Financial Stability Facility (EFSF).

This is what the US treasury secretary, Timothy Geithner, suggested was needed when he warned at a meeting of the International Monetary Fund in Washington on 24 September that failure to combat the Greek-led turmoil threatened "cascading default, bank runs and catastrophic risk".
The idea is that the current limit of €440bn (£380bn) could be leveraged up to €2trn (£1.7trn) through the ECB, so that there is enough money in the coffers to backstop Italy and Spain. It's a good start, but even that might not be enough if the crisis spreads to France. Eventually the fund might have to expand to as much as €5trn. I remember voting in favour of £75bn of quantitative easing (QE) in March 2009, and I thought that was big money.

Where does all this leave the UK economy? The Bank of England's Monetary Policy Committee (MPC) is likely to agree on more quantitative easing soon, perhaps at its October meeting, but most likely in November, when it produces its next quarterly forecast. That much was clear from the minutes of its last meeting, as well as from comments made by the new external member Ben Broadbent, who said he came close to voting in favour of more QE in September.

There is gathering momentum behind the push by another MPC member, Adam Posen, and myself to expand the Bank of England's asset purchases to help small firms. The Chancellor, George Osborne, has suggested that he would support such a plan to get money to cash-constrained small and medium-sized businesses, but QE on its own is unlikely to be enough. Monetary policy and fiscal policy have to work in the same direction to be effective, and at the moment that's not happening.

During his speech to the Labour party conference in Liverpool, the shadow chancellor, Ed Balls, announced a five-point plan for change. Step one: repeat the bank bonus tax this year and use the money to build 25,000 affordable homes and guarantee a job for 100,000 young people.

Step two: bring forward long-term investment projects (schools, roads and transport) to get people back to work and strengthen our economy for the future.

Step three: reverse the damaging VAT rise for a limited period.

Step four: an immediate one-year cut in VAT to 5 per cent on home improvements, repairs and maintenance to help homeowners and the many small businesses that are dependent on the housing market.

Step five: offer a one-year National Insurance tax break to every small firm that takes on extra workers.

All of these policies are sensible, but they are pretty timid - Osborne-lite. It was disappointing that Balls went no further than saying he would "examine proposals for a National Investment Bank for small business". I hope he does that quickly and adds his support, because such a measure is likely to boost job creation and hence growth. Labour desperately needs to offer both a credible long-term deficit-reduction plan and a viable short-term plan for growth that are distinctly different from what the government is offering.

Give us incentives

Osborne is known as a weasel politician because he will do whatever it takes to gain a political advantage. Given that the possibility of introducing income-tax cuts before the next election in 2015 is decreasing fast, some sort of government U-turn on economic policy is becoming increasingly likely.

What happens if the British economy tanks as a result of Europe's spreading financial crisis? Osborne could plausibly argue that, through no fault of his own, his growth forecasts are not materialising. He could then adopt one or more of Balls's proposals and, along with cuts to corporation tax and further reductions in National Insurance, he could claim the moral high ground.

Balls has to get ahead of the game. He should argue that now is the time to give firms big tax incentives to create jobs that get the economy moving again, with the extent of the tax cuts to be determined by the scale of any negative shock to Britain's economy from the eurozone crisis. This would get employers on his side, and could easily be targeted to help the young, which would also be popular.

David Blanchflower is the New Statesman's 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 03 October 2011 issue of the New Statesman, Which Tories is it ok to love?

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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.