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Greens and blues

Whatever the outcome at Copenhagen, the real work will be done in Europe, where the Tories look incr

If the UN summit on climate change in Copenhagen ends with an agreement on legally binding targets (which it almost certainly won't), the hard work of implementation would still need to be done. Targets have value - they focus political, business and media attention - but they don't automatically lead to delivery.

Look at Kyoto. The fairest overall assessment of it is that the developed countries which ratified the protocol have allowed their emissions to increase by 9.1 per cent, while the US allowed its emissions to increase by 14.4 per cent. Kyoto can plausibly be said to have reduced non-US, developed-country emissions by about 5 per cent from what they would have been without the deal, which is better than nothing. But it's not nearly enough.

The EU's target of a 20 per cent reduction in greenhouse-gas emissions by 2020, though still not enough, is at least enforceable. And the EU has significant policy levers - regulatory powers and money to invest in clean energy. So, even though Copenhagen is important, the EU Council of Ministers is the crucial forum for UK pol­iticians wanting to control climate change.

The EU has led international negotiations on climate. Its commitment to reduce emissions is not dependent on what anyone else does. Its target to get 20 per cent of all energy from renewables by 2020 is achievable and it has the money to help construct the more extensive and efficient infrastructure needed, including grids across the North Sea and the Mediterranean. It has also said that it will have up to 12 large-scale carbon capture and storage (CCS) plants operational by 2015. Although this is just a target and the words "up to" are classic fudge, the Commission has already allocated more than €1bn (£910m) to CCS projects under the European Economic Recovery Plan and has selected the projects to receive the money, which national governments seem to find hard to do.

There is no significant disagreement between the UK's main political parties about climate change, but there certainly is disagreement over the EU. New Labour has generally been pro-EU; the Liberal Democrats are very pro, but the Conservatives remain divided (though David Cameron's sensible decision not to hold a referendum on the Lisbon Treaty failed to produce the ructions that some expected, or hoped for). Cameron and the shadow energy secretary, Greg Clark, are serious about controlling climate change. But the damage done to relations with other centre-right parties by the Tories leaving the European People's Party (EPP) may be a significant obstacle.

Trouble on the right

The Conservatives have good policies on the low-carbon transition. Yet I know from my own experience that it is considerably less difficult to adopt good policies in opposition than it is to achieve good outcomes in government.

From 1992-94, I was adviser to the then shadow environment secretary, Chris Smith, and secretary of the Labour policy commission on the environment. This produced In Trust for Tomorrow, which proposed targets to reduce carbon dioxide emissions by 20 per cent by 2010 and to generate 10 per cent of electricity from renewables in 2010. Smith negotiated the considerable internal discussion about this with skill and determination.

Then, from 1997-99, I was adviser to the environment minister, Michael Meacher. He and John Prescott played an important role in the Kyoto negotiations and tried hard to make our economy less climate-damaging. The changes in performance since 1997, however, have been very disappointing. The UK will meet its Kyoto target, due largely to the "dash for gas" that Labour inherited from the Tories. In office, ministers have had to deal not only with Labour Party politics, but also with interdepartmental Whitehall politics. Too often, these have proved insuperable barriers. The 2010 targets for carbon dioxide and renewables will both be missed. The UK gets a lower proportion of its energy from renewables than any EU country except Luxembourg and Malta.

I am no longer a member of a political party, and so do not have inside knowledge of politics today. But it is worrying that Tory ministers trying to implement their climate plans would have to deal not only with internal party and Whitehall politics, but also with difficult relations with other centre-right parties. Cameron, William Hague and George Osborne have all said that the EU should focus on global issues such as climate change. Yet, by leaving the EPP, the Tories have made it more difficult for the party to achieve this. For instance, a central part of developing clean energy sources is to get the EU emissions trading scheme working better. The scheme has had little impact so far because the price of carbon is unpredictable and too low; the best way to improve it would be to set a floor price. This could be done formally through the EU, but that would take many years. It could be created instead through a bilateral deal between the UK and German governments, which have enough allowances in effect to guarantee a floor price. But the Tories have reduced their influence with Angela Merkel's Christian Democratic Union.

The Conservatives accept that climate protection cannot be left to the market. They have called for an Emissions Performance Standard (EPS) to set a maximum pollution level from any power plant. This was an excellent proposal, as Ed Miliband, the Climate Change Secretary, recognised when he said that an EPS could act as a "safety net" in case CCS is not as effective as hoped. The UK could introduce an EPS on its own, but it would be much more effective if introduced across the EU.

Let us not lose faith

The EU's target to improve energy efficiency by 20 per cent by 2020 is merely an aspiration at present. The Commission is now saying that the target should be made binding, with predictable hostility from national governments. Allowing decisions to be made by the right tier of government is important, but not as important as taking the right decisions.

However, one way to get one tier to do certain things is to get another tier firmly committed. If Copenhagen and the follow-up negotiations in 2010 can secure legally binding commitments, it will concentrate minds. Several EU governments have been more willing to accept EU directives because they have a legally binding Kyoto target. The EU itself has said that if there were a strong international agreement, its reduction target would be 30 per cent, not 20.

So let us not lose faith entirely in Copenhagen. It is good that Gordon Brown and other world leaders are going to the summit (although, for Brown to be credible, he must put serious money into the low-carbon transition in the pre-Budget report). The real challenge, however, will come after Copenhagen. For it to be met, whoever forms the next UK government must engage extensively, seriously and constructively with Europe.

Stephen Tindale is a climate and energy consultant and co-founder of Climate Answers

 

Take a walk on the dark side

In June, David Cameron pulled his party out of the centre-right European People's Party (EPP). He has argued that leaving the EPP will be good for European democracy, but the Tories' departure has distanced them from old conservative allies in Europe. In 2006, Cameron signed a joint declaration to form a new partnership, the European Conservatives and Reformists Group (ECR), chaired by Michal Kaminski.

The Conservative leader has pointed to the ECR's anti-federalist stance in attempting to justify his party's new alliance in the European Parliament, but among the politicians in the group are some who hold sexist, homophobic and racist views. Kaminski has come under scrutiny in recent months for his previous membership of the National Revival of Poland party, which has been accused of neo-Nazism.

The Tories may now lose influence in Europe in important settings such as the environment, public health and food safety committee (vice-chaired by Boguslaw Sonik, a member of the EPP), the committee on industry, research and energy, chaired by an EPP member, and the economic and monetary affairs committee, which has two EPP vice-chairmen.

The Conservatives are the largest party in the new parliamentary grouping, making up 25 of the ECR's 54 members. Its two other main partners are Poland's Law and Justice party and the Czech Republic's Civic Democratic Party.

James Burgess

 

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This article first appeared in the 07 December 2009 issue of the New Statesman, Boy George

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt