Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 3 October 2014

Has Cameron blown the austerity cover?

What I had expected to happen was that the Conservatives would keep to the line that spending had to be reduced because debt and the deficit were too high. The need for austerity because you have borrowed too much was a simple message that everyone understood, even if it didn’t make much sense when applied to a government during a recession. There would be appropriate nudges and winks that, once elected, this tough fiscal line might be modified to make room for tax cuts, but the official line would be ‘debt implies austerity’.

Those who are better informed about the macroeconomics, whether on the right or left, have always understood that this was cover for a desire to shrink the size of the state. However this perspective hardly ever saw the light of day in the media. It is tempting to lapse into conspiracy mode at this point - to believe that the rules of mediamacro are whatever suits a particular set of interests. I suspect this is too simple. For myths to work well they have to be based on half-truths, and they have to obey some internal logic.

So when John Snow berated Ed Miliband for forgetting to talk about the deficit, I think he actually believed that the deficit was this all important constraint that was driving austerity. People understand that when they borrow too much, hard times have to follow. That cornerstone can support many other beliefs. The bank manager who says you must reduce your spending is not popular, but you know he is being responsible. I suspect a great deal of the advantage that the Conservatives enjoy in terms of economic competence in the polls simply comes from this idea (and associating Labour with creating the debt problem). It is difficult to see where else it comes from, with deficit targets missed and stagnant real wages and productivity.

Now that Cameron has promised large tax cuts, does this blow away the cover? Nice if it happened, but unlikely. The Conservative line that only they were prepared to take the debt problem seriously still works. For every person who, as a result of the promised tax cuts, begins to question whether the size of the deficit really was such a major problem, there will be many more that continue to believe it is and will scold the Conservatives for not being responsible enough (but still vote for them).

As a result, I do not think it will change how voters see the past. Looking to the future, on the other hand, it is will be very difficult for Osborne to argue that his future austerity is a painful necessity, and the plans of others dangerously profligate. The retort ‘how come there is room for large tax cuts’ is too strong. If they have any sense Labour will turn the tables. Whereas they have costed all their new commitments, Cameron’s tax cuts are to be paid for by yet unspecified spending cuts (the ‘magic asterisk’). The political danger of the magic asterisk is that it is left to the voter’s imagination to fill them in. If Labour are clever (which may be a big if) they will make appropriate suggestions depending on the audience. Furthermore, interviewers with any self respect will press the Conservatives to outline exactly where ‘the money will come from’ to pay for the tax cuts.

It also lets Labour free of all those questions about the commitments they do have, and whether the country can really afford them. The choice becomes should we spend money on the NHS or on tax cuts, and that I think is ground Labour should be happy to fight on. (There is also the danger that these tax cuts, which mainly benefit the better off, will be viewed in the same way as the cut in the 50p rate.) It is also a more honest debate. Hopefully Labour will spell out exactly how they will achieve their fiscal targets, so that the contrast between their fully costed plans and the Conservative’s uncosted plans will be crystal clear. Add to this the uncertainty created by the proposed EU referendum (see Roger Liddle here reinforcing some of my own thoughts), and perhaps the Conservatives will no longer be seen as the safer pair of hands. (For an example of this train of thought, see these remarks about UK credit ratings.)

For these reasons, I do not think that announcing large tax breaks was always part of the Conservative’s plan. Of course offering tax cuts will gain some votes, but it puts at risk one of their main political assets, which is the perception of future economic responsibility. This in turn may suggest that the Conservatives are far from confident about winning in 2015, as the polls so far have not shown the hoped for pre-election drift to the governing party. Whatever happens, watching how mediamacro develops just got more interesting.   


  1. "This in turn may suggest that the Conservatives are far from confident about winning in 2015"

    Nobody at all expects the Tories to win in 2015, and that includes Osborne and Cameron.

    (i) The electoral system heavily favours Labour. They only need to draw in the popular vote with the Tories to get a majority. the Tories need to be 11 points clear.

    (ii) The Tories were 6 points clear in 2010. There is no possibility that Labour can do as badly next time after 5 years of 'austerity'. There is (almost) always a swing away from the governing party.

    (iii) The Lib Dem vote collapsed in 2010, went to Labour, and shows no sign of returning. This was in part because all small parties always get squeezed in coalitions, but also because they cocked up the tuition fee rise (which was right in principle but electoral suicide).

    (iv) The rise of Ukip is killing the Tories (and explains their attempt to tack rightwards). if Ukip polled, say, 10% in 2015 that alone would be enough to return Labour to power, regardless of other factors.

    (iv) Labour has a core constituency that will not abandon it: public sector workers, the young, BMEs, the north, most cities.

    (v) The press has a vested interest in talking up the race as a close one, when really the result was settled years ago. The press is also overly influenced by personalities. Nobody informed thinks Miliband is up to the job (because he isn't). But it is almost certainly a mistake to think this will lead to any swing back to the Tories, his uselessness is already factored in. Miliband is considerably less able than even Brown, but not more unpopular.

    All of this explains why the Tories are behaving as they are. Their proposals on public spending are so tight as to be ridiculous. Cameron doesn't want a referendum on Europe. The proposals on human rights are crackpot. All of these reveal a party that knows it will not win a majority, and so won't have to follow through on this nonsense.

    Which means it is much more important that we know what Labour will do, as they expect to be in government. The pessimism on Labour's side doesn't spring from fear of defeat, they know they'll win. Rather it comes from the fact that, despite the rhetoric, there hasn't really been any austerity by Osborne, and so no scope for reversing it. They don't really have very much of substance to offer as an alternative.

    "Hopefully Labour will spell out exactly how they will achieve their fiscal targets."

    Naive. We know all we are going to know. Labour is promising more of the same, plus a few daft things (the impractical mansion tax, the irrational energy price freeze). 2015-2020 will be a sharp dose of reality for those who see our current ills as down to Osborne.

    1. SpinningH:
      Whilst I agree with some of the potical observations you raise above, I find your remark "the fact that, despite the rhetoric, there hasn't really been any austerity by Osborne, and so no scope for reversing it." utterly bizzare, given that the most accurate measure of the extent of fiscal consolidation - the fiscally adjusted primary deficit - clearly shows significant 'austerity' implemented by Osborne, especially up to 2012, which them slows down notably.
      You know this, because you read SWLs post which detailed it, and acknowledged this fiscal contraction that took place in your comment below his post by writing "Almost all of 'austerity' was frontloaded" and "Austerity was abandoned in 2011/12"...even stating that as your firm belief!

      Because UK austerity wasn't to the extent of certain Eurozone countries does not mean that "there hasn't really been any". There has been a large amount by any measure, as the data clearly illustrates, so why argue otherwise?
      Calling the host of the blog "naive" - especially you of all people accusing him of being so is laughable, since almost all of your comments are indicative of an individual seriously afflicted by the Dunning-Kruger effect.

      Whatever happens between 2015-20 does not change the fact that many of the UKs current and recent ills were squarely down to Osborne and this government's policies.

    2. "clearly shows significant 'austerity' implemented by Osborne, especially up to 2012"

      It turns upon what you mean by 'significant'. Clearly there was a fiscal tightening at the start of the Parliament. But a fiscal tightening from a deficit of 11% of GDP to around 6% by 2015, doesn't seem to me to be austerity at the end of that period. 6% is, by both historic and comparative standards, a very large deficit not austerity.

      I am puzzled why you think it 'utterly bizarre' that Labour won't be reversing Osborne's fiscal tightening. Are you claiming that they will be? That certainly is not what Balls has been saying, and I believe him. Labour are proposing further fiscal tightening, not a relaxation. What is proposed is less severe than what Osborne is proposing, but it is a continuation not a reversal.

    3. SH:
      "It turns upon what you mean by 'significant'...a fiscal tightening from a deficit of 11% of GDP to around 6% by 2015, doesn't seem to me to be austerity at the end of that period. 6% is, by both historic and comparative standards, a very large deficit not austerity."
      Unfortunately you appear to have little idea of the concept of fiscal consolidation - how it is measured or indeed if it is large or small.
      It is the change in the fiscally adjusted primary deficit which is widely accepted as the best measure of the extent of fiscal consolidation, and the change between 2010-12 is described by various institutions (IMF, OBR etc) and by various economists and commentators as 'sharp' and 'significant'. Even George Osborne (oddly quoting IMF figures and not those of the OBR) stated in April 2014:
      "The pace of our fiscal consolidation over the last four years has been steady* , with an average annual reduction in the cyclically adjusted primary balance of around 1.6% of GDP according to the IMF – **the largest and most sustained** of any major advanced economy. "
      The existence of a 6% deficit by itself is no indication or measure of the extent of consolidation that has taken place.

      My "utterly bizarre" comment is clearly focussed upon and addresses your ridiculous claim that "there hasn't really been any austerity by Osborne", not what labour will or won't do. Avoid the diversionary tactics and try to explain why you thought that there has not "really been any austerity"...especially given you acknowledged previously that there had been (and also now appear to ackowledge it).
      Read the SWL link and the NIESR one above carefully, because you really appear to be a prime example of the Dunning-Kruger effect.

    4. Well, here I agree with Portes, S W-L etc and not Osborne (somewhat odd to see you side with Osborne, but there we are). As I have said, it is in Osborne's interests to talk up how tough he has been. It is that which has given the Tories the space to now promise unfunded tax cuts. Labour, with its criticisms of 'austerity' doesn't have the same freedom.

      Indeed if you bother to read the very link you give from Portes, its entire point is that the claim by Osborne that we have seen constant fiscal consolidation for four years that you rely on is not in fact true. In 2012 the cyclically adjusted deficit reduction was 0.2%.

      Some austerity.

      I'll take it you just agree with me that what fiscal consolidation there has been isn't going to be reversed by Labour, but rather continued?

      The next government, whoever is elected, will follow the same path as the last. What fiscal consolidation there is will take place at the start of the Parliament and be relaxed later on. That is politics in a democracy, and is the major problem with trying to use fiscal policy to manage the economy. It is a theme of S W-L's blog that he doesn't like the economic consequences of democracy and wants structures in place to control the politicians. I rather like democracy myself.

    5. Beyond bizarre (and coherent thinking), but I can clearly see where the 'Spinning' comes from!
      "Side" with Osborne?? Me quoting his remark regarding the reduction in the cyclically adjusted primary balance being **the largest and most sustained** along with the OBR and IMF data simply illustrated the complete incorrectness of your point (about there having not really been any austerity). It's not a question of "siding" with Osborne, since he relied on and refers to the IMF figures which show this, as do OBR figures. I don’t dispute their figures, and neither does Osborne it seems.
      Your next point is incomprehensible and illogical. I send you a weblink supporting my claim...then strangely you reply that I'd not bothered to read it or understood the point it illustrated!! Unlike you, I carefully read (and re-read) everything. Which is how you somehow manage to misinterpret my argument as having to "rely on" Osborne's false claim of “constant fiscal consolidation over four years”. I stated unambiguously in my very first reply to you that: "the fiscally adjusted primary deficit - clearly shows significant 'austerity' implemented by Osborne, especially up to 2012, which them slows down notably." Likewise in my next post, in disproving your erroneous claim of hardly any austerity I wrote: "the change between 2010-12 is described by various institutions (IMF, OBR etc) and by various economists and commentators as 'sharp' and 'significant'”.
      Hardly the comments of someone whose argument relies on Osborne’s false claim of “constant fiscal consolidation for four years”. Read it again SH… "significant up to 2012…then slows down notably” and "change between and significant". Constant over four years?? Given my words above, how did you manage to think that I based my argument on this lie??? Hint: 2010-12 is approximately two years (depending on exactly when you start/end), and “slows down significantly” after 2012 is also a bit of a give away!

      No, it’s certainly not “some austerity”. Keep backpedalling until you get to the truth. Try adjectives such as “large” or “significant”, even if it does challenge your prejudices.
      So back to the question you keep dodging. Why did you claim there had been “hardly any” austerity when you were aware of the figures?? And once more, please explain why you previously accused SWL of cherry-picking data (on the FT economists survey) when you know he didn’t? It wouldn’t be because the evidence doesn’t fit your prejudices?
      It is extensively documented that Labour has confirmed they are to continue with austerity if they win. So why do you question if I agree with you that they will do so?? They’ve said they will, and given what they've said as yet I have no reason to doubt it.
      Given your evident inability to read, comprehend or interpret even simple concepts and arguments (as illustrated above), your last farcically inaccurate paragraph is not even worth addressing. Like the rest of your post it has Dunning-Kruger written all over it. Without wishing to sound rude, you really are way out of your depth as far as both economics and constructing logical arguments are concerned.

  2. Spinning Hugo
    (iv) Labour has a core constituency that will not abandon it: public sector workers, the young, BMEs, the north, most cities.

    Having just drawn up the Venn diagram, all that's left is old, white, private sector, rural Southerners. All of a sudden, the Tory strategy makes sense!

  3. SW-L; "watching how mediamacro develops just got more interesting."

    Only in the same vein as watching a dog chasing its tail can be amusing for awhile ..

  4. The same mediamacro that had whipped up UKIP Europhobia and had assailed the Tories since 2010 turned in the week fully behind Cameron - Daily Mail and Sun in unholy alliance again.

    However, so deep has been their rhetoric on Europhobia and so shallow their support of Cameron, I expect the extent of their exaggerations may come to harm the very thing they want, lower high rate taxes through electing a rightist majority.

    All the BBC has left in its locker, having dismissed university peer-review macro, is a parade of the Farages from now until May. Ugly!

  5. "The need for austerity because you have borrowed too much was a simple message that everyone understood, even if it didn’t make much sense when applied to a government during a recession."

    But we weren't in a recession in 2011 when Osborne's austerity measures began to take effect (VAT rises, public sector wage freezes and capex cuts) as Osborne's critics are always pointing out Labour left a "strongly growing economy" and even the bond market, which saw gilt yields rise from 3.2% in mid 2009 to over 4% in mod 2010, seemed to concur.

    If you can't begin to deal with a double digit deficit with a "strongly growing economy" then you are really taking an ideological stance in favour of permanent large deficits.

    When the economy began to slow unexpectedly in 2011 as the Eurozone crisis blew up and the rising price of oil began to cause inflation to rise, and provoking the cost of living crisis, then Osborne began to retreat on previously announced austerity targets. As most would think a sensible response.

    1. The economy being described as "strongly growing" by a politician is hardly a justification for austerity, it's a single data point. We were still way below the pre crisis peak.

      You shouldn't really be starting about austerity until you've got some level of confidence in the recovery, that didn't seem to be the case in 2010. It's also worth pointing out that austerity in the wake of the far smaller 1990 recession didn't really start until around 1995/6.

    2. As Andreas points out, the UK was still far far below it's pre-crisis peak. Unemployment was still at about 8% (as compared to just above 5% in 2007). You are correct however that Osbornes retreat from austerity was sensible. The strange thing is that he and and most of the media kept on talking as if austerity was still being implemented.

    3. Deficits as policy tools are relevant in a cyclical context which requires splitting your data between a trend and a fluctuation around that trend. The question is thus not whether or not output is growing, but actually where it is relative to its long term trend.

      The actual argument goes that deficits as large as necessary must be suffered until the output gap is filled. Said differently, you don't stop when you start to recover; you stop when you get back on trend. How do you know when that is the case? It's extremely hard to tell, but we know what will happen if you overshoot: inflation will accelerate.

      As a sidenote, I wonder what professor Lewis thinks about the "asymmetry" of this phenomenon. Everyone acquainted with macroeconomics would expect a sustained output gap to pressure inflation downward -- exactly like you'd expect inflation to accelerate if you overshoot with a countercyclical policy. Why isn't there deflation in Europe right now?

  6. " puts at risk one of their main political assets, which is the perception of future economic responsibility."
    What they depend on I believe is more like "...future economic prosperity."

    I think you're judging Cameron by the wrong yardstick though. He doesn't lay out a path across the river, he uses stepping stones. Just when someone has worked out how to unsettle the one he is standing on, he is already moving to the next one. Typical PR man. Just look at whenever he or his Government have been in trouble in the media; suddenly there is a series of shocking daily information releases from various Government departments until one day's story strikes a chord with the press and then the releases stop. This way he avoids having to debate issues that he cannot win.

    As for economic arguments, they might persuade one or two LibDem voters (the only party that seems to have thinkers for members or supporters) but in reality it is all about perceptions. And unfortunately for poor old Milliband, his image is not that of a man of quick wits or dynamic energy. Rightly or wrongly, people believe Cameron because he rode a bike to the office while his chauffeur drove behind him...

    Regarding the LibDems, they might have thinking members, but Clegg is politically naive. As you say, giving up the Tuition Fees argument just to be in power was not a good move electorally; nor was Vince Cable's statement in the first fortnight of office that the debt situation "really is that bad" when in fact it never really was. That closed off any possibility of the LibDems claiming austerity was the wrong policy.

    As for being scared of UKIP, I believe Cameron is more fearful of his own backbenchers leaving his party and joining them than of anything Farage can do on his own. As John Major said it's "the B4s*** ds" inside that Tory leaders have to worry about. Not macro economics.

  7. i hope that you brits are smarter than we americans or at least, less resentful of the poor.

  8. You do make a great point regarding the contemplation we might have for the manipulative plot as an explanation of politics.

    This semester, I enjoy the privilege of taking an optional course outside of the economics department and decided I would attend "introduction to logic." It is interesting, but, more to the point, it made it obvious to my mind how easy it is to go wrong when reasoning and how some of the fallacies involved are not necessarily easy to spot for everyone.

    In our worst case scenario, a politician knows when he is being fallacious and actually does it on purpose. He'd pick and choose the most subtle fallacies he can find to suit his goal. And, do you know what the worst part of it is? He would probably get away with it.

    The problem does not have to be tied to some conspiracy, to an evil plot carried by a manipulative sociopath, such as the one I hypothesized above or even to plain problems related to group think or emotional biases. The real point I make here is that invalid inferences are not easy to spot and, specifically because of this, they might have long lasting effects. This is not to say that nothing else is important in explaining what is happening, but you have a problem right there as I said: if someone can't picture the problem with a given reasoning, he certainly can't be rejecting it on the grounds that it's fallacious.

  9. Slightly off topic, but…..Simon says quite rightly that most of the popular debate on economics is governed by the emotional overtones of the words “debt” and “deficit”. This “governed by emotional overtones” phenomenon applies, of course, not just to economics. The opening sentences of a recent Guardian article deal very nicely with this phenomenon (link below). It reads thus:

    “The whole language is a machine for making falsehoods”, says the main character in Iris Murdoch’s first novel, Under the Net. His view is that the words we use trap us into seeing the world in a certain way. Orwell believed the same: if there’s no name for it, you can’t really think about it. Conversely, a name can be created for something that doesn’t really exist.

    Linguists have argued for decades about this effect: the consensus is that language guides, rather than determines, thought. It can set up habits, no more. But habits can be tenacious. Politicians have long known this. Advertisers know it. And so do terrorists.”

    1. Talking about using words correctly......"Her", not "His". Iris Murdoch was a woman.

    2. The main character in Under the Net is Jake. A man.

    3. Sorry, but I'll have to contradict you both.

      If memory serves, a male character, Hugo Belfounder, tells "the whole language is a machine for making falsehoods" to Jake Donaghue (the protagonist of Under the Net).

      I think when David Shariatmadari writes "his view", he does not mean Iris Murdoch or Jake Donaghue, but Hugo Belfounder (who, yes, is a male, but is not Jake). :-)


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