Lib-Dem Manifesto – an appeal to the Labour Left

After Nick Clegg produced the best performance in last night’s ITV debate, it is time to examine their manifesto. Others has so far failed. John Redwood attacks the £5bn hole in the Lib-Dem figures, but misses the more important bits. Brian Barder on LabourList has clearly not read the Manifesto and Tom Harris thinking that the policies are irrelevant. However, the manifesto is significant for anyone (like me) sad enough to read the thing. In detail it is a direct appeal to the Liberal Left. It is far more re-distributive than Labour, whilst also scrapping some of Labour’s more authoritarian policies like the ID cards.

For instance

–         In the army, reducing the top brass to fund increased pay for the lower ranks.

–         Tax increases for the rich (CGT, pension tax relief, mansion tax)

–         Anti tax avoidance measures.

–         Hitting big business with higher corporation tax.

–         Devaluing the Nations investment in the Banks by a banking levy; by breaking them up; through state sponsored competition in the form of a PostBank; and a UK Infrastructure Bank (high interest safe returns for “green investment”).

–         Cancelling a replacement fo the Trident nulear missile system. They say they will look for cheaper alternatives, but this is unlikely to happen soon with even bigger cuts in other areas necessary to pay it.

Added to this the fact that Labour have created a structural deficit that will undermine public spending for a generation, and you have a strategy to overtake Labour as the party of the left. Perhaps it is Nick Clegg’s strategy to emphasise this in the third debate when Gordon Brown thinks he will avoid Clegg’s criticism.

Is Lucy Powell the right candidate for Manchester Withington?

Lucy Powell has some of the qualities to make a good politician. In particular she is hard-working and believes in the cause. However, there are two debilitating hurdles she needs to overcome. (see also here)

First, is that she stands for a political party that has undermined public services for a generation. By creating a structural deficit in the boom years, by my estimates, up half the National Debt of £1400bn in 2014 will be due to Labour’s policies, with less than a fifth the hang-over of the world recession.

Second, one of the worst aspects of the present government is failure to admit when their errors and learn from that experience. In the wake of defeat of the Manchester Congestion Charge by 4 to 1, Ms Powell wrote in the Guardian on 12th Dec 2008

 “Even after a big public information campaign, the basic facts of the proposed scheme just didn’t get through. It was a complex set of proposals, which were not readily understood. There remains much confusion and misunderstanding about them.”

I suggest, after an enormous expenditure of public money to vote in favour, people understood exactly what was proposed. Though only 20% of adults would have paid the charge, there were loads of voters who know someone who would be. Like donating to disaster relief, lots of people sacrificed a little to help a minority a lot. It would be a mark of political maturity for Ms Powell to recognise this aspect.

Update – Ms Powell’s strong support for the congestion charge caused her to make a little video.

ManicBeancounter Elsewhere

Commenting at

Mark Reckons on Nigel Farage on Drugs Policy.

– Why mainstream politicians will not back an open discussion.

John Redwood on Can Labour End it’s War on Business?

–         Not without Labour imploding, as it’s involvement

Burning Our Money on Bashing the Rich Bankers

–         As a way of diverting from Labour’s involvement in the current crisis.

John Redwood on Are Christian Country?

– Christ dying so that we might be forgiven is the central message. Watered-down implication is that we recognize our mistakes, say sorry and move on.

John Redwood on Cutting Spending Abroad

Perhaps the biggest risk we are facing is with the foreign purchase of our National Debt. The resulting high value of the pound would further erode the ability of our exporters to compete. Also, if the deficit is not brought under control we may not only have to pay higher interest rates, but issue debt in other currencies, to protect the lenders against any weakness in the pound. Then we will be like the emerging economies in the 1980s and 1990s.

Labour bashing business to save facing their awful reality

John Redwood wonders when the Labour Party will stop attacking business.

Not this side of the election and perhaps never is the simple answer.

 

This war with business started with blaming the banks for the current crisis. In the Labour view their wild excesses created the crisis, and so must be now tightly regulated to prevent this happening again. Once you go down this route, it is only a small step to saying that all business is only beneficial to the general welfare if tightly controlled.

To go back on this might be to admit that the banks were not entirely to blame for the crisis and the mounting debt. Allow this chink in the anti-bank defence, and the debate in the general election campaign will be as to how far the tripartite structure of central banks, regulatory authorities and government policy was to blame.

The further stage is then to lay bare how poor the state of the government finances were during the boom years. That is, through creating an ever-increasing structural deficit when at least budget balance should have been attained. By my calculations about half the forecast National debt of £1400 billion in 2014 will be down to economic mismanagement since 2001.

During the forthcoming election campaign I expect a constant barrage of attacks on bankers in particular and business in general. The hope from the spin doctors is that people will be distracted enough not to look at the true causes of the current crisis. If the Labour party – the self-proclaimed defender of public services – were to admit that they have wrecked the public finances for a generation, the party would implode. If they have any let-up on the business-bashing, then Gordon Brown will end up with a bigger defeat than Michael Foot in 1983.

The Golden Rule has lead to Economic Ruin

The current financial debt crisis can be laid at the door of the Golden Rule and its interpretations. It states

“The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.

Therefore, over the economic cycle the current budget (ie, net of investment) must balance or be brought into surplus.”

This gave two consequences for the UK.

1. For a number of years there was a deficit to finance the creation of assets which would give non-monetary returns.

2. This deficit increased the nominal National Debt faster than the nominal growth in GDP.

That is the new assets were either in the category of having no significant financial returns (such as schools or hospitals) or had financial returns that would never cover the capital cost.

In terms of level of public services, the country is probably benefitting. But we entered the severest downturn in 60 years with a structural deficit. Yet these assets created liabilities as well. There are the running costs of the new assets and there is the interest on the debt. Furthermore, there are a huge number projects financed by Public Finance Initiatives (PFI). That is the Private Sector meeting the initial capital cost and charging for the flow of services.

The consequence is the UK entered the severest downturn in 60 years with a structural deficit. This was for the financing of “investment”. Further, each addition to the capital stock added to the Nation’s liabilities. For a new school or hospital to deliver its’ stream of benefits requires staff and maintenance.

The Golden Rule turns out to be far from Prudent, because it was not for investment in the accounting sense. That is assets acquired with expectation of a future stream of revenue generation or cost savings. Rather, the acquisitions were liabilities. Under Labour, we have acquired extra debt to pay out extra money year after year. Gordon Brown took a gamble with the Nation’s finances, by failing to understand the term “investment”. It should not come as a shock that in the long term it would unravel.

For clarity, here is a simple analogy.

1. Someone sets up as a plumber. They acquire a van to transport themselves, tools and equipment to places of work. The van has running costs, and also there is a loan to repay. But it enables chargeable work to be undertaken. It therefore enables or augments an income stream by an amount that is expected to exceed the cost.

2. Someone owns a basic low-cost reliable car, acquires a new 4×4, partly financed by a loan. The fuel, servicing and insurance all go up, along with the finance cost. It may increase their standard of living, but substantially increases that person’s outgoings.

Most Government “investment” is in the second category. It may provide services that people individually could not afford, but increases the sense of well-being. However, if debt financed, will just result in extra costs.

The Economic Legacy of Labour – A Summary for the Tories

Thirteen years of Labour has increased the National Debt by £600bn or £10,000 for every person in this country.

How is this worked out?

  1. A prudent government would have kept the National Debt at a constant level of GDP in the boom years. From 2001 to 2007, Labour let this grow by around 15% of GDP.
  2. A prudent government balance the budget over the course of the business cycle. In 2007 Labour were at least 4% short of that. That is, they had a structural deficit.

 

Take the two together. Under current forecasts the structural deficit will still be around in 2014. That is after four years of strong growth, the economy will have grown maybe 15% from the bottom in 2009 and be nearly 10% above the 2007 level. Yet the deficit will still be over 5% of GDP. Seven years at 4% is 28% of national income.

15% + 28% is 43%. Translate this into pounds by multiplying 43% by national income of £1400bn, gives £600bn.

Some could be a little less generous by adding compound interest to the extra £200bn of debt acquired in the good years and 4% structural deficits for seven years the at least £150bn to add to the end of 2014. So that is £750bn.

Under a Prudent Government, this very severe recession would have added up to £300bn to the National Debt. It would have peaked slightly higher than Labour managed in 2007 before the downturn. Most of that could be reduced with a sustained strong recovery and without real cuts in public expenditure.

Instead, the legacy of 13 years of economic mismanagement by a Labour government will be high taxes and a squeeze on public expenditure for a generation.

More detail for my earlier posting at https://manicbeancounter.wordpress.com/2010/03/21/the-impact-of-labour-on-the-current-crisis/.

This is prompted by John Redwood’s posting “Labour Government’s end in Economic Chaos“.

Thanks to Stuart Fairney for the suggestion of passing this idea to the Tory Front Bench.

The Impact of Labour on the Current Crisis

UPDATE 11th APRIL – I WAS RIGHT IN SAYING THAT THIS WAS TOO LOW AN ESTIMATE. IN THE BUDGET REPORT NATIONAL DEBT REACHES OVER 91% OF GDP, NOT 87% AS MODELLED HERE.

John Redwood today claimed that

“Labour governments typically devalue the currency, run out of money, and preside over industrial chaos. Welcome to the spring of discontent.”

However, Redwood fails to attempt to quantify the extent of this economic mess. Gordon Brown would counter that the current situation is none of his doing. The Labour Spin Doctors might try to imply that the Tories are saying that the worsening of the deficit & national debt is 100% down to them. This is literally untrue. The opposite – that none of the current economic crisis is due to Labour’s economic management – is equally not true.

It is important to be able to split out the worldwide impact from the Labour Government’s

economic ineptitude.

I did some simple calculations comparing two situations (all as a % of GDP)

1) An actual (Labour) one where in 2007, at the top of the cycle there was a budget deficit of 3.5% and a national debt of 44%.

2) A fiscally prudent (Prudence) one where budget deficits had not been incurred in the good years, so in 2007 the budget surplus was 0.30% and the national debt just under 30%.

Let us assume there is a similar worsening of public finances of 8.5% of GDP, so under Labour the deficit peaks at 12.2%, under Prudence 8.6%.

Under a Labour the national debt peaks at 87% of GDP in 2015; under Prudence 48% in 2013.

Under Labour we have a structural deficit of at least 6% of GDP; under Prudence at most 2%.

This is graphed below.

That is, the Labour (or specifically Brown) effect  is an increase if the National Debt of over 40% of GDP and a structural deficit of £90bn that must be eradicated. Under Prudence the increase in National Debt is less than 20% of GBP and a structural deficit of £30bn.

This is, however, much too generous on Labour, as I have assumed.

1)     Growth Rates are the same.

2)     The average level of interest on the National Debt is the same.

3)     The worsening of the Government Finances is the same from peak to trough.

4)     The effectiveness of the fiscal stimulus is the same.

5)     The turnaround in the public finances is the same.

6)     The growth forecast through to 2015 is 3.2% growth. This is roughly as forecast in the 2008 Autumn Pre-Budget forecast. Thereafter the growth rate will settle at 2% per year.

Therefore, by implication:-

–         There is no impact on the recovery through massive cuts in government spending and/or real tax rises.

–         There is no rise in interest rates as a result of the ballooning deficit.

–         There is no real problem in reducing public spending by 12% of the total in five years (or by around 30% of the total excluding the health sector, education and transfer payments), as against a 4% reduction.

–         The existing deficit pre-downturn had no impact on the size of the downturn.

–         The effectiveness of the economic stimulus was the same regardless of the size of the deficit, or whether it was on the back of a fiscal stimulus (through public expenditure increases) for the last seven years.

So going forward, it is fair to say that as long as the recovery is strong and interest premium does not rise in relation to the euro area, and the government achieves the deficit reduction targets, the national debt is at least 80% larger due to Labour, and the fiscal squeeze is at least 3 times greater.

Stephanomics shows anti-Tory Bias

Stephanie Flanders, on her BBC blog Stephanomics, can often provide thoughtful comments on the UK economy. Yesterday’s blog, “Cameron’s Nixon Moment” is anything but.

“Nixon famously denied he was a crook. At the weekend David Cameron denied he was a recovery-wrecker, confronting directly the argument that faster deficit reduction would jeopardise growth.”

Whatever the rights and wrongs of the arguments that SF later presents. There is a double meaning.

  1. The superficial one. Nixon’s claim that he was not a crook worked against him. So will Cameron’s denial that he is not a recovery-wrecker.
  2. Guilt by association. Nixon lied about Watergate. He was a crook and only a Presidential pardon allowed him to escape prosecution. The Tories, in trying to cut the deficit will wreck the economic recovery. They are not campaigning to do what is better for the country

There is no distinction made between the political realities (don’t frighten the voters) and the economic realities of doing what is best for the country. This is a tightrope all political parties are walking. With an election looming, the leaning is towards the political side. Any impartial analysis should recognize this. An impartial economic analysis should recognize the real risks that the economy is facing.

The economic reality is this

  1. We have a total deficit of over 12% of GDP. The majority of this is structural. On the Government’s optimistic growth forecast, the deficit will be reduced by a boom, but the structural deficit will be largely untouched. (At the top of the economic cycle, the actual deficit will be less than the structural)
  2. Most of the growth since 2001 has come from two sectors on the output side – the State and the financial services sector. Neither will contribute much to the recovery. In the expenditure side, much of the boom was debt financed – both consumer spending and Government spending.
  3. The flexibility of the UK economy has diminished in the past decade due to increased regulation. The growth will be slow from other sectors.
  4. Due to the high levels of debt, the recovery is at the mercy of interest rates. A modest rise could reverse the recent house price rises, and could add to the cost of servicing the National Debt.
  5. If the deficit is not tackled we could pass a tipping point. Every higher national debt will lead to higher interest rates, which will increase the debt, leading to higher interest rates. The only way out will be to have the IMF impose a solution. That will cause short-term intense expenditure cuts and tax rises. There may then be a long period of reduced growth the pay off the debt.

Government is no longer New Labour of the 1997 Manifesto

The Government is now further from the “New” Labour in the 1997 Manifesto, than “New” Labour was from the traditional Labour party.

These extracts from that 1997 Manifesto demonstrate the point.

Spending and tax: new Labour’s approach

 

“The myth that the solution to every problem is increased spending has been comprehensively dispelled under the Conservatives.”

That is as true for investment as for current spending. It is certainly true for increased current spending, even if you attempt to re-define as investment. It is also true for spending your way out of recession, or a fiscal stimulus during a boom. As the manifesto goes on to state:-

“The level of public spending is no longer the best measure of the effectiveness of government action in the public interest. It is what money is actually spent on that counts more than how much money is spent.”

“The national debt has doubled under John Major. The public finances remain weak. A new Labour government will give immediate high priority to seeing how public money can be better used.

The national debt had indeed risen, and was coming down during a boom. It came down even further during Labour’s first term, due to their adhering to the Conservative’s policy. This high priority has been dusted off again, as a way to reduce spending, having failed for over twelve years to implement it.

New Labour will be wise spenders, not big spenders.”

Not for the last nine years they have not. By any measure, they have been big spenders, not wise spenders. Increased expenditure on the NHS has mostly been wasted on exhorbitant pay rises, and much expenditure of very expensive hospitals. However, the sharp end of survival rates from strokes to cancers is still amoungst the lowest of the OECD countries. That is lower productivity, or less value for money.That is less value for money. In Education, there has been a lot of new schools built, lower staff to pupil ratios, but little evidence of improving standards. That is lower productivity, or less value for money.

To be wise spenders you must first acknowledge your limits and seek counsel from those who have a track record in these matters. The Taxpayer’s Alliance has some good ideas, supported by Wat Tyler at Burning Our Money. John Redwood draws on his experience in government, along with his time in business. The Adam Smith Institute also provides some thoughtful pieces at times. Further, you should ignore the master’s of spin. That is the Mandelson’s, or the Campbell’s of this world. And treat as lepers the Mcbrides and the Drapers, who will only serve to destroy good government.

 

“No risks with inflation

We will match the current target for low and stable inflation of 2.5 per cent or less. We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation.”

In the last year the Bank of England has pumped £200bn of money into the economy. They have reduced interest rates to 0.5%, a record low in over three centuries. Although nominally independent, are very much in line with Government policy, and would have been leaned on heavily if they had disagreed. Sound money has gone. In so far as it existed since 2001, it was despite of deficit-funded spending boom. The risks taken with future inflation are huge, and prices are already rising.

“Strict rules for government borrowing

We will enforce the ‘golden rule’ of public spending – over the economic cycle, we will only borrow to invest and not to fund current expenditure.

We will ensure that – over the economic cycle – public debt as a proportion of national income is at a stable and prudent level.”

Another policy that was shelved in the second term by pretending current expenditure is investment. Also by believing that the government had “ended boom and bust”. At the peak of the cycle in 2007, the deficit was about 4% of GDP, despite a long period of historically-low interest rates. At such a long-term peak, there should have been a surplus of around 2% of GDP. The differential – the structural deficit is around £80bn. With the collapse in the financial sector, that structural deficit now exceeds £100bn.

“We will clean up politics”

 After twelve years of government, the expenses scandal erupted. The headlines were grabbed by rich Tories (for cleaning the moat, a duck house, and manure), but the biggest monetary claims were mostly Labour MPs, including government ministers. It was kicked off by Home Secretary, Jacqui Smith claiming her main home as her sister’s house in London, not her family home in her constituency. The Labour party have not just failed on this policy. Many members of that party have helped bring it lower than at any time since the 1832 Great Reform Act abolished pocket boroughs.

NB – My thoughts were prompted by John Redwood’s short piece today on Labour’s Pledges. He says

“Keep this card and see that we keep our promises” says my copy of Labour’s pledge card from the start of the government. I did:

“Get 250,000 under 25 year olds off benefit and into work

Set tough rules for government spending and borrowing; ensure low inflation; strengthen the economy”

We all look forward to those. Any chance any time soon?

Lord Mandleson in Denial

This country now has a structural deficit £100bn, or around 7% of GDP. To tackle it effectively will require a clear vision, a steely determination to turn things around and the leadership ability to carry a significant proportion of the public with them.

It will not be tackled by those who created this problem by running large deficit through the boom years. Neither will it be resolved by those who see reality in terms of political point-scoring to influence the next opinion polls. Nor by someone who cannot even utter the word “cut”.

The longer we leave this situation, the more likely it is that any government will be forced to cut indiscriminately to save the economy from collapse, on the instructions of the IMF. A compassionate and caring government is like a compassionate and caring GP. They diagnose effectively, and tell you straight when you have a serious problem. They then recommend the best form of treatment, administered quickly before the ailment gets any worse.

 

Comments by Lord Mandleson can be found at playpolitical.com

The nature of the deficit from the BBC and Burning our Money

 

Comments by John Redwood, Ian Dale