Eurozone fiscal rules should be based on national macroeconomic stabilisation, not national debt stabilisation

 

In memory of Andrew Hughes Hallett

Eurozone fiscal rules have been suspended during the COVID crisis, thankfully. But I have argued on this blog since it began in 2012 (e.g. here) that the Eurozone fiscal rules, or any modified version thereof, were not fit for purpose. Now is the time to rethink the whole basis on which those rules were introduced.

Olivier Blanchard, Álvaro Leandro, and Jeromin Zettelmeyer also think the existing rules should be scrapped, but their alternative still has concerns about debt as central. It is the obsession with debt that has helped cause so many problems. We need a much more radical rethink, by going back to basic macroeconomics.

Before the Euro was formed, I argued in academic papers with others (e.g. here) that the Euro could only work well if fiscal policy was allowed to perform a macroeconomic (not debt) stabilisation role. That work continued after it was ignored when the Eurozone was set up (e.g. here). The idea reflects basic macro. During periods where the economy is growing rapidly relative to the EU average individual countries need to contract fiscal policy, and in relative downturns individual countries need fiscal stimulus. This follows once it is recognised that a monetary union takes away effective national monetary policy.

When the Eurozone was set up all this was ignored, and the Eurozone fiscal rules focused on debt stabilisation rather than macroeconomic stabilisation. The result was a disaster. From the beginning of the Eurozone until the global financial crisis (GFC), the smaller European countries experienced a boom because their interest rates were now tied to the Eurozone average, and the resultant fiscal surpluses were used as an excuse for fiscal excess. In contrast a recession in Germany was not met with fiscal expansion there, and produced below average inflation that gradually undercut other Eurozone countries.

These chickens came home to roost during the Eurozone crisis. Germany decided, regardless of the fact that most countries were only just recovering from the GFC, that the Eurozone crisis was because of generalised fiscal excess. A wave of fiscal contraction (with the help of an increase in ECB interest rates) produced a second recession. Because Germany had undercut everyone in the decade before, the only country not to suffer much during this recession was Germany, and the Periphery countries were subject to excessive austerity. For those unfamiliar with some of the horror stories over this period, you only need to read the chapter on the Eurozone in my book.

I can confidently say that if only the Eurozone had followed fiscal rules of the kind we suggested before the Eurozone’s creation, none of this (besides the GFC itself of course) would have happened to the extent it did. (For some analysis that backs this up, see the study I discuss here.) To see why this is, we have to return to macro basics.

Imagine a country that keeps interest rates fixed, but successfully uses fiscal policy to control inflation at target. That is close to how some countries tried to run their economies under the fixed exchange rates of Bretton Woods. What keeps government debt stable in these countries if the macro stabilisation policy is successful? The answer is booms and recessions. With booms and recessions following each other in what we call the business cycle, every period of fiscal stimulus (during a downturn) is followed by a period of fiscal contraction (during a boom). To a first approximation it nets out over time, so government debt is stable and sustainable. .

The Eurozone reproduces that situation with one important difference. When ECB interest rates are not stuck at their lower bound, the ECB controls the average rate of inflation. What national fiscal policy needs to do is to look at domestic inflation relative to the average Eurozone rate. [1] If a country’s inflation is above average, fiscal contraction is required and vice versa.

How would this have worked out before the GFC?

Inflation (HICP) differences to Euro area average: source Eurostat

	2000	2001	2002	2003	2004	2005	2006	2007
Germany	-0.7	-0.4	-1	-1	-0.3	-0.3	-0.4	0.2
Spain	1.4	0.5	1.3	1	1	1.2	1.4	0.7
Ireland	3.2	1.7	2.4	1.9	0.2	0	0.5	0.8
Portugal	0.7	2.1	1.4	1.1	0.4	-0.1	0.8	0.3
Greece	0.8	1.3	1.6	1.3	0.9	1.3	1.1	0.9

If Eurozone countries had followed this ‘basic macro’ fiscal rule, we would have seen fiscal contraction in the periphery countries, and fiscal expansion in Germany. As a result the fiscal position of the periphery countries would have been much healthier, and Germany would not have undercut everyone else. The actual fiscal rule that focused on excess deficits failed, because the periphery countries fiscal position looked healthy because output was growing too fast.

Focusing on relative inflation only works when the ECB is effectively controlling average inflation, as it was during the period above. Once ECB interest rates hit the lower bound, this is no longer the case. As a result, Eurozone fiscal rules need to switch from looking at relative to absolute inflation when interest rates are at or close to this lower bound. How would that have worked out during the period since 2013 when Eurozone inflation has been stuck below target?

Inflation (HICP) rates: source Eurostat

	2013	2014	2015	2016	2017	2018	2019	2020
Germany	0.5	0.4	0.2	0.0	1.1	0.7	0.7	0.3
Spain	1.5	-0.2	-0.6	-0.3	2.0	1.7	0.8	-0.3
Ireland	0.5	0.3	0.0	-0.2	0.3	0.7	0.9	-0.5
Portugal	0.4	-0.2	0.5	0.6	1.6	1.2	0.3	-0.1
Greece	-0.9	-1.4	-1.1	0.0	1.1	0.8	0.5	-1.3

As we can see both German and Periphery inflation was below 2% throughout this period, so fiscal policy should have been more expansionary to get inflation back on track. What stopped this? The existing not fit for purpose Eurozone rules. You can also see excessive fiscal contraction in Greece over this period.

There is plenty of detail around the edges of these ‘basic macro’ fiscal rules for the Eurozone. For example, what is the best inflation index to use? Answer, one that excludes fast moving prices like commodities. Do you need to do anything about countries that fail to follow their rule by persistent excess (or deficient) inflation? Answer, yes. This is where external monitoring needs to come in.

Even in cases where countries persistently fail to get to average Eurozone inflation, the response by the Commission should not be to talk about excess debt but to talk about competitiveness misalignments. Judgement is required because sometimes changes in real exchange rates are required in monetary unions. That apart, any external intervention would be clearly symmetrical, with attempts to undercut other Eurozone countries treated as equally serious to emerging overvaluation. If you focus just on debt, the former is ignored. [1]

In the simulation studies I have been involved with, fiscal rules of this kind tend to reduce by around half the costs of asymmetric shocks to the Eurozone. The current rules seem to amplify the welfare cost of shocks. In reality macro stabilisation among Eurozone countries, trying to eliminate periods of relative boom and recession, may have a critical influence on the fortunes of some of the more extreme right wing national political parties.

Basing European fiscal rules around debt have proved a complete failure. I remember arguing with people from Spain before the GFC saying you need for fiscal contraction, and the incredulous reactions I got. But we are running surpluses, they replied, your suggestion makes no sense. Unfortunately after the GFC it made perfect sense. Having any Eurozone fiscal rules based on deficits and debt has failed, and is bound to fail.

Of course nothing like this will happen. The mindset of policymakers in much of Europe is dominated by the failed ideas that depart from basic macro, and that were hard-copied with the formation of the Euro. But it is important that at least some people outline what fiscal rules derived from basic macroeconomics would actually look like, and why they are much superior to those we have today.

[1] Why do I focus on inflation, rather than output gaps? Simply because output gap measurement is very poor.

[2] There is one possible scenario when the commission needs to worry about debt, and that is when all countries simultaneously fail to enact fiscal contraction in a boom, and the inflationary impact of that is counteracted by higher interest rates. That is the equivalent to why you need deficit based fiscal rules in a single country with a floating exchange rate outwith the zero lower bound. But that can be easily dealt with by the commission requiring an equal fiscal contraction across all Eurozone countries. Problems occur when government debt is used to call for fiscal contraction in some countries and not others. Once again the problem is symmetrical: if countries are simultaneously failing to enact sufficient fiscal stimulus in a recession, leading ECB interest rates close to the zero bound, or worse still not undertaking fiscal stimulus at the lower bound, all countries can be told by the commission to enact more fiscal stimulus.

Why neoliberalism’s evolution into a populist plutocracy was inevitable

If anyone gets these blogs via an email alert, unfortunately the platform I use is ending these in July. Sorry about this (outside my control), so please find another way to regularly receive this blog.

In last week’s post I referenced an earlier post I had written in 2017 called “Was Neoliberal Overreach Inevitable? The question it posed was whether Trump and Brexit were an inevitable consequence of Thatcher and Reagan, or whether there was an alternative ‘fork in the road’ which if taken could have saved neoliberalism from that fate. That post was written in the aftershock of Trump’s election and the Brexit referendum. Four years on I think it is worth revisiting that question. (This post is a slightly more focused version of something I wrote six months ago.)

The best way to look at this is to ask what normally stops plutocracies happening? The first obvious but important point is that the threat of plutocracy depends on the number of the very rich, and also perhaps the extent to which they gained their wealth by actions that could easily be reversed politically. Those who have money will often want to influence politics either to increase or preserve their wealth, and this can be done by lobbying or political donation that compromises but does not end democracy. However the more very wealthy people there are, the more likely it is that some will wish to go beyond this, and try and influence the nature of democracy.

A plutocracy is where at least some of the very rich play a much larger part in determining key political decisions than lobbying or donations allow. This is quite compatible with the continuation of a nominal democracy as long as the party that will ensure the influence of the plutocrats is dominant always gets elected to power. If that fails to happen the plutocracy can just attempt to win next time, or can attempt to overturn the democratic decision that saw them lose power.

So what stops some wealthy people trying to change a democratic system into a plutocracy that is almost bound to serve their interests? The most obvious answer is the democratic process. A party run by a tiny minority of the very rich is not likely to be seen favourably by most voters if they see it as such, and so has little chance of being created. The way plutocrats can get around this is by persuading the members of a political party (inevitably a party of the right) to follow their wishes.

The first sense in which neoliberalism makes a transition to plutocracy easier is by increasing the number of the very wealthy. The 1980s saw a huge reduction in the marginal tax rate on high incomes in the US and UK. A bit of neoliberal mythology is that this wealth is actually good for everyone else, because the wealthy are ‘wealth creators’. That myth was increasingly accepted in part because of another defining aspect of neoliberalism, the destruction of the unions as an effective political force.

By substantially reducing the power of trade unions, neoliberalism reduces the influence of organised Labour on the electorate. That makes it easier to spread the myth that the wealthy are wealth creators, rather than the reality that the high incomes of the wealthy are at the expense of everyone else. Reducing union influence also increases the potential influence of the media on voters’ opinions.

The third way neoliberalism makes plutocracy easier is that, in the name of reducing regulations, restrictions on bias in the media are reduced. Under Thatcher, Murdoch was able to significantly increase his share of UK newspapers he owned, and Reagan abolished the Fairness Doctrine. The link between plutocracy and media ownership is very direct because media barons are part of the plutocracy and their influence on both right wing party members and voters more generally is considerable.

These three aspects of neoliberalism in the US and UK are necessary for plutocracy to emerge, but not I think sufficient. The main reason for this is that, after an initial decade or so, progressing neoliberalism from the right becomes unpopular. Starving public services in order to reduce taxes (particularly if the main beneficiaries are the wealthy) is not what most people want. Partly as a result the Conservatives lost to Labour in 1997. Labour, while accepting the neoliberal changes under Thatcher, actually increased health spending by raising taxes.

The way around this for both the Republican party and (later) the Conservatives was to shift the political debate away from economic left/right issues towards a culture war. Taking the socially conservative side in culture wars is attractive to parties of the right in both the UK and US partly because it detracts from the right’s less popular right wing policies, but also because of the properties of the electoral system. Social liberalism flourishes in cities and university towns, so the bias in the US Senate (and therefore the electoral college) towards rural communities and the bias of FPTP towards social conservatives means the right can win without a majority of the popular vote.

Culture wars are possible because of the tremendous social liberalisation of society over the last 60 odd years. That transformation is led by the young and those who have been to university, so there will always be many voters who feel left behind by this pace of change. Furthermore, as much of the material on the broadcast media is made by university educated socially liberals, social conservatives are open to talk about a liberal elite. Culture wars are a natural consequence of neoliberalism because right wing parties will adopt them, and that becomes a fourth reason why neoliberalism encourages populism.

In the US the Republican party had for some time allowed money to greatly influence elections, and had fought culture wars. The radicalisation of the party increased substantially when the Koch brothers helped finance the Tea Party, and Murdoch’s Fox News stopped just being supportive of the Republican party and started trying to change it in a more radical direction. In both cases we have very rich individuals pushing their political line not only because it is in their interest, but also because their ideology tells them it is right for the country.

The Tea Party and Fox meant the Republican party lost control of its base, and therefore who stood for election for the house, senate or President. In truth Trump was nobody’s candidate initially, but his appeal to the Republican base reflected two main factors. The first is that he said in plain language what had been dog whistled before in terms of the culture war. Second, he broke with neoliberalism in two important populist directions: controls on trade to ‘save jobs’, and controls on immigration. With his election the transformation from consensus neoliberalism to right wing populism became complete.

While Trump is unique, a right wing party controlled by its more militant base fighting a culture war is always vulnerable to a populist leader. In some ways the US was lucky that the populist they got was also fairly inept at strategy once in power, although we should note that it is quite possible he could be re-elected having learnt important lessons. Neoliberalism, having created the conditions where there are plenty of wealthy people able to mount a Presidential campaign, and having lost control of their base because of the actions of wealthy people, provided ideal conditions for a very wealth populist leader to win the Presidency, and through charisma then take over the right wing party.

The route taken by Trump to control the main right wing party was not available in the UK, because MPs could exclude any of their number they didn’t like from standing to be their leader. That, together with the absence of primaries, reduces the power of the right wing base. So if populism was to come to the UK, it would be through using a majority of voters to enable a populist takeover of the main right wing party. That could only be achieved by the right wing press and a charismatic politician who could convince a majority of voters that Brexit would allow them to take back control, which of course can only be done through lying on an industrial level. But it also needed a populist outside of the Conservative party that threatened its hegemony, Nigel Farage.

After Brexit the right wing party tried to keep control from populists, but the reality of those lies threatened to end the right’s control on power because they were being eclipsed by Farage, so Conservative MPs finally turned to Johnson as their saviour. A divided opposition and FPTP ensured the takeover of the right by a populist government under Johnson was complete. For those who still doubt Johnson’s government is a plutocracy, the group that provides 80% of Conservative party funds is called the Leaders group, and they meet regularly with senior politicians. Matthew d'Ancona describes the plutocratic world of senior Tory politicians. A defining characteristic of the Johnson government is that it provides public money to many of its donors through non-competitive contracts. With most of the press and a fearful BBC permanently on side, there is no accountability and so no reason why public wishes should be respected (see Barnard’s Castle, a second wave, bullying, corruption and so on).

Should we call the populism of Trump and Johnson a variant or evolution of neoliberalism? Certainly neoliberal ideas among both live on. That is for another time, but I would make one point on this. Neoliberalism (more precisely monopoly neoliberalism) as an ideology that acts in favour of the existing structure of capital. The populism of Johnson and Trump favours parts of capital (friends and donors) at the expense of others (particularly trading firms).

For the US it’s hard to argue against the proposition that the Republican party was wide open to a Trump like figure emerging. For the UK, it is tempting to focus on some 'if only' event. If only Cameron hadn’t agreed to a referendum, or Johnson had sent his other article, or Cameron’s campaign had been better and so on. But in a choice between losing power and giving in, at some point any Conservative leader was bound to give in, and a charismatic populist leader was bound to take over.

To summarise, neoliberalism in the US and UK was bound to lead to plutocratic populism, because it promoted growing inequality at the top, drastically reduced the power of trade unions, deregulated the media, and adopted culture war politics. These create the conditions in which populists acting in the interests of private money can take over the main party of the right.

Two types of recovery from the COVID recession, or how you cannot effectively fight plutocratic populism by returning to the recent past.

 

I don’t normally talk about forecasts, but last week’s IMF World Economic Outlook illustrates a point a number of people have made. While both the UK and EU countries are prepared to gradually return what they believe as their non-inflationary level of output from below, the approach in the US is to overshoot, running the economy slightly hot for a period. This table from the Outlook shows expected GDP growth. The key figure is the last column, which shows overall growth from the start of the pandemic to when the recovery is largely complete. It shows how focusing on just 2022 growth, as I’m sure many in the UK and Europe will, is completely misleading.

IMF Economic Outlook April 2021 Forecasts

GDP growth	2020	2021	2022	2022/2019
United States	-3.5%	6.4%	3.5%	6.3%
Euro area	-6.6%	5.3%	5.1%	1.2%
United Kingdom	-9.9%	5.3%	5.1%	0.0%

These are forecasts of course, but they reflect something that has already happened: the US has enacted a large stimulus package ($1.9 trillion mainly directed to individuals followed by at least $2 billion on infrastructure), while any expansionary measures in Europe are projected to be more modest (750 bn recovery fund). I pointed out the planned undershooting for the UK after the March budget. You can see the under and overshooting more clearly by looking at forecast output gaps, although all output gap numbers should be taken with a big pinch of salt..

IMF Economic Outlook April 2021 Forecasts

Average Output Gaps	Average, 2020-21	Average, 2022-23
United States	-1.26	1.19
United Kingdom	-3.73	-1.08
Germany	-2.52	-0.20
France	-3.75	-0.39

The OBR agrees that the UK is planning to approach ‘normal’ from below. As I noted after the budget, forecast UK inflation remains below target and so expected short interest rates hardly rise. The main measure Sunak announced in the budget to stimulate the economy, fiscal incentives to bring forward investment, is modest compared to the US stimulus. The rationale for and limitations of this stimulus are set out by James Smith here.

So what are the relative merits of undershooting compared to overshooting and thereby running the economy a little hot after the recovery? With interest rates stuck at their lower bound, the answer is unambiguous. First, it makes sense to end recessions as quickly as possible, rather than the more gradual end that undershooting implies. Second, running the economy with near zero short term interest rates has various undesirable consequences. Assets prices (including house prices) remain high and banks or other financial organisations may go on risky searches for yield. Economies where interest rates cannot fall are more vulnerable to negative shocks, because fiscal policy often responds more slowly (and erratically) than interest rates.

Third and finally, we need to think about risks. The risks of a more rapid recovery are not a problem in either case, because they will mean a mild inflation overshoot and a quicker rise in interest rates. The chances that any above target inflation (or inflation due to higher commodity prices) becomes entrenched in the US, UK or Euro area is zero. The downside risk is also not a problem if you are trying to run the economy hot, because you will just be running it cooler.

The downside risk if you are planning to undershoot are serious, because that means a more prolonged recession with interest rates unable to fall because they are stuck at their lower bound. It is particularly a problem if you have governments that are committed to some kind of deficit target, because they are unlikely to respond to an unexpected slow recovery with a fiscal boost. This is exactly what went wrong in the UK with 2010 austerity: the expected recovery failed to happen because of the Eurozone crisis, and Osborne kept to his austerity plan.

Yet despite the lesson from the UK and Eurozone of a post 2010 recovery that crashed because of unwarranted deficit concerns, both the UK and Eurozone seem to be making the same mistake (albeit in a more modest way) after the pandemic. They should follow Biden’s example, and use fiscal stimulus to end the COVID recession rapidly once vaccination is complete.

Of course the significance of the Biden plan goes well beyond the macroeconomics of ensuring a good recovery, as both Philip Stephens and James Meadway discuss. (Noah Smith has a much more detailed analysis.) I personally find it rather hopeful that someone who was tagged as being rather dull before an election can turnout to be very different in government. But it is important to realise that anything dull following Trump would be a recipe for a near certain return to Trump. Biden’s plans are not so much seeing the beginning of the end of neoliberalism as a serious attempt to keep the US out of the hands of a party that no longer believes in democracy.

As I have argued elsewhere in 2017, neoliberalism in the two countries where it was created has already been turned into a plutocracy. I wrote

“It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right.” [1]

And as I argued here, this plutocracy cannot be fought with a return to what went as normal before, because what went as normal before created the plutocracy that we are trying to escape from. Fighting for democracy requires a turn to the left (in economic terms), and that is what we are seeing in the US. The reason is quite simple - without radical economic change in a left wing direction the reasons why enough people in the US voted for Trump will re-emerge. Moving left does not guarantee that will not happen, but it gives democracy a fighting chance. Returning to the neoliberalism that created Trump is just asking for a return of Trump.

[1] Talking about a split in neoliberalism seemed right at the time, but now seems misleading. The opposition to Trump or Brexit on the right has all but disappeared (or more accurately been extinguished), and those on the right who oppose either say nothing or start supporting the opposition to plutocracy. So now I would call Trump and Brexit as just one final stage in the evolution of UK and US neoliberalism into populist plutocracy.

Labour should start contesting the Tory record in running the economy

 

I recently wrote a post entitled “Why are the Conservatives so bad at running the economy?”. By bad I meant both in absolute terms (so many home grown crises: monetarism, ERM, austerity), and relative to the last Labour government. My post was hardly contested, and what criticism i received was easy to bat away. Things like ‘Labour left the economy vulnerable to a global financial crisis’, where the post noted that the Tories wanted even less financial regulation before the crisis. However, as I also noted, Labour have for the last decade been well behind in the polls on who is best to run the economy.

Labour under Ed Miliband made the huge mistake of failing to contest the Tory lies about how Labour profligacy caused the ‘deficit crisis’. As a result, many voters blamed Labour for austerity. Labour are not going to reverse the popular misconception that they are bad at running the economy by being quiet and defensive. What Starmer needs to do (and it has to be Starmer as the media ignores anything else) after the local elections is to go on the attack, by setting the government’s current macroeconomic policy mistakes in a historical context starting in 2010.

He could list there major blunders made since the last Labour government in terms of running the economy.

1. Austerity. Here Labour usually focus on the costs of this in terms of public services. It is fine to point out the impact of lower public services, particularly showing how austerity left us badly prepared for the pandemic. But this is weak unless it is accompanied by a macroeconomic argument about why austerity, far from being necessary, was actually harmful to the economy. Not just in terms of a delayed recovery, but wages perhaps permanently lower. There was no debt crisis, and many eminent economists supported fiscal stimulus rather than austerity. The golden rule is that in a recession you help the recovery first, because only after a strong recovery will you know how much of a deficit problem (if any) you have.
   
   

2. The coronavirus second wave. By pushing against an early lockdown, Sunak allowed the second wave to gain momentum that required a prolonged lockdown to fix, where many lives were lost. The economy suffered because of this extensive lockdown. The golden rule here is that when cases start rising lockdown strong and early, which saves lives and saves the economy from a more prolonged lockdown.
   
   

3. The Brexit deal. By ruling out any type of cooperation with the EU, Johnson’s Brexit deal created a bureaucracy mountain that has hit exports and many firms very badly. I suspect examples may be more powerful than aggregate figures here.
   

It is in this context that he can place the big mistake in Sunak’s March budget. A lost opportunity to obtain a strong economy, because once again Sunak was more concerned about the deficit than the recovery. The comparison with Biden in the US is revealing. The lesson from 2010 has not been learnt: in a recession focus on the recovery because only after the recovery is complete will you know how much of a deficit problem (if at all) you will have.

In contrast the first ten years of the Labour government, before the Global Financial Crisis hit virtually every major economy around the world, saw ten years of strong and steady growth. That strong and steady growth allowed Labour to direct more resources into public services, particularly the NHS. Virtually any NHS performance indicator can be used to show NHS performance is far worse now than when Labour left office. 

The reason that no Labour leader has made a speech like this, directly questioning the economic competence of Tory economic management, is that the response from the Tory press and MPs will be to rubbish the claim. The way they will do this is to focus on the Labour profligacy claims about the last Labour government. Better for Labour to say nothing, many will advise, rather than allow the Tory press to remind voters of this past. And from a short term point of view that is correct.

But if Labour keep retreating from this terrain they will allow the myth that they are rubbish at managing the economy to persist. It could lose them elections, because all Tory politicians need to do with any Labour promises is to point back at past Labour profligacy. The Tories will continue to talk about having created a strong economy and no one will contradict them in the media that matters. I fear that this has gone on so long that even some Labour MPs are starting to believe that it is true.

A few years from the next election is the time Labour should start contesting the received wisdom. That will mean having clear lines of response to the attacks coming from the government and right wing press, who will be desperate to preserve the Labour profligacy myth. Here are a few suggestions.

Q) Labour left office with a record deficit of over 10%. How can you claim Labour was not profligate?

A) That deficit was a consequence of the Global Financial Crisis (GFC), and the measures we took to stop the freefall in jobs after banks collapsed. The deficit is likely to be 17% last year. Is that because of Conservative profligacy or COVID?

Q) The IMF/OECD estimate that before the GFC, Labour had a structural deficit of around 5% of GDP.

A) That number is pure hindsight, produced by those organisations to help explain poor growth after 2010. At the time all organisations, including IMF/OECD, suggested very different numbers. The OBR, whose numbers are not revised in hindsight, think that in 2007/8 the cyclically adjusted budget deficit was just 2%, which is not unreasonable given estimates for the output gap made at the time.

Q) Didn’t the Coalition government’s austerity measures save the UK from a financial crisis?

A) No. It is now generally understood that in a recession you should use tax and spend policy to support the economy and not to reduce the deficit. In 2010 the Eurozone crisis led international organisations astray, but the only financial crisis was in the Eurozone. Just as we see today, the Bank of England would buy any UK debt if the markets wouldn’t do so. The idea that the Coalition government saved the UK from some kind of crisis is a myth spread by Tory supporters in the City. 

Q) The Labour government were planning austerity if they were reelected.

A) The Conservatives really do need to make up their mind. Was the Labour government profligate, or was it going to do exactly what the Coalition government did. Of course we cannot know what would have happened if the economic recovery assumed in that 2009/10 budget had failed to materialise, but we can be pretty sure a Labour government would not have continued with fiscal consolidation as the Coalition government did. [1]

Q) Wasn’t the Labour government partly responsible for the damage the GFC did to the economy, because it failed to regulate the banking sector sufficiently?

A) That would be a serious point if the Conservatives had been pushing for more regulation before the GFC. But in reality they were pushing for less regulation, as the Conservatives typically do.

I’m sure there are other lines of attack which need to be covered. In addition, these responses can be supplemented with comparisons of GDP per head or real wage growth under Labour and since 2010, which despite the GFC still flatter Labour.

The argument that Labour are more competent at running the economy can be seen as an essential part of a general attack on the competence of this and past Conservative governments. Just as the Conservatives were incompetent in dealing with the first and second COVID waves, there are also incompetent at running the economy (obsessed with deficits rather than economic recovery), they are incompetent at running the NHS (wholesale reorganisation under the Coalition government now being partly undone by the current government, with all the time trying to privatise), incompetent on law and order (huge delays in trials because of past austerity), and incompetent at looking after public money. 

It is true that this government have handled the vaccine rollout well, because unlike test and trace they have allowed the NHS to do the work. But besides that, the only thing they seem very good at is giving public money to their friends and financial supporters.

[1] An alternative approach, which is more honest, is to say that the Budget of 2009/10 was wrong to suggest substantial austerity so soon.