Osborne's plan isn't working - and Labour shouldn't follow it. Photo: Oli Scarff/Getty Images
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There is no economic reason for Osborne’s surplus plan. It’s time Labour stopped playing catch-up

Osborne is using the budget as an excuse for reducing the size of the state. Labour must not follow his lead.

When George Osborne imposed tough fiscal austerity in his first two years as Chancellor, he at least had an excuse. He could point to Greece and say: we must do whatever it takes to avoid that fate. Many economists at the time argued that eurozone countries were rather different from the UK, and we now understand much better why having your own central bank is the critical difference. But back in 2010 there were many who were worried by what was happening in the eurozone and supported the spirit if not the detail of Osborne’s plans.

Five years later, and the Chancellor wants to repeat the experience of those first two years by making it unlawful for the government to run budget deficits in normal times. On this occasion he has no excuses: there is no chance the UK will become like Greece. Seventy-nine economists have already written a letter denouncing the surplus plan, and both the Financial Times and the Economist have joined the criticism.

Why are economists against the idea? The Chancellor wants to bring government debt down rapidly. Yet economic theory is pretty clear that if you want to reduce government debt, it is generally best to plan to do this slowly. The costs of raising taxes or cutting spending today can easily exceed the future benefits that come from having to pay less interest because debt is lower.

However, Osborne rarely appeals to economic theory when it comes to fiscal policy, preferring household analogies involving credit cards. Yet even this does not work for him. We should pay off credit cards quickly because interest rates on credit-card debt are very high. In contrast, interest rates on UK government debt are historically low. Any business will tell you that the best time to invest is when borrowing is cheap. Now is the time to borrow to improve the UK’s infrastructure, but in order to achieve its surplus target the government plans to spend less on public investment than at any time over the past 12 years. So, how does the Chancellor justify going for surpluses? One argument is an old favourite of those advocating austerity: reducing the burden on future generations. Yet intergenerational equity hardly justifies reducing debt rapidly. Those who have suffered the most from the Great Recession are the young and it is they who will bear the cost of going for surpluses.

The second argument the Chancellor uses is that we need to be prepared for an uncertain future. It is important to decode what this means. He is not talking about a possible recession in the next few years, because the economics goes completely the other way. As the governor of the Bank of England, Mark Carney, has said, going for surplus will be a big drag on growth. He may be able to offset this by keeping interest rates low, but if other things go wrong the Bank will run out of ammunition. Going for surplus increases the chances of a downturn in the next few years, which is another reason why Osborne’s plans have angered many economists.

The risk that the Chancellor probably has in mind is not a mild economic downturn but another major crisis, like a new global financial crash. He wants the government to be able to run up large deficits in such a crisis and to have the resources to be able to bail out financial institutions once again. (The Conservatives may say the 2010 deficit was down to Labour profligacy but Osborne knows that is not true.) However, presumably the Chancellor also thinks that the banking measures he has implemented should prevent such a crisis happening in the next decade or two, so we are talking about something 30 or 40 years hence. In that case we do not need budget surpluses: modest deficits will be sufficient to cut the current debt-to-GDP ratio by half in 30 years’ time.

There is a quite different explanation for why Osborne is so keen to get to a budget surplus quickly. It is a great excuse for reducing the size of the state, particularly when you have pledged not to raise most taxes. Politically, this is best done quickly, to be well clear of the next election. This was what happened from 2010 to 2015: sharp austerity, followed by much more modest cutbacks and tax breaks. Even though the economy suffered as a result, he still won the election, so why not do it again?

How will Labour respond to Osborne’s surplus strategy? Some MPs want to capitulate completely: say they overspent before the recession and follow Osborne’s lead today. That is a frightening prospect, because it would leave the SNP as the only major party talking any sense about UK fiscal policy. (Ironically, this is the same party that tries to pretend, against all the evidence, that the immediate fiscal position of an independent Scotland would not be dire.)

The problem for Labour is that it keeps on making the same mistake on fiscal policy, which is to triangulate between sensible macroeconomics and what works well in focus groups. Just before and after the 2010 defeat, it should have made the positive case for ensuring recovery before worrying about debt. Instead, the message of “too far, too fast” just sounded like “austerity-lite”. And crucially, it failed to counter the narrative of past Labour profligacy, preferring to “move on”.

It is time for Labour to change the strategy to something completely different – to start telling the truth. To say that managing the government’s finances is different from running a household budget and that the deficit fetishism of the past five years has damaged the economy. Only that way can it avoid being tagged in five years’ time as the party that is always fiscally irresponsible.

Simon Wren-Lewis is Professor of Economic Policy at the Blavatnik School of Government, University of Oxford

 

 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 19 June 2015 issue of the New Statesman, Mini Mao

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On civil liberties, David Davis has become a complete hypocrite – and I'm not sure he even knows it

The Brexit minster's stance shows a man not overly burdened with self-awareness.

In 2005, David Davis ran for the Tory leadership. He was widely assumed to be the front-runner and, as frontrunners in Tory leadership campaigns have done so enthusiastically throughout modern history, he lost.

The reason I bring up this ancient history is because it gives me an excuse to remind you of this spectacularly ill-judged photoshoot:


“And you're sure this doesn't make me look a bit sexist?”
Image: Getty

Obviously it’s distressing to learn that, as recently as October 2005, an ostensibly serious politician could have thought that drawing attention to someone else’s boobs was a viable electoral strategy. (Going, one assumes, for that all important teenage boy vote.)

But what really strikes me about that photo is quite how pleased with himself Davis looks. Not only is he not thinking to himself, “Is it possible that this whole thing was a bad idea?” You get the distinct impression that he’s never had that thought in his life.

This impression is not dispelled by the interview he gave to the Telegraph‘s Alice Thompson and Rachel Sylvester three months earlier. (Hat tip to Tom Hamilton for bringing it to my attention.) It’s an amazing piece of work – I’ve read it twice, and I’m still not sure if the interviewers are in on the joke – so worth reading in its entirety. But to give you a flavour, here are some highlights:

He has a climbing wall in his barn and an ice-axe leaning against his desk. Next to a drinks tray in his office there is a picture of him jumping out of a helicopter. Although his nose has been broken five times, he still somehow manages to look debonair. (...)

To an aide, he shouts: “Call X - he’ll be at MI5,” then tells us: “You didn’t hear that. I know lots of spooks.” (...)

At 56, he comes – as he puts it – from “an older generation”. He did not change nappies, opting instead to teach his children to ski and scuba-dive to make them brave. (...)

“I make all the important decisions about World War Three, she makes the unimportant ones about where we’re going to live.”

And my personal favourite:

When he was demoted by IDS, he hit back, saying darkly: “If you’re hunting big game, you must make sure you kill with the first shot.”

All this, I think, tells us two things. One is that David Davis is not a man who is overly burdened with self-doubt. The other is that he probably should be once in a while, because bloody hell, he looks ridiculous, and it’s clear no one around him has the heart to tell him.

Which brings us to this week’s mess. On Monday, we learned that those EU citizens who choose to remain in Britain will need to apply for a listing on a new – this is in no way creepy – “settled status” register. The proposals, as reported the Guardian, “could entail an identity card backed up by entry on a Home Office central database or register”. As Brexit secretary, David Davis is the man tasked with negotiating and delivering this exciting new list of the foreign.

This is odd, because Davis has historically been a resolute opponent of this sort of nonsense. Back in June 2008, he resigned from the Tory front bench and forced a by-election in his Haltemprice & Howden constituency, in protest against the Labour government’s creeping authoritarianism.

Three months later, when Labour was pushing ID cards of its own, he warned that the party was creating a database state. Here’s the killer quote:

“It is typical of this government to kickstart their misguided and intrusive ID scheme with students and foreigners – those who have no choice but to accept the cards – and it marks the start of the introduction of compulsory ID cards for all by stealth.”

The David Davis of 2017 better hope that the David Davis of 2008 doesn’t find out what he’s up to, otherwise he’s really for it.

The Brexit secretary has denied, of course, that the government’s plan this week has anything in common with the Labour version he so despised. “It’s not an ID card,” he told the Commons. “What we are talking about here is documentation to prove you have got a right to a job, a right to residence, the rest of it.” To put it another way, this new scheme involves neither an ID card nor the rise of a database state. It’s simply a card, which proves your identity, as registered on a database. Maintained by the state.

Does he realise what he’s doing? Does the man who once quit the front bench to defend the principle of civil liberties not see that he’s now become what he hates the most? That if he continues with this policy – a seemingly inevitable result of the Brexit for which he so enthusiastically campaigned – then he’ll go down in history not as a campaigner for civil liberties, but as a bloody hypocrite?

I doubt he does, somehow. Remember that photoshoot; remember the interview. With any other politician, I’d assume a certain degree of inner turmoil must be underway. But Davis does not strike me as one who is overly prone to that, either.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Daniel Hannan. You can find him on Twitter or Facebook.

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