Author: johnredwood

The Eurozone’s disciplines have been nicknamed the politics of austerity for good reason. Each state is meant to keep its budget deficit down to 3% of GDP – way below the large cyclical deficits the UK, US and other single currency areas allowed themselves in the great recession. Each state is meant to keep its total amount of borrowing to below 60%, though most of them have given up on that idea. No individual state can print more money, make its economy more liquid or devalue to provide a private sector stimulus. As a result when a Eurozone state cuts public spending it is likely to lead to a fall in GDP which the private sector struggles to offset or does not offset at all.

We have seen that cutting the growth rate of public spending substantially in the UK after 2010, and in the US cutting national defence spending and State level spending, did not lead to a fall in GDP. The private sector responded well to extra money being put into the system, to the gradual rebuilding of the banks and the spread of some more private credit, and to the available spare resources caused by the great recession. Both countries experienced a recovery despite or because of the action taken to control public sector budgets. Both benefitted from the continued low interest rates, made possible in part by growing control of state borrowing. In the UK real public spending did edge up a little as well. I was criticised recently for quoting deficit reduction as a percentage of GDP rather than in cash terms. As I have often pointed out, the fall was bigger as a percentage of GDP, smaller in cash terms. I used this version on Thursday because I was dealing with those who said budget cuts would lead to another recession, and they always use the figures which show the biggest “cuts”

In contrast, the much harsher budget cuts in Greece have added to the collapse in GDP in that country. Greece today has a national income and output 22% below its peak in 2007. It is amazing that the policies which have created this disaster have been allowed to continue for so long. Even now the Greeks have voted in a government which rightly points out how damaging the policies have been, there cannot be much change as that same government bizarrely wishes to stay in the Euro, the origin of much of their trouble.

The enormous Greek recession has gravely reduced tax revenues. As a result there have to be most severe cuts in public spending to try to get the deficit down to the tough target levels – in Greece’s case even tougher owing to the debt covenants. The private sector so far has been unable to pick up the very considerable slack. owing to weak banks. Greece has no power to create more money, no power to lower its own interest rates further, no power to devalue to price itself back into more world markets. As a result they have experienced the misery of sliding from public sector cuts to less private sector demand, and from less tax revenue to more public sector cuts.

If you wish to see a true austerity policy then look at Greece. They have had major cuts in public spending, major cash reductions in wages and salaries, major job losses, and mass unemployment. Many businesses have closed. Any sensible person is against the kind of austerity policy inflicted on the Greek people. Unfortunately it just seems to go with being in the Euro.

It was inevitable that this very political Labour party would want to expose the student loan issue to offer maximum embarrassment to the Liberal democrats in the run up to the election. Sure enough on cue and probably on schedule- after leaks alleging delays – Labour yesterday launched its price cut for university courses, cutting the student payment from £9000 a year to £6000 a year from September 2016.
The prime aim of the launch seemed to be to remind left of centre voters that Lib Dems had promised to get rid of tuition fees, a prominent and oft repeated pledge before the election in 2010, only for a Lib Dem Secretary of State to dream up and push through a scheme which did the opposite. I am told it is called punching the bruise in modern political strategist and spin doctor circles.

What matters to most people is not what it does to the relative votes for the Lib Dems and Labour, but what it would do for our country, our students and taxpayers, in the years ahead were Labour to be given the power to do it. The first in the frame to express doubts are the universities. They like the certainty of getting the payments from the students. They will immediately lose a third of their UK student revenue. They will have to rely on government grant to make up the shortfall, and are worried in case that gets squeezed in later years.

The second group to complain will be those who have to pay the extra bills. Labour will need to spell out more of the detail of how it gets £3bn extra tax out of people saving for their retirement. Whilst they claim it will only hit people on high incomes, it may be they do not get anything like as much extra tax out of that group as they hope. Will they then spread the pensions tax lower down the income scale? Are they happy to be deterring people from pensions saving?

The third group who find the new policy does not help them very much are the groups Labour says it wishes to help – students from low income backgrounds and students who obtain lower income jobs after graduating. The first group is already helped by various scholarship and bursary schemes. The second group do not have to start paying interest or making repayments on their loans until their income is high enough to allow that.

Labour’s left wing critics point out that the winners from the scheme are the graduates who do get into better paid jobs, who will have to repay less capital and pay less interest on their debts as a result of cut. Some are already dubbing it a policy to help future hedge fund managers and City high fliers. The Labour response is they do wish to raise the interest rate people have to pay on their loans if they earn more than £42,000. That sounds complicated. To make such people worse off or no better off they will need to raise the interest rate on the loans by at least 50% to avoid the richer and more successful graduates benefitting.

Will it be worth all that hassle? Can we really believe Labour’s figures on all that extra tax from a few highly paid pension savers? Is this really the best use of the money? To me it looks like clever politics makes bad government.

Yesterday I gave a lecture at Reading University. I asked the question, does austerity work as an economic policy? Why do the IMF and the Euro area favour austerity programmes for countries in trouble? Do they succeed in rescuing countries by these means?

Austerity is a wide ranging word, not a precise term of economics. It has come to mean in recent debates the idea that a country in debt with a large deficit should cut spending and raise taxes in order to reduce its deficit. This has led to passionate debates about the wisdom and the impact of such a course of action.

In the UK between 2009 and 2013 the main parties all agreed the deficit was too large and needed to be brought down. All agreed if left unchecked the deficit could lead to crisis interest rates, an unaffordable cost of interest on a burgeoning public debt, and an eventual squeeze as the debt grew out of control. We could see the damage unchecked deficits caused in countries like Greece or Venezuela. There was nonetheless a tough argument with Labour saying the coalition wished to cut the deficit too far and too fast, whilst the coalition said it needed to speed up the pace of deficit reduction it had inherited as the financial situation was grave.

We now know the outcome of these policies. Labour’s prediction of rising unemployment, a dip into a new recession, and more personal misery as a result proved to be untrue. Instead the UK economy has grown over the four years of deficit reduction so far, employment has grown rapidly and unemployment has fallen. The deficit has been cut, though not by as much as planned as tax revenues have fallen short of budget.

Labour never answered my questions of 2010 and 2011 as to how the US economy was recovering so well when the US was cutting its deficit more rapidly than the UK. Since the worst year at the end of the last decade the USA has brought its deficit down from over 10% to 2.5% of GDP. This deficit reduction has included some big cuts in states spending and defence spending. The US economy has grown well every year this decade, contrary to predictions that austerity policies stop growth.The UK deficit has been brought down from a peak of over 11% of GDP to 5% of GDP, a bit less than the USA.

The economic records of the USA and UK in recent years show us that bringing deficits down does not necessarily stop growth. Indeed, some of the deficit reduction occurs thanks to growth, which raises revenues. Growth however, does not automatically follow from cuts to public spending. There need to be other policies towards banks, money and private investment to ensure success with a strong private sector led recovery. In a future posting I will look at some of the harder cases of extreme austerity in the Euro area, where damage has been done by the policies pursued.

Yesterday I joined a debate at Local Government House on devolution, with the Greens, Lib Dems and Labour.

I explained how the grant of powers to the Scottish Parliament, promised for early in the next Parliament, necessitates justice for England. I reminded them that if Scotland is to settle her own income tax, there is no way England would accept a higher rate of income tax voted through with the help of Scottish MP votes at Westminster.

I argued that the artificial regions of England which some wish to create as governing units are unloved and unsuitable to be elected administrations. There is no great sense of South Eastern belonging nor any big outbreak of East Midlands feelings . England is a country of Counties and Boroughs, of ancient areas of local government that do not require Sunderland to accept government from Newcastle, Liverpool to be governed by Manchester or Plymouth to be governed by Exeter.

Governing areas need to be ones that command support and loyalty. People need to feel they belong to an area or place for it to have a government people will obey, shape and accept.

I drew attention to the idea that some Northern Councils working together should have influence over their local NHS budget. There have always been difficulties with issues that lie on the borders of NHS and Council jurisdiction. There are problems in some places finding sufficient Council places for care to allow people to leave hospital in good time. More common decision making between the NHS and Council social services could help.

How far would you go in offering devolved powers and budgets to local government? For it to work central government has to grant more power to Councils, and Councils have to show maturity in making decisions and accepting responsibility for what they decide.

It was little surprise that Greece’s late response to the demand for details of how they will run their budget was accepted yesterday by the Euro group.

The Greek state government committed itself to change tax codes to raise more money from the better off, and to find ways to improve tax collection and enforcement. They have offered to make many changes to different parts of revenue collection, with more inspections, more audits and more and better staff to do the collecting.

They have also pledged to improve their controls over public spending, concentrating on non wage expenditure which accounts for 56% of the total. They also wish to improve the provision and quality of medical services, with universal access. They are going to consolidate pension funds and seek to reduce early retirements to cut pension spending.

It will cut the number of government Ministries from 16 to 10, cut fringe benefits to MPs, Ministers and top officials, improve public sector tenders and keep wage costs down.

The government has had to accept much of the privatisation programme it inherited and disliked. It now says it will not roll back privatisations already committed. It will rejig future ones with “the emphasis on long leases,joint ventures…and contracts that maximise not only government revenues but also prospective levels of private investment”

The pledge to pay a higher Minimum wage has become “the ambition to streamline and over time raise minimum wages in a manner which safeguards competitiveness and employment prospects. The scope and timing of changes to the minimum wage will be made in consultation with social partners and the European and international institutions…..” taking into account whether changes are in line with productivity developments and competitiveness.

As expected, both sides have had to sacrifice a lot. The Euro area has agreed to lending Greece more money, and to giving more time to trying to negotiate a longer term solution later this year. In the meantime the ECB has now lent more money to Greece. The rest of the zone has to accept promises, which rely heavily on the ability of the new government to raise much more in taxation than previous governments have managed. For its part, Syriza has to accept privatisation of state assets, accept a delay in raising the Minimum Wage, accept Eurozone surveillance of its budget and loan programme, and recognise there is not going to be a large planned fiscal stimulus for the economy.

In summary, the Greeks have not slain the dragon of austerity as they see it, and the Eurozone has not weaned Greece off more loans and assistance. If revenue does not respond quickly to new treatment, the issue of how to pay for the Greek budget will intensify.