What do we mean by
an end to austerity? There seem to be two meanings being used
currently. The first, used by Conservative politicians in particular,
is equivalent to what economists call fiscal consolidation: cutting
spending (or raising taxes) in order to reduce the deficit (as a
share of GDP). However when Labour say they will end austerity, I
think they mean something even simpler: to stop (and reverse) cuts to
government spending as a share of GDP.
The confusion has
been compounded by two factors. First, Conservative Chancellors have
mainly used cuts to spending rather than tax increases as part of
their austerity programme. Second, they have also justified cuts to
spending that were needed to finance tax cuts (corporation tax,
inheritance tax etc) as austerity, which is a clearly not fiscal
consolidation and is simply a reduction in the size of the state.
How do I know Labour
do not mainly mean ending fiscal consolidation when they talk about
ending austerity. Just look at their GE2017 manifesto. That involved
various increases in current spending financed entirely by higher
taxes (including corporation and inheritance taxes). This manifesto,
which helped gain them such rapid popularity in the GE2017 campaign,
was a proposal to increase the size of the state.
I explore in a shortcut piece for the London Review of Books how this ambiguity is a serious problem for the
Conservatives. Even if they ended austerity completely (made no
further attempts to reduce the deficit), Labour would be able to
offer a much more attractive fiscal package to the voters because
Labour are prepared to undo the tax cuts the Conservatives have made
over the last seven years.
How do I know such a
package would be attractive? Here I reproduce my favourite chart from
the latest
Social Attitudes survey that I talk about in the LRB piece.
The ‘neoliberal’
line is in yellow at the bottom. In 2010 nearly 90% either wanted to
keep the size of the state the same or increase it. It is why the
Conservatives were forced to use what I call deficit deceit -
pretending cuts to the size of the state were about cutting the
deficit - to pursue neoliberal goals (see my last post).
By using deficit deceit to reduce the size of the state, when concern
about the deficit was bound to wane, the Conservatives have condemned
themselves to current unpopularity as voters realise what they are losing.
Why didn't this stop the Conservatives winning the 2015 General Election? Here is a YouGov poll that explains why.
In 2015 more people blamed Labour that the Conservatives for spending cuts. This was translated into views about economic competence because the Conservatives, with the help of mediamacro, made reducing the deficit the key variable in judging economic policy. We are now in a period where this narrative still has an influence but it is no longer enough to win an election. The Conservatives dare not throw it away because many voters still believe it. They have become trapped by their own austerity policy and the reduction in the size of the state that went with it..
Why didn't this stop the Conservatives winning the 2015 General Election? Here is a YouGov poll that explains why.
In 2015 more people blamed Labour that the Conservatives for spending cuts. This was translated into views about economic competence because the Conservatives, with the help of mediamacro, made reducing the deficit the key variable in judging economic policy. We are now in a period where this narrative still has an influence but it is no longer enough to win an election. The Conservatives dare not throw it away because many voters still believe it. They have become trapped by their own austerity policy and the reduction in the size of the state that went with it..
It's sad to see here a naive defense of Corbyn's money tree. There is lots of evidence that the decease of corporation tax and the decrease of the top rate tax INCREASED tax revenue by bringing (back) companies and high-rate taxpayers. The IFS also agrees that Labour proposals will not bring anything as close as they thing they do.
ReplyDeleteIf we want to increase (slightly) tax revenue we all have to pay. Kudos to the LibDems for defending it.
Frankly I think you are over intellectualising this issue. I would guess that most people focus on issues that they know about in their everyday lives(the NHS; schools) and do not think about these things in the way you suggest. And answering a survey does not mean that in the real World they think about issues in the same way.
ReplyDeleteThe policy of austerity has largely failed in any case and the target date for balance just gets pushed further and further back and is largely meaningless. As I see it the Tories might just simply spend more and achieve better results on the ground and get their friends in media macro to play down the Schwabian housewife problem. this would of course mean that the deficit would simply grow but, as you have said many times on here, where we are at the ZLB there is no better time to spend from the macro economic point of view.
Although this Tory government is clearly inept at putting things across it does not mean that it is beyond the wit government of any stripe to finagle through tax increases and spending cuts which achieve some sort of result; perhaps not the neoliberal ideal but not the abandonment that you suggest, particularly where you have an electorate that does not perceive things in the analytical way that you do.
On both those graphs you can see Osborne changing to Plan B in 2012 as the beginning of the Tories fall in popularity.
ReplyDeleteKeith Joseph's Edgbaston speech of 1974, in light of the 2017 election result.
"The decline is spreading. We know that some universities have been constrained to lower their standards for entrants from comprehensives, discriminating against more the talented [sic] because they come from grammar or independent schools. We see how the demand for absolute equality turns into the new inequality. In the universities, which should be sanctuaries for the pursuit of truth, the bully-boys of the left have been giving us a foretaste of what leftwing dictatorship would endeavour to achieve, actively cheered on by the casuistry of some members of the university staffs, cuckoos in our democratic nest, and by the pusillanimity of others, by the apathy of many and, I must add, by moral cowardice in public life. And since these universities are financed mainly by the taxpayers, only a minority of whom will have had access to them, it is the right of the public to pass judgment on how its money is spent. Whatever we may have thought fifteen years or so back, it is our right and duty to question, in the light of experience, the rapid expansion of the universities, and the belief that by increasing the number of undergraduates we necessarily multiply the benefit either to the young people concerned or to the nation."
"During the elections, discussion focussed almost exclusively on economics; and we lost the election. Were these two facts unconnected? I don't think so. The voter has faced three parties all of who claimed that they alone had the secret of fighting inflation, of achieving economic growth, of keeping down prices and providing benefits. This was the kind of auction in which Labour was bound to outbid us, because they are quite unhibited [sic], in promising the earth."
It seems we are on the cusp of a once in a generation sea-change in politics as Callaghan put it. My problem is that the alternative, Corbyn, has already betrayed the very youth vote that is said to have flocked to him. On the most important political issue of the day, Brexit, there is no opposition. Corbyn is as incoherent and anti European as much of the Tory party.You may like his domestic agenda but the mounting chaos surrounding Europe alongside the mounting costs in lost or deferred investment will simply make us all poorer obviating the redistributive benefits of Labour economic policy. We have no Pericles willing to stand up to the demos and tell them that they are wrong!
ReplyDeleteAn added reason the Chncellor gives for not borrowing more is because it burdens future generations.It would be good if Simon could address this in his blog. My simplistic view is that our heirs will not only inherit collectively an obligation to repay the debt but will also inherit the governmenr bonds etc which are being serviced. Thus there are distributional consequences but no overall burden except insofar as the bonds are held by non UK residents. Also it would be useful if Simon could comment on the significance of who holds the debt. There seems to be little discussion of the fact that after QE a lot of the debt is held by the Bank of England and presumably could be written off with no effect on either the public finances or the economy . More widely as long as the debt is held by UK residents, servicing it is not a burden on the economy as a whole.
ReplyDeleteCan you tell me where your taxes go once you've paid them simon ?
ReplyDeleteThen you can you explain the overnight interbank market ?
Thanks.
«The Conservatives dare not throw it away because many voters still believe it.»
ReplyDeleteMany voters are not affected negatively by deficit reduction, or are affected more positively by booming asset prices, because the government policy is not generalized austerity like in the 1950s or the 1970s, but of upward redistribution via a very loose credit policy and a modestly tight spending policy.
As usual my guess is that the apparent unwillingness of Economists to discuss the balance between very loose credit policy and modestly tight spending policy, and the distributional impact that has, and focus only on the latter is that "they" think that asset prices are not zooming up fast enough and a looser spending policy without tightening the credit policy would help push up asset prices. Then the argument than becomes almost always that without a less tight spending policy an even looser credit policy should be adopted. QED :-).
I don't like that because the negative impact on the standards of living of most of the population of a very loose credit policy is much bigger than that of the modestly tight spending policy: the negative impact of high property prices and rents on current living standards and of high share prices on future pensions is much bigger than the reduction in the rate of growth of spending.
For example the Blair governments achieved a tripling of property prices (and at least a doubling of rents), for the benefit of a geographically concentrated if significant minority, and the impact of that on the majority was much bigger than that of their less tight (yet still prudent) spending policy.