Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 9 July 2015

A budget for our next Prime Minister

There is a simple way to read George Osborne’s budgets. Forget the economics, and just think politics.

Take the macroeconomics of aggregate fiscal policy, for example. Many pages have been filled (in some cases by me) about the folly of fiscal austerity while interest rates are near their lower bound. Under the coalition I calculated (with the OBR’s help) that this policy cost the average household the equivalent of at least £4,000 over the last five years. The arguments put forward to support this misguided policy have changed, but they seem to get worse rather than better: I go through the latest in this short piece for today’s Independent. But the focus on the deficit helped Osborne win the last election (admittedly with the help of Labour’s reluctance to challenge what he said), and is on course to lead to a radical reduction in the size of the UK state, as Colin Talbot sets out here.

How about his bold move of a substantial increase in the minimum wage? At first sight it seems very strange: it is a policy that if introduced by Labour would have much of the press, and most economic journalists, screaming about unnecessary interference with the market and the onset of socialism. Until now the level of the minimum wage has been carefully calculated by the Low Pay Commission to avoid significant job losses. The OBR calculate that Osborne’s proposed hike will lose about 60,000 people their jobs. But as Tim Harford explains, it is not as if Osborne has an alternative economic view. He just needed a dramatic move to give him political cover for his large cuts in tax credits.

Most of those on low earnings will still be worse off - by a lot in some cases, often decreasing work incentives - but he knows from the last election that impressions are more significant than numbers. [1] Probably the most important impact of this budget will be to raise poverty, particularly child poverty. The previous coalition’s policy changes also increased poverty, but their impact on the official statistics was offset by the overall decline in real wages. Over the next five years that will no longer happen, so again the cover is being put in place: change the definition of poverty. The economics is ludicrous, but we should have got used to that by now.

Then there is inheritance tax. It is not often I agree with Janan Ganesh, but he is correct when he wrote just before the budget:
 “George Osborne wants to refurbish the Conservatives as the natural habitation for working people … But the message will always be muffled as long as the tax system favours assets, including those bequeathed, over earned income … the greatest perversity of the system survives and will only worsen if the threshold for inheritance tax is lifted this week.”
But this year, and probably for the next one or two, George Osborne has a more important political goal in mind than confining Labour to opposition (particularly when they are doing just fine without his help). He wants to be sure that when David Cameron steps down, as he has promised to do, it will be George Osborne who is seen as the natural successor. Most of the Conservative base is not devoted to the cause of free markets, but is passionate about their own families’ income and wealth. It also likes high defence spending, so the budget contained a commitment to keep to the 2% Nato target. For those who hope for measures to tackle what Chris Dillow calls the true ‘something for nothing’ culture, the UK housing market, I suspect that too will not happen before the Conservative Party have elected their new leader (if it happens at all).    

If this sounds too cynical to you, all I can say is that I learn from experience. When I wrote this three years ago, Paul Krugman no less said I was getting “remarkably cynical”. Unfortunately, save for one detail, my cynicism proved pretty accurate. When it comes to implementing good (evidence based) economic policy, in both the UK and the rest of Europe, we are living through very depressing times.

[1] Postscript: the reaction of the UK press is outlined here


41 comments:

  1. Some people have said:

    "The reform is based on the idea that tax credits currently subsidise employers. There is scant evidence for this."

    What do you think Simon ?


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    1. Some people are right: see Resolution Foundation for example.

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  2. Are we in a new era of "Stop-Go"? That is, Austerity in the first years of this government, which will cause a new recession (which Osborne blames on the Greek crisis), followed by an easing off of the breaks and a modest recovery. Presumably, to Osbo, it doesn't matter if the economy shrinks overall if those at the top do better? As for the Labour Party's weak response: I was born in the age of Butskellism; now we have OsborneBalls instead!

    PS May I ask a technical question, the World Bank Broad money figures show a decline from 2013 to 2014, and a big decline from 2010, without adjusting for inflation. The previous years' pattern is interesting too. Does this mirror the performance of the real economy? And where did the £375Bn QE disappear to - abroad, debt deflation or both?

    http://data.worldbank.org/indicator/FM.LBL.BMNY.CN

    ReplyDelete
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    1. QE involves an increase in 'base money' - in this case bank reserves. Broad money is more closely related to how much banks lend out. So the answer to your question is that, when interest rates are near zero and banks reluctant to lend, creating reserves does not cause banks to lend more.

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    2. Thank you. So the figures illustrate that an increase in base-money need not cause inflation, (unless 'inflation' is redefined to suit one's prejudice). Presumably the downward trend of broad money is echoed in the indifferent performance of the economy?

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    3. Banks do not lend out reserves. Lending is lax because there are no creditworthy borrowers!

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    4. "(unless 'inflation' is redefined to suit one's prejudice)"

      No. Just no.

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  3. Yet again you are wrong on austerity. If your "research" was valid, you would publish it in a peer-reviewed journal. The fact that you haven't, and are instead merely spouting partisan nonsense on the internet proves that your economics is rejected by all competent economists.

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    1. Run along now back to Tory HQ...

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    2. Derp!
      http://noahpinionblog.blogspot.com.au/2013/06/what-is-derp-answer-is-technical.html

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    3. You mean a peer-reviewed journal owned by someone like Murdock?

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  4. Osborne can only get away with it due thanks to the remarkable bias and frequently poor reporting/analysis of such matter throughout the UK media. He is scarcely being hel to accurate account anywhere.
    It can (and has) got worse, with the Conservative machine actually on the offensive when anyone challenges or points out the folly and impact of their policies, as Oxfam found out in 2014 when Conservative MP Conor Burns reported the charity for being overtly political, but did not appear to deny what they were actually claiming in their austerity poster campaign. A case of 'we don't deny it, but we deny you (Oxfam) the right to highlight it to the British public.
    http://www.dailymail.co.uk/news/article-2881449/Oxfam-s-perfect-storm-ad-party-political-Watchdog-reprimands-charity-poster-attacking-Coalition-s-austerity-programme.html

    ReplyDelete
    Replies
    1. It's been even worse in Greece!
      http://www.thepressproject.gr/details_en.php?aid=79064
      (I wonder when the complete News Corp takeover of Sky will be back on the agenda?)

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  5. So what is the likely result of increased minimum wage and lower tax credits?
    Should the opposite be done?

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    1. I thought that was clear from my post. Increases in the MW will make a few people better off, but quite a lot of people will lose their jobs. The cut in tax credits will make a lot of people worse off, and may decrease work incentives. With the minimum wage and (maybe) tax credits we were pretty close to the optimum before the budget, and we have now moved further away.

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    2. Let's stand by for an unemployment rise, then.

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    3. Lots of people in the U.S. on the left disagree with this. Here's Krugman for instance.

      http://krugman.blogs.nytimes.com/2013/02/16/minimum-wage-economics/

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    4. As suggested, there'll be unemployment for the over 25s but the under 25s will no doubt suddenly find themselves popular as employees if not as customers. I'd guess employment levels will stay about the same for a a time at least till the decrease in demand brought about by employers only paying kiddie money which is no longer made up by WTC makes itself evident and staff are let go as a consequence. Does this make sense to people?

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  6. I don't unsterstand why the Uk would need high defense spending, other than for stimulating, and are surely more productive investments like medical research.

    About the estate tax, check out Bernie Sanders on youtube. The UK could use a guy like him.

    One may be cynical but still realize to fight entrenched power you must organize and fight. Civil-rights and gay marriage were not gifted from God, nor will economic justice or sound macro policy.

    Most play politics as a short game. It isn't. It's long. See the American right movement in the 70s with all the think tanks like Cato. Now run the Republicans.

    There is a difference between cynicism and paralysis.

    ReplyDelete
    Replies
    1. This level of defence spending is what we committed to with NATO.
      Whether politicians can spend it well is another matter.

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    2. We do have a guy like Bernie Sanders. Jeremy Corbyn.

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  7. Simon, do you think the current definition of poverty is a good one?

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  8. As usual with this blog:

    Mainly Politics.

    ReplyDelete
    Replies
    1. As too often with Anonymous comments:

      Mainly Clueless.

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    2. Yet, here we are :-) Telling, no?

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    3. You mean he preaches to the converted - exactly so.

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    4. Simon10 July 2015 at 00:02
      Big Bill10 July 2015 at 01:10

      Excellent for leftist bull sessions.

      Pieman

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  9. I spent 10 years in China; whenever something occurred which I could not understand invariably I was being insufficiently cynical; e.g. ongoing stock market gyrations. Russia: ditto. No reason the same lessons dont apply to Europe (or the US).

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  10. It is amazing how muted the response from the BBC and others to this budget has been. It is already almost forgotten. In terms of its social and economic effects it should be considered very controversial and generating a lot of discussion. My feeling is also that Labour has not lifted its game

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    1. I have noticed a fair few people on my local FB social group suddenly realizing that they will be £1000 a year or more worse off.

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    2. The BBC, to be fair, led with the IFS review yesterday. But little has been made of the Tories stealing Labour policies - imagine the outcry if Labour had increased the minimum wage, or attacked non-dom status.

      I'd suspect that this is for two reasons. The boring reason is that the media is just an echo chamber for various right wing interest groups, and they are allied to a Tory government and are being quiet right now - especially as they don't want to signify the contradictions between Tory rhetoric and policy. The second reason is that it has no traction amongst "serious people" who have sunk capital in modern capitalism. A prime example of the latter is Martin Kettle in the Guardian. Who would have thought that:

      "They [the coalition and Tory government] have also been concerned about fairness and social justice"

      ... while we have a continued assault on the poor and disabled.

      Regarding Labour - their response has been pathetic. They could have congratulated Osborne on discovering that the minimum wage is not such a bad thing after all, and then used the IFS report to expose the truth behind the PR. But whatever they do has such a lack of conviction ...

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  11. " When it comes to implementing good (evidence based) economic policy..."

    What does inheritance tax have to do with evidence based economic policy? Inheritance taxes turn on one's values.If your values tilt to favouring asset preservation across generations, then obviously lowering or eliminating the inheritance tax is good policy. While in this case my values coincide with SW'sL, I am disheartened by his continual inability to see that values inform his conclusions; it's not a priori economic reasoning.

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    Replies
    1. If those assets have been bought with taxed income, why should a change of ownership require them to be taxed again?

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    2. Anonymous10 July 2015 at 00:45

      "I am disheartened by his continual inability to see that values inform his conclusions; it's not a priori economic reasoning."

      How right you are. SWL's lack of self-awareness is stupendous.

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  12. Firstly you claim, reading between the lines, that an increase in minimum wage will lose countless people their jobs. The reality is the minimum wage will be raised very gradually, which considering it hasn't been raised in the same percentages as inflation, is not a bad thing. The insinuation that an increase in minimum wage would decrease incentive to work is just ludicrous. Especially with the decreased cap on benefits. Which is again a good thing. It's a sad state of affairs when so many people can be better off on benefits than working. The latest budget is the first for years to combat this problem.

    You proceed to claim inheritance tax being abolished shows conservatives value estate worth rather than salary. How you have reached this conclusion I cannot fathom. What I also can't fathom is why so many left wing voters choose this as a source of outrage. The fact is the tax didn't apply to low valued estates, and only the "middle class" have benefited from this cut. The fact remains low valued estates don't pay it anyway so what fair reason can you come up with for it being applied for others? If someone works hard all their life, surely it is their right to have that estate go to the people they love? Rather than the government? Rather than, going back to my earlier point, going to people who live on benefits because they know they'll be better off than if they work?

    I'm not a Tory voter. In fact I think David Cameron is one of the worst things to have ever happened to British politics. The fact remains that this budget, for the first time in years, makes sense. It is cutting from the places that can either afford to be cut, or deserve to be cut. It is also righting wrongs which have been in place for a fair number of years now.

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