Those looking for any kind of economic logic from yesterday’s budget will look in vain. The budget had one goal, and only one, goal - the election of George Osborne as David Cameron’s successor. Now that mayor of London Boris Johnson has come out in favour of leaving the EU, a position also favoured by the majority of Conservative Party members who will elect the next leader, Osborne has a real fight on his hands.
Once upon a time Osborne could have actually played the prudent Chancellor role for real, but those times are gone. Getting the deficit down no longer appears (to the media and Conservative MPs and party members) the overriding priority it once was. So it has to be tax cuts designed to benefit most those in the upper quarter of the income distribution, plus yet more cuts to corporation tax. (As I noted in a piece for The Independent, the OBR’s downward revision to expected productivity growth suggests the extra dynamism these cuts were meant to induce stubbornly refuses to materialise.)
That is why a Budget where the main external news was a deterioration in the outlook for the UK economy, and where the centrepiece is a (ludicrous) target for the budget surplus at a fixed date, could end up being all about tax cuts. (Apart from the new sugar tax, which is welcome and long overdue.) It is achieved by a combination of more cuts to welfare (the disabled) and spending. Yes there is a lot of creative accounting as well, but when those chickens come home to roost you can be sure that the response of this government will be how public spending has become unaffordable and more cuts are required.
Cut taxes, and use the deficit as an excuse to cut spending. For the Conservatives it has proved to be a winning formula, and Osborne intends to milk it for as long as mediamacro lets him get away with it.
Another good rule with this Chancellor, apart from it is always about the politics, is that whatever phrase he keeps repeating tells you where he thinks he is vulnerable. Hence 'long term economic plan' to cover decisions made to achieve short term political ends. That is why the current slogan is ‘putting the next generation first’, because everything Osborne has done so far has achieved the opposite. The slogan is not meant to signal a sudden change, but just to distract from more of the same. Climate change? He failed to raise fuel duty, and more. Public investment? As I say in The Independent, lots of talk but the OBR numbers tell us he plans in this parliament a level of net public investment almost 25% below the level in the previous parliament. The rhetoric may be enough to win the votes of (generally old) Conservative party members, but the next generation will not thank him for it.
So, what is welcome about the sugar tax?ReplyDelete
Discourages sugar consumption, benefits public health maybe.Delete
There's an externality (through the NHS). If you consume lots of sugar, you'll cost the NHS more. Then everyone else has to pay for your treatment. In principle, this tax reduces the amount of sugar people consume so that this externality is internalised.Delete
It isn't a generalised sugar tax though - it's a tax on a particular type of sugary drinks, to the exclusion of other sugary drinks and sugary foods more generally.Delete
Is sugar consumption really such a problem?Delete
It seems to have been decreasing anyway over the past few decades.
Raises revenue. Given all the tax cuts, we need it.Delete
Well, it cannot reduce sugar consumption AND raise revenue. If it does the former, then the revenue will decrease over time. It can only do the latter if it fails to do the former.Delete
Do these figures for public investment include PFI?ReplyDelete
"level of net public investment almost 25% below the level in the previous parliament"ReplyDelete
This is a clever piece of mediamacro mythmaking! You are getting the hang of spinning the numbers to fit the narrative.
General government investment in £2012 prices over five years to:
2010 Q1: £204bn
2015 Q1: £236bn
2020 Q1: £239bn (OBR forecast)
(The 2010 figure is "unfair" because of the 2005 BNFL reclassification. The ONS series adjusting for that, G93X, has £221bn for that period, which is a better comparison.)
The 25% cut narrative leans entirely on that fact that investment as a share of GDP has fallen since 2010. But this tells us almost nothing. The fall in GDP in the period to 2010 will bias the investment share of GDP strongly upward. This is exactly the same trick that right-wingers use in arguing Brown pushed government spending up to 50% of GDP.
Indeed if the fiscal multiplier from investment spending is very large (as some would have us believe), then increasing public sector net investment should CAUSE the PSNI/GDP ratio to fall.
The narrative around investment is so bizarre that you cannot even endorse a stimulus when Osborne does what you wanted! Darling brought forward £3bn of capital spending (current prices) in the 2008 PBR in the face of an utterly dire macro forecast. Osborne has brought forward £1.5bn (OBR figure) today in the face of a fairly benign forecast, with the OBR and BoE both saying the output gap is close to zero across the forecast period.
"you cannot even endorse a stimulus when Osborne does what you wanted" In constant prices, the fall in net investment planned for this parliament relative to last is 13%. I do not think that is doing what I want.Delete
I'm shocked. As shocked as Claude Rains in Casablanca. So it turns out that Osborne won't in fact be running a fiscal policy anywhere near as tight as he claimed before the General Election? How completely unastonishing.ReplyDelete
Almost as unastonishing as your inability to see through the rhetoric, and give even a teeny credit to the action. Because Osborne has spent years and years talking the language of fiscal rectitude, he has the political room to run a looser fiscal policy. Labour is politically outmanoeuvred.
Politics and economics not having a very close relation, one to the other.
Some of what Osborne did was disgraceful (the cuts to disability benefits coupled with the cuts to CGT is just outrageous). But, it should be acknowledged that his actions on overall fiscal policy are far better than his words. Again.
"But, it should be acknowledged that his actions on overall fiscal policy are far better than his words."Delete
"Because Osborne has spent years and years talking the language of fiscal rectitude, he has the political room to run a looser fiscal policy. Labour is politically outmanoeuvred."Delete
Osborne is being slammed for failing his ludicrous self-imposed fiscal targets at the first hurdle. Labour has overtaken the Conservatives in the polls. Some manoeuvring.
"inability to see through the rhetoric"Delete
Reading back through any number of SWLs posts on Osborne, a clear and consistent feature of all of them is SWL cutting through the rhetoric to reveal the underlying macro and political reality. But therein lies the great problem for you...reading was never a strong point, and correctly interpreting appears out of the question for the most part.
"Labour is politically outmanoeuvred"Delete
The (as you say outrageous) cuts to disability benefits and to CGT are surely a political gift to Labour? To the extent that I can almost believe it's deliberate. Corbyn & Co are so inept that only the equivalent of putting the ball on the spot and sending the goalkeeper home will allow them to score a few points and perhaps keep alive the hopes of wavering MPs that things might all work out without a coup.
Perhaps it's all designed to outmanoeuvre the PLP.
never has it been more true that opinion polls don't matter. And Labour is a long, long way behind where it was in 2011.
Can we just take your "S W-L is great and you can't read" posts as read from now on?
It is pretty amazing how incompetent it looks. Oh, for an opposition with an ounce of credibility.
Is the data on the 2015 General Election in yet to give a spread of ages voting for the Conservative Party, in particular how much they are relying on the votes on pensioners?ReplyDelete
Completely off topic; but wondering if there you have put up a bibliography anyway or have any recommended reading?ReplyDelete
Hi Simon, just wondering your thoughts about the downward revision to productivity. I'm quite contrarian about productivity as I believe we have the causality wrong. Ie. for me, as soon as GDP/capita starts growing I'm sure we will mysteriously see productivity growth growing.ReplyDelete
If there is some truth in that, then the OBR revising down long term growth is just another aspect of the austerity obsession. All it really amounts to is that the govt doesn't want to spend money to stimulate demand. And rather than the OBR saying this ie. that the govt isn't spending the money it should to stimulate demand and therefore growth and therefore productivity, it is saying that long term productivity has fallen.
That's a bit of a digression, but I originally wanted to ask about were your thoughts about downgrading productivity given the context of low inflation. Surely it implies there is the slack in the system to boost productivity.
I think there is a sufficiently strong possibility that you are right that it is worth trying. The arguments for continuing fiscal consolidation get more and more tenuous.Delete
If this budget was all about the politics, then how do you explain the sugar tax? It's seen as nanny state meddling by the conservative grassroots (and it doesn't help him with his deficit targets either, as revenues will be spent on school sport).ReplyDelete
It's worth reading this by Fraser Nelson - you might be amused to know that some of the 100,000 Tory members consider Osborne to be "unacceptably leftwing" and this plays into this narrative.
Do you think these cuts to the disabled will have them dying on the streets?ReplyDelete
Otherwise, I can't see how you can consider that a bad thing while considering the sugar tax on sugary drinks (such a slight safe small pleasure) an overdue good.
Excuse silly question - but how exactly is productivity being measured? Is it just GDP / total number of employable persons? Or something more arcane?ReplyDelete
I don't agree with much you say Simon, but I completely agree with you on this.ReplyDelete
Your political yourself Simon.ReplyDelete
One thing more than anything really annoys me.
Why do you never announce or go public and say that taxes do not fund government spending ?
Until you do then politically no matter what you do you are just supporting fiscal conservative framing and propaganda and speaking from two sides of your mouth.
Until you do the voters will always vote against Labour because of 8 little words.
"How you going to pay for it"
Just come out and say it Simon and turn the political debate on its head.
So it is political to use a budget constraint!Delete
The poster is referring to the MMT position from Bill Mitchell:Delete
"In the mainstream approach, the GBC framework is used to analyses the so-called “financing” choices governments face when spending. The GBC equation says that the budget deficit in year t is equal to the change in government debt over year t plus the change in high powered money over year t. So in mathematical terms it is written as:
which you can read in English as saying that Budget deficit = Government spending + Government interest payments – Tax receipts must equal (be “financed” by) a change in Bonds (B) and/or a change in high powered money (H). The triangle sign (delta) is just shorthand for the change in a variable.
However, once we strip this off the erroneous theory (that governments are like households and have to “finance” their spending) then the GBC is a n accounting statement. In a stock-flow consistent macroeconomics, this statement will always hold. That is, it has to be true if all the transactions between the government and non-government sector have been correctly added and subtracted.
So in terms of Modern Monetary Theory (MMT), the previous equation is just an ex post accounting identity that has to be true by definition and has no real economic importance.
But for the mainstream economist, the equation represents an ex ante (before the fact) financial constraint that the government is bound by. The difference between these two conceptions is very significant and the second (mainstream) interpretation cannot be correct if governments issue fiat currency (unless they place voluntary constraints on themselves to act as if it is).
In fact, the mainstream economists know that there is no constraint – what they really want to say is that using ΔH to fund government spending is inflationary and therefore undesirable. They should be more open about that so that we can move beyond it being a debate about constraints and discussing when inflation becomes possible."
Oh come on Simon you know exactly where I am coming from.Delete
If you and a number of your colleagues just come out in a signed letter to the Guardian and elsewhere and said taxes do not fund government spending and explain why. You turn the debate on its head and stop fiscal conservative framing and propaganda in its tracks.
97% of voters especially those on the left believe we have to balance some imaginary household budget.
Do you not believe even for a second it is your duty to destroy this myth once and for all. Then we can move this debate where it should be.
Why can't you see if you just come out and say it it will destroy the Tories strategy of the last 40 years.
Say exactly what taxes are Simon and the part they play in stopping inflation and in the reserve drain.Delete
Until then 97% of the voters will never believe your new fiscal policy.
They will be way too busy balancing their household budgets.
Your objection seems to be that sometimes economists neglect the option of creating money. But you do not change that by making silly statements like 'taxes do not fund government spending'. You just invite ridicule.Delete
It never done Wray, Mosler, Mitchell and Kelton any harm.Delete
In fact, they used the ridicule to their advantage and turned the debate on its head.
You and your colleagues could do the same Simon.
It would be the fiscal conservatives in full retreat. As it would clearly show their framing to be void and finished with forever.
Most economists know the truth Simon.At first the ridicule would come from the voters. That would stop after you clearly provide them the economic truths.
Wray,Mosler,Mitchell and Kelton are more popular than ever because they done exactly that.
The statement that taxes do not fund government spending is just another way of saying that governments that issue their own currency are not financially constrained I.e. They can create money so don't need taxes to finance their spending.But they do need taxes to reduce private spending so additional public spending does not cause inflation. It's a subtle distinction and arguably makes little difference in practice, but it is not ridiculous.Delete
Bell, Stephanie. “Do taxes and bonds finance government spending?.” Journal of Economic Issues (2000): 603-620.Delete
You are just making the opposite mistake to those you criticise. A budget constraint is just that: it cannot be ex ante or ex post. And because of that, to say taxes do not fund government spending is just silly. Really, really silly.Delete
But it is not the truth Simon.Delete
The voters believe the budget constraint is that taxes fund government spending.
You and Many economists know the budget constraint is taxes control inflation.
You are all lying about what the budget constraint is.
Just look at all the back flips and how many hoops you have had to jump through with your new fiscal charter because you conflate the two constraints.
If you told the truth as a public servant you would not have to run an assault course just to build policy.
To me it is you know the truth but you are going to produce x,y and z to hide the truth and the real constraint for the same outcome to make you look clever.
While all along supporting fiscal conservative framing of household budgets.
The MMT argument (sorry!) is that the GBC is merely an Ex-post accounting identity and that to treat it as imposing an ex-ante constraint on govt spending is an ideological construct.ReplyDelete