Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 15 October 2015

The fiscal charter media fiasco

The House of Commons passes into law a fiscal charter which enshrines in the short term another period of severe austerity, and thereafter commits the government to a crazy fiscal rule. The media (with one or two notable exceptions) focus on Labour U-turns and 20 odd abstentions. The Labour leadership have only themselves to blame of course. Which given the way the media operates is true. But does it have to be this way?

Behind the gimmick of a charter is a real policy that will impact on everyone. This policy is the reason the government will make substantial cuts to tax credits for millions of poorer working people, making their already difficult lives substantially harder. George Osborne said as much in his budget speech . Would these people really think that this was of less interest than endless discussion of Labour embarrassment? Who are television news programmes made for: ordinary people who receive tax credits or a Westminister bubble obsessed with political process?

The charter is all about macroeconomics: fiscal policy and fiscal rules. There is an academic literature on fiscal policy and fiscal rules. I have not come across a single non-partisan academic economist who supports this charter, and certainly not one who knows about this literature. For an academic discipline that is always accused of being hopelessly divided, that is saying something. The reasons are not that difficult to get across:

  • The policy restricts public investment at just the time that public investment should be high because borrowing and labour are cheap. Its a near universal view among economists that now is the time for higher public investment.

  • Targeting a surplus year in and year out is likely to lead to harmful volatility in tax rates or spending. All macro theory says the deficit in the short-term should be a shock absorber.

  • If the charter is achieved, it will bring debt down ridiculously fast, penalising the current working generation.

  • Fiscal austerity when interest rates are very low is never a good idea

Again with the exception of a few newspapers, I heard nothing of this in media reporting. Instead I heard misleading statements, like you needed surpluses to get debt down when what matters is the debt/GDP ratio. (2% deficits with normal growth will reduce the debt ratio.)

Even the ‘highbrow’ news programmes like Channel 4 news and Newsnight chose to spend most of its time talking about U-turns on either side. No mention of the complete lack of economic support for this charter. On an issue with such important consequences, is that fulfilling a duty to inform? We have millions of hardworking but poor families who will be made substantially worse off as a result of a fiscal rule which no academic economist has supported? Will these families ever find that out? What does that tell us about our media, and our democracy?

50 comments:

  1. Some suggest a conspiracy, that the media is in the most part friendly to this Government and have formed a claque to support it, however absurd and damaging its policies.

    There may be an element of truth in this, although I suspect the main reason why the media shy away from analysing the economic arguments may be because they do not understand them and therefore assume the public will not understand them, or be interested in them.

    Economists do tend to speak in an arcane jargon which leaves the rest of us struggling to understand.

    Your piece is crystal clear though - and others (eg Richard Murphy) also write clearly on the follies of the fiscal surplus.

    How often are you interviewed or appear in the media?

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  2. I hope, when you do speak to the Labour Party, that you make them aware of that 2007-2012 'BBC Breadth of Opinion Review' which you flagged up on one of your previous blog posts.

    When Mike Berry, one of the report's authors said of the BBC that:

    "Here opinion was almost completely dominated by stockbrokers, investment bankers, hedge fund managers and other City voices. Civil society voices or commentators who questioned the benefits of having such a large finance sector were almost completely absent from coverage. The fact that the City financiers who had caused the crisis were given almost monopoly status to frame debate again demonstrates the prominence of pro-business perspectives. So the evidence from the research is clear. The BBC tends to reproduce a Conservative, Eurosceptic, pro-business version of the world, not a left-wing, anti-business agenda.”

    The first job of any successful opposition party is to gnaw at the leg-bone of the BBC seven days a week, because left to its own whims, the BBC has performed appallingly these past seven years and shows no sign of improvement.

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    Replies
    1. This is exactly right. And even more disturbing when you reflect that the best hope of non-partisan media is the BBC.

      The commercial media are more-or-less a lost cause, beholden as they are to advertising revenue and corporate interest.

      The irony here is the perennial Tory accusation of left-wing bias in the BBC. Another example of 'branding' if you like. And so the BBC ends up parroting the same nonsense as the commercial media.

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    2. Deja vu. Do you know what one of the major justifications of Britain maintaining the Gold Standard at par was in the 1920s? To preserve the status of The City. What a price we paid. Don't underestimate the political influence of the financial sector.

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  3. The fact that this is a law rather than a target says it all, by making it a law it gives the impression that deficits are immoral, that they are never good and are always bad for society. In a way Osbourne believes he has eradicated boom and bust, and that over the next five years there will not be another recession, even if he doesn't use a fiscal stimulus, he will more than likely break the new law as taxes drop but spending remains the same. That is one huge gamble, but as no-one held him to account for his failure to meet the last round of deficit targets, no-one - politically will hold him to account for this failure

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    Replies
    1. I think you will find that it was the other lot who thought they had ended 'boom and bust'.

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  4. It was a breath of fresh air to listen to Stephanie Flanders (who has a mixed record) on the Today programme yesterday essentially saying that the charter was a baseless and useless piece of politicking. Let's hope for more.

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  5. Fascinating times we are living in. In political economy it is a clear as day debate about fiscal and monetary rules (and related central bank independence) vs discretion. I'm on Corbyn's side with this one.

    My only concern is has Corbyn retracted his statement calling for withdrawal from NATO? I understand many of his foreign policy positions but not this one. NATO has been the bedrock of stability since 1945 - this is something all foreign policy experts would agree on. A break up of that organisation would be truly disastrous. Unfortunately that policy, because security policy is the most important policy of all, is the only thing making me reluctant to support Corbyn. We need a clear retraction.

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  6. left-wing, anti-business
    That is a revealing conflation.

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  7. misleading statements, like you needed surpluses to get debt down
    Surely this demonstrates that the problem is simply one of ignorance, stemming from the common-sense explanatory power of the ubiquitous 'economy as a household' analogy.

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    1. That might be partly it - but most households do have the experience of mortgages, where you do borrow to invest. I think it's more that there's a general misunderstanding of how much investment is needed and how productive it is.

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    2. Most households also don't experience something analogous to a nation's GDP growth. The analogy becomes less distorting and more informative if you factor something like that in: e.g. household income steadily rising at a higher rate than the interest on mortgage repayments.

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    3. This comment has been removed by the author.

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  8. Brief and to the point. That should of course be printed in all the newspapers!

    Especially in the papers which will support this nonsense, as (I assume) the Sun, Express, and Daily Mail, who all specialise in keeping their readers in the dark on such matters.

    Why do you not email that to all the UK newspaper editors? And see whether they will publish this.

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  9. I seem to be on the Conservative emailing list.. this arrived today.

    They do seem quite determined to push this..

    == Dear Andrew,
    ==
    == Yesterday Labour voted to keep on borrowing forever. Seriously.
    ==
    == The Fiscal Charter commits the government to deal with our debts and run a budget surplus.
    ==
    == By voting against this yesterday Labour confirmed that they want to go on borrowing forever - loading debts onto our children that they can never hope to repay.
    ==
    == You wouldn’t raise a family or run a business in this way, so why should it be any different for our country?
    ==
    == We can’t let Labour wreck our economy. Donate today and let’s make sure that they never get back into power again.
    ==
    == Unlike Labour, we are building a country where we deal with our debts and live with our means. Where hard work is rewarded and you and your family are secure.
    ==
    == And if you want the same for our country, and help us deliver it.
    ==
    == Best wishes,
    ==
    == The Conservative Party

    I snipped the 'donate £20' button.

    ReplyDelete
    Replies
    1. The govt has been been "borrowing forever" since the beginning of time.
      So will the Tory govt.
      Deficits are normal and common, if you look at history. We need growing net financial assets as the money supply expsnds and economy grows.
      Interest generates tax when spent and respent and the government has total control over what interest to pay, incl zero.
      Not comparable at all.

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    2. Indeed, it's the whole bare-faced making-up-the-economics that amazes me.

      But apparently these are the 'sensible people' who have economic competence.

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  10. "public investment should be high because borrowing and labour are cheap"

    This line of thinking, regarding borrowing costs, seems to fall apart when you consider how public debt actually works. Every single year a substantial part of the debt is rolled over, which means when the central bank raises rates back to historically normal levels, the new debt will eventually have to be refinanced to a higher interest rate. You must consider what the interest rates might be in the future when considering fiscal sustainability, not just what interest rates are now.

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    Replies
    1. Then guess what. Interest rates *won't* rise.

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    2. Cool, but as soon as you start suggesting that the central bank should permanently suppress interest rates, you depart from any kind of conventional mainstream economics - Prof Wren-Lewis can no longer claim that as part of his "this is all just basic economics" mantra.

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    3. Central banks can and do issue long dated fixed interest debt.

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    4. The average maturity of gilts is around 14 years. When you advocate significantly greater borrowing, isn't it a concern that no-one can provide a credible forecast for where interest rates will be in 2029? Unlikely as it may seem at present, what if interest rates return to early 1990s levels of 12%, by then?

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    5. Good point, but at what proportion is new debt financed by long maturity bonds? How much is the government capable of doing this? I read that 40% of US debt is rolled over each year, I imagine the stats are similar for the UK.

      If we can really lock in a huge amount of investment, finance it all with 30 year super low interest rate bonds, then that is great - however I'm skeptical this is possible.

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    6. Just look at the excess bank lending and see what they are lending for.
      No that would be terrible wouldn't it.

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    7. The last time I looked the aver maturity of UK gov debt was just under 15 years.

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    8. I think this has increased now to over 17 years.

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    9. Honestly, I don't get your line of thought. It strikes me as insane on stilts.
      "the new debt will eventually have to be refinanced to a higher interest rate. You must consider what the interest rates might be in the future when considering fiscal sustainability, not just what interest rates are now."
      "as soon as you start suggesting that the central bank should permanently suppress interest rates, you depart from any kind of conventional mainstream economics "
      Why should it matter where ideas come from?
      The "problem" is easily solved if you are not stuck in the "permanent debt crisis/long term spending crisis (lite)" Groupthink.
      This comes out as the "Last Stand" after the money multiplier lies taught to students are debunked.
      The "mainstream economics" problem is that they are the central bank is "independent" and may raise the voluntary corporate welfare payments and this "costs money." Interest rates can rise to infinity percent. But you can't make the central bank non-independent, so the govt will just have to tax n spend and battle you for resources in the private sector.

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    10. "Central banks can and do issue long dated fixed interest debt."
      They can, but why pay corporate welfare when you don't need to?
      Don't let the central bank Mafia run over you.
      The Pavlovian reflex "rates have to rise! The end is nigh!" just shows how desperate they are.
      "you depart from any kind of conventional mainstream economics - Prof Wren-Lewis can no longer claim that as part of his "this is all just basic economics" mantra."
      I shall be keeping that quote as evidence of Groupthink. It is really quite excellent.
      However, if you can see if you squint just right, as a veiled threat.
      "If you dare ask awkward questions you won't be our friend anymore Simon and you won't be invented to our book club!"
      These people are thugs. Go shill for corporate welfare somewhere else "Briteconomist"
      They haven't threatened you physically, have they Simon?

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    11. "If we can really lock in a huge amount of investment, finance it all with 30 year super low interest rate bonds, then that is great - however I'm skeptical this is possible."
      Of course it is possible! What a ridiculous question.
      The state's cost of money is zero. Any payment above that is voluntary.

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    12. "If we can really lock in a huge amount of investment, finance it all with 30 year super low interest rate bonds, then that is great -"
      Not it isn't. Why the obsession with "investment"? The UK economy is 80% service based.
      "which means when the central bank raises rates back to historically normal levels, the new debt will eventually have to be refinanced to a higher interest rate. You must consider what the interest rates might be in the future when considering fiscal sustainability,"
      That's a political choice. There is no need for the government to pay interest at all to any third party not under its control. It can do it all internally within its own and controlled entities.

      The whole political debate should be about why the government needs to pay money to savers, particularly overseas savers when it patently doesn't have to.

      It is exactly the same as saying the government could pay disabled people more in the future.

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    13. Prof Wren-Lewis, things are still unclear to me. Do you think we would have managed to reduce our debt to GDP burden in 15 years? If not, then this extra debt will still need to be refinanced. High interest rates and high debt are a toxic combination - we should be doing what we can to avoid this situation. The problem I see is that this is rarely mentioned by Keynesians (other than nutbag MMTists who explicitly address this point by stating we should just not pay interest at all). I want a coherent model of long term debt from traditional Keynesians, that accounts for when debt is and isn't sustainable, taking future possible interest rates into account - otherwise I get nervous.

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    14. The point about investment is very simple. If you are going to do it sometime anyway, and you have some choice over timing, its best to do it when its cheaper.

      I think your concern is more about paying off the overall level of debt. Here Osborne is right - you do it while the sun shines. But that translates into macroeconomics as when monetary policy is able to respond to any downturn. With rates still at 0.5% we are not there yet.

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    15. That's definitely true. If it's a choice between now or later regarding when to invest, now makes far more sense.

      Yes my concern regards the overall level of debt. Yes it's ideal to reduce our debt burden when the economy is booming and the central bank can offset this. Sometimes I'm cynical this time will ever come soon enough however, and sometimes I suspect the high debt levels might endogenously be causing low growth expectations (through various channels), as people like Rogoff suggest.

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    16. It's not a debt burden, it is our savings. Gilts are savings. It is the opposite. Low growth = high "govt debt." Plus, R and R has been debunked. It has spreadsheet errors and does not apply to currency issuing governments.
      "the point about investment is very simple. If you are going to do it sometime anyway, and you have some choice over timing, its best to do it when its cheaper.

      I think your concern is more about paying off the overall level of debt. Here Osborne is right - you do it while the sun shines. But that translates into macroeconomics as when monetary policy is able to respond to any downturn. With rates still at 0.5% we are not there yet."
      Osbourne is an idiot. Ignore him.
      And it is that view of the world that is wrong. It was shown wrong in 2008.
      You can *always* respond to a downturn by increasing spending or cutting taxes. There is no need for recessions, and we can preempt them with very strong auto stabilisers.
      If you have supply side issues solve the supply side issue. Don't cause a recession to push down "average" inflation.
      If you have issues with democracy, then put control of fiscal policy out of the hands of politicians.
      The state's cost of money is zero. Issuing Gilts is a voluntary choice. I would end them as I see them as corporate welfare.
      I think you need to look at things slightly differently.
      I strongly disagree - if you are going to do something you need to make sure the resources and staff are free.
      Otherwise you build bridges to nowhere.
      Investment needs to be long term and planned IMV. I would "fund" it via Land Value Taxation, so those who benefit do not receive free rents.
      A massive programming of social housing - build to the Passivhaus standard is urgently needed.
      This and LVT will fix the housing market.
      I say again if Denmark is enforcing Passivhaus standard for all buildings in Denmark, then why aren't we?

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  11. Have you tried writing to your MP explaining why the charter makes no economic sense, asking what the counter-argument is, and insisting on a response from the minister concerned? I presume this charter never gets debated by the Lords, so never becomes Law, as such?

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  12. Matt, don't forget the central bankers.
    The Russian CB is going on about "reform." It's always "reform" isn't it, regardless of the circumstances?http://mikenormaneconomics.blogspot.co.uk/2015/10/bloomberg-business-50-oil-for-15-years.html?m=1

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  13. The concept of surplus law is clearly bonkers but just to compound things, the mechanics of this one are hopeless.

    The attempt at flexibility hinges on the OBR judging in its twice-yearly Economic and Fiscal Outlooks that a negative shock to the UK economy is likely to take place, or already has taken place -- defined as real GDP growth of less than 1% on a rolling 4Q-on-4Q basis.

    As the financial crisis showed, time is of the essence when dealing with negative shocks and it's unclear what the mechanism would be to turn the fiscal taps one when they are needed -- or at least in a timely fashion. Do we wait for the next EFO when forward looking indicators like PMIs are already heading south?

    Larry Summers says not a single U.S. post war recession was a predicted a year in advance by the Fed, the Federal government, the IMF or a consensus of forecasters. I'd wager the same is true of Britain.

    While there's widespread agreement the OBR is a good thing, its ability to forecast a recession is untested -- not just in a technical sense, but a political sense too. While it has asserted its independence when Cameron told porkies about austerity not hurting growth, it's hardly on the same scale as telling the government a recession is coming.

    It's all so arse-backwards. With more conventional, flexible system, you could stimulate the economy and head off the scenario in which the OBR tells us that growth is about to fall off the cliff. We now have it the other way round.

    (I realise you've already made some of those points Simon but I'm in rant mode!)

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  14. And the other thing - they have cut auto stabilisers massively! Especially welfare cuts.
    This is insane!

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  15. I can't remember the last time I saw a serious discussion of economic ideas on a mainstream news channel. As you say, the "news" here seemed to be all about McDonnell's u-turn.

    The BBC should be doing a lot better. It's a public service broadcaster. We have countless programmes on sport, buying houses, fat porn and benefits porn but we need a serious ten part series on economics and all of its flavours - and how money and credit is created. We need to be able to make informed choices. All the government and its compliant media seem to want to do is obfuscate and reduce all "debate" to the ad-hominem level.

    The vast majority of us simply don't have the knowledge to understand why this fiscal charter is nonsense.

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    Replies
    1. Pretty much like the electorate being ghosts on the famous Marie Celeste ship marooned in a sea fog in the middle of the Sargasso Sea and just drifting aimlessly.

      Here's Steve Keen's attempt to help lift some of the fog:-

      http://www.forbes.com/sites/stevekeen/2015/06/18/are-surpluses-normal/

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  16. Some legal question:

    A budget law is a law, and can with a single line override earlier, less specific laws. So the charter cannot truly bind future parliaments at all - they can swipe any such restrictions away with a single line in a new law of theirs.

    The whole thing appears to be an exercise in setting and fortifying a narrative.

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  17. Simon,
    You are of course right but you are preaching to the converted (most of the comments that precede this one agree with you as I do). The obvious problem is bringing common sense to a wider public. The Labour Party has a role to play here. Their spokesmen will not get a fair hearing perhaps, but they will get a hearing. Sadly, I feel the current team is just not up to the job. The famous U-Turn may be of more interest to the inhabitants of the Westminster village than anyone else but is symptomatic of a lack of clarity of what is really wrong about the Osborne charter, which you explain so eloquently above

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  18. Funnily enough, we now have George instituting a policy that he derided just a few years ago.
    I note, or rather do not note, labour asking him what has changed in just over five years..

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  19. There's a simple counter-attack slogan for the new Labour Party leadership to now start pushing at the public "Time for a little Economics 101!":-

    http://www.socialeurope.eu/2011/06/government-deficits-and-national-accounting-identities/

    If it won't take on this critical responsibility it deserves to lose at the next general election.

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  20. I am dying to know whether George Osborne is aware that the charter amounts to reckless treatment of the economy for a risky political move to buttress a certain dogma, or whether he is sincere in his stupidity.

    Does anyone have any leads?

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  21. I would like to take issue with various commenters' assertions to the effect that the problem is basically to do with widespread ignorance, with the corollary that educating the wider public to understand some basic mainstream macroeconomics is the way to tackle it. I'd argue that the key problem is a combination of ignorance and deliberate deception practised by irresponsible and unprincipled elites and oligarchies, specifically in the worlds of high level politics and the media. To put that another way, an effective way needs to be found to challenge those elites and oligarchies, if possible replacing them with ones that have standards and principles which at least act as some brake on the temptation to exploit the gullibility of the great majority of the general public. And it just seems to me monstrously unrealistic to expect the general public itself to provide such a challenge: the last 7 years have surely demonstrated comprehensively that it cannot, and instead what counts is the thinking and actions of the powerful and influential few.

    To illustrate what I am driving at in concrete terms, try explaining to a generally intelligent and informed friend or acquaintance the deception practised by the Conservatives during the general election campaign (and still) regarding reduction of the deficit in Government finances. The deception involves asserting (correctly) that the deficit has been approximately halved since 2010 as measured by the Debt/GDP ratio and then going on to assert that in order to carry on with the good work Budget surpluses will have to be run. It is of course simply incorrect, as a matter of arithmetic that can be demonstrated, to assert that Government borrowing has to be eliminated in order to carry on reducing the Debt/GDP ratio. But I can guarantee you will find very, very few who can actually grasp that this is the case.

    The phrase "trahison des clercs" springs to mind. And also "Stands to reason, dunnit?" Older readers of this blog may recognise the words of that great Conservative thinker Alf Garnett.

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  22. How will a challenge to the "elites and oligarchies" be achieved without a greater awareness amongst the wider public, of the deceptions being practised upon them?

    Or are you suggesting that what is needed is replacement of one elite with another, more enlightened one.

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  23. Those affected can be more effective than academics on mainstream media, as Michelle Dorrell showed on Question Time on tax credits. We should encourage more of that.

    But we also need a positive alternative. We won't win fighting Osborne on 'living within our means'. Instead we should how public investment can build a better future: housing, infrastructure, skills, green technology ... Here academics can offer a lot by making a financially sound, costed case that the benefits would exceed the costs, in both the short and long runs.

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  24. I of course meant to write Deficit/GDP ratio. Doh!

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  25. I agree with this post. But the charter states that the rules will be longer apply if the OBR assesses that growth slows to below 1%. This offers some flexibility in a severe downturn or recession. Presumably, therefore, the constraint imposed by the charter is only a problem when growth is 1-2%, in which case the automatic stabilisers would push the budget into deficit, requiring austerity during a weak growth period to deliver a surplus.

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