Other countries' wars and the media

 

According to this article in the New York Times, Trump’s decision to bomb Iran was taken in part because Israel’s attacks were playing so well on Fox News.

“The president was closely monitoring Fox News, which was airing wall-to-wall praise of Israel’s military operation and featuring guests urging Mr. Trump to get more involved. Several Trump advisers lamented the fact that Mr. Carlson was no longer on Fox, which meant that Mr. Trump was not hearing much of the other side of the debate.”

It should not be surprising that populist figures like Trump, and earlier Johnson in the UK, should pay a great deal of attention to coverage by their favoured media organisations. They are both creatures of the media: Johnson as a journalist, Trump as a TV celebrity. As a result it is perfectly plausible that a war pursued by an ally playing well in the media should make someone like Trump want to join in on their side.

Many associate the word ‘propaganda’ with state control of the media, but there is no reason beyond ideology why its use should be limited in this way. A standard definition of propaganda is selective or biased information that is spread in order to influence people’s opinions in a particular way. It is clear that any media organisation can produce propaganda. That propaganda can be aimed at a general audience, or it could potentially be aimed at just an elected elite or indeed just one particular leader.

The ideal most media organisations say they try to live up to is to present all the relevant facts to their audience so that the audience can make up their own minds. Of course no media organisation can ever present all the potentially relevant facts and arguments, so selection is always required. The key distinction is whether selection takes place according to criteria like importance or relevance, or whether selection is based on the impression that this will leave with the audience. I can imagine how Israel’s strikes on Iran were portrayed on Fox News: plenty of favourable adjectives (‘successful’, ‘daring’), exaggeration of the threat ‘eliminated’, ignoring civilian casualties and so on. Here is a more detailed account.

In a post written during the Covid pandemic I labelled media like Fox News, or most of the right wing press in the UK, the ‘direct propaganda media (DP media)’. My reason for doing so was because so much of the media class prefers to pretend that these organisations are just like the rest of the news media except they have a more pronounced political stance. They are not. [1] The DP-media don’t produce news in the same way as the rest of the media do most of the time, but instead they produce propaganda. They select what information they provide in order to influence or flatter the opinion of their audience. Whether they do this because that is what their audience wants or because they want to alter what their audience thinks is another matter (I’m sure both are involved), but for whatever reason they try to avoid providing information that might challenge the views of their audience or the media’s owners.

Fox News knows how much Trump watches them, and that they therefore have considerable influence on him. Whether they slanted their coverage of Israel’s attacks on Iran with this in mind I have no idea, but the possibility shows why confining propaganda to something the state does is so misleading. In many of the advanced economies currently run by or containing right wing populists, the media that supports those leaders are run by independent agents (they are part of the dominant plutocracy), and they will attempt to influence the leader’s decisions just as the leader’s advisors or donors do.

Populist leaders are well aware of the power the media has to influence public opinion. That influence is often publicly downplayed or denied by those in the media and elsewhere, but I have written extensively in the past about the accumulating evidence of its power (e.g. here for the US. For something more recent on Fox see here). The power is far from absolute, but it is significant enough for any populist to want to do what they can to get this media onside. This may involve granting favours to media outlets that support them and penalising those that do not, as Trump obviously does but which Netanyahu did for Channel 14, a television organisation accused by lawyers within Israel of letting pundits and guests call for war crimes, including genocide, against Palestinians.

While the behaviour of the DP-media in war time is similar to its behaviour pretty much all of the time, the behaviour of the rest of the media covering other countries’ wars can seem quite different to its normal behaviour. While it is often called the ‘non-partisan’ media, during the conflict between Israel and the Palestinian people this media has been anything but non-partisan, particularly in the US but also in the UK [2].

Analysis of coverage in the first six weeks of the current Gaza conflict in three leading US newspapers indicated a “gross imbalance in the way Israelis and pro-Israel figures are covered versus Palestinians and pro-Palestinian voices”. On US television Sunday talk shows, guests were far more likely to be pro-Israel than pro-Palestinian. Evidence suggests this bias comes primarily from the media companies rather than the views of the journalists who work in them.[3]

This is why in that earlier post I called the media that wasn’t involved in producing propaganda the ‘manufacturing consent media (MC-media)’. I argued that both the MC-media and DP-media were involved in selecting information. Where the DP-media selected information in favour of a particular viewpoint within an economic, social and political system, the MC-media selected in favour of that existing economic, social and political system. [4]

Of course any categorisation of this kind is inexact, but I felt these descriptions made more sense than references to some media being non-partisan, when clearly the non-partisan media is quite capable of being pretty partisan on some issues. In particular, given the US political elite’s support for Israel and its extensive supply of arms and money, such bias would be the natural outcome of a media in the business of manufacturing consent. Anti-Palestinian bias in the US media is after all quite longstanding.

That foreign policy, and particularly wars, is an area where the MC-media feels it needs to encourage consent is hardly surprising considering that media’s coverage of the Iraq war. As Paul Krugman notes, anyone willing to face the facts could see that the US government was lying about the war, but the media overwhelmingly backed the government rather than exposing the lies.

According to Pew in April this year a majority of Americans had a negative view of Israel. (For a survey for some Western European countries, see here.) Does this indicate a failure by the media to manufacture consent? It certainly shows that the power of media bias is limited, particularly when set against views of death and destruction in Gaza, which are readily available on social media. What it cannot tell us, of course, is what this polling would have shown if US coverage of the conflict had been more balanced. However, looking at manufacturing consent as only about public opinion may be too narrow. It may also function as a means of harmonising elite opinion.

As the alleged influence of Fox coverage on Trump shows, media coverage can influence the opinions of the political elite just as the political elite can influence the media. Once we see those who run the media as independent agents rather than just enforcers of some status quo, then biased media coverage can not only reflect the position of the political elite, but it can also contribute to political elite views.

While for issues involving wars and some other areas the differences between the MC-media and DP-media may seem to be small, there remains a huge difference elsewhere between the two groups. Take Trump’s claims after the 2020 election that he had really won. The MC-media treated those claims on their merits, merits which increasingly tended towards the non-existent. Newsmax, by contrast, saturated its coverage with election denialism. We now know, thanks to the Dominion Voting Systems’ lawsuit, that Fox News then panicked, and started slanting its coverage to what it thought its Trump supporting audience wanted to hear. It could do that, in a way the MC-media cannot, because it is in the business of producing propaganda rather than news. 

[1] The pretense, at least in the UK, that the DP-media are news organisations helps the DP-media to often dictate what the rest of the media does, particularly through confected outrage. How else, for example, can what a rapper said at Glastonbury dominate news headlines for two days while there is no end in sight for daily starvaton and slaughter in Gaza?

[2] In the UK, for example, compare and contrast a headline in an Israeli newspaper with one from the BBC here.  

[3] In the UK BBC staff have also complained about its coverage.

[4] One way of describing this is that the MC-media controls the Overton window of views that are considered acceptable or unacceptable.

A minimum tax on billionaires

 

Most people would agree that taxes, taken as a whole, should be progressive. When you add up all the taxes that an individual pays, the percentage that tax is of their income should be positively related to how their income is relative to others. The poor should pay a lower percentage of their income in tax than the rich. The political argument is generally about how progressive taxes as a whole should be.

In most economies taxes are roughly progressive until we reach very high incomes. The chart below comes from a recentlecture by Gabriel Zucman.

In all four countries taxes are mildly progressive (although the progression is far from smooth) until we get to the very rich. Billionaires, in particular, seem to pay significantly less in tax as a percentage of their income than most other people.

This is hardly fair, but it is perhaps not that surprising. Specifically much of the income of the very wealthy comes from capital gains on the assets they hold, and generally these will only be taxed when those assets are sold. More generally those with a lot of money can afford to pay people to help them avoid tax, and those with a great deal of money have the power to influence whether politicians or those that collect tax try to stop that avoidance.

One way to try and rectify this unfairness, and also to raise a not insignificant amount of revenue, is to try and change specific tax laws to prevent avoidance or tax capital gains. While eminently sensible, this approach suffers from two political problems. First, such proposals are often highly technical, and so rarely attract widespread popular support. Second, the very rich are also very skilled at finding individual cases or circumstances where such changes in tax codes seem unfair.

Proposals for wealth taxes, for example, are often countered by invoking the widow who lives in a large expensive house but has relatively little income. There are ways around such problems, like deferring tax, but as those that own the media also tend to be very rich those work arounds can easily get lost in public debate. Another example became apparent in the UK recently, after the government changed the law to allow farmers to pay some inheritance tax. It was quickly claimed that doing this would prevent farmers passing on their farm to their children, demonstrations were organised and newspapers campaigned, featuring wealthy celebrities some of whom had bought farms just to avoid inheritance tax.

An alternative approach is to only look at the total taxes paid by the extremely wealthy, and set some minimum level of their wealth that these individuals should pay each year. If they already pay that minimum then fine, but if they pay less than that minimum they will be required to pay an additional tax to reach that minimum. This is the idea pioneered by Gabriel Zucman, an economist at the Paris School of Economics and former pupil of Thomas Piketty. [1] Specifically he suggests billionaires, or those with wealth above 100 million, should pay total taxes each year worth a minimum of 2% of their wealth.

The great advantage of this approach is that it is harder to obstruct politically. As the tax applies only to the extremely wealthy, it is much more difficult to evoke public sympathy for any of the individuals involved. As the wealth of the very rich can easily increase by more than 5% a year, paying just 2% in tax will hardly cause hardship.

The breakthrough for this proposal came at the G20 summit last year, when hosts Brazil asked Zucman to present his proposal, and managed to get countries to agree: “With full respect to tax sovereignty, we will seek to engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed.” The “Zucman tax” was adopted by the French parliament (the far right abstained), but was rejected by the Senate.

A standard objection to taxing the very wealthy is mobility. If you try to tax billionaires more they will move to a country that taxes them less, and you will lose all their tax. Again we saw an example of this in the UK last year, with a report claiming a wealth exodus from the UK caused by proposed tax changes. However the reality is rather different to the rhetoric. In his detailed proposal for the G20 Zucman notes that recent studies suggest that such billionaire flight is modest, and that the number of billionaires who live in a country different from their country of citizenship is still below 10%. Last year’s UK study, although it got widespread publicity at the time, was always of dubious status and has since been debunked. [2] To reduce even this modest possibility of billionaire flight, countries could charge an exit tax, or could continue to tax individuals wherever their companies do business.

Because Zucman’s proposal sets a minimum tax of 2% of wealth, it is not in competition with other proposals to change the tax system designed to make it less regressive at the very top. In some ways it could be seen as a means of making other measures easier to implement. For example, if billionaires are paying a minimum tax anyway, proposals to reduce forms of avoidance on other taxes will receive less opposition from the very wealthy because any additional tax they will pay will just mean they pay less to reach the 2% threshold.

Zucman’s proposal is incredibly modest. It would just stop the richest in society paying less tax as a proportion of their income than everyone else. It is highly unlikely to stop the wealth of the richest from increasing. Many would like to go further, but the great advantage of his proposal is that it will be seen as fair by virtually everyone. We know that monied interests have the power to persuade governments that taxing them fairly will lead to all kinds of imagined horrors, or to persuade politicians that taxing them would not be in their personal interests. The French government opposed the Zucman tax. The only realistic chance we have of taxing the very rich fairly is to oppose such lobbying with mass support. Only democratic pressure can fight a plutocracy.

[1] Something similar was suggested by Warren Buffet more than ten years ago, when he noted that his secretary worked just as hard as he did, but paid twice as much of her income in taxes. His proposal was adopted by President Obama, but was rejected by Congress.

[2] Arun Advani and colleagues look at the impact of past changes in the taxation of non-doms here.

Is the decline of democracy inevitable?

 

    From 2025 V-DEM report

In global terms autocracies are on the rise, and democracies are declining. According to the V-Dem Institute, for the first time in more than 20 years, the world has fewer democracies than autocracies. Other estimates point to the same trend. At a global level there are obviously many reasons why this is happening, but in Western countries one stands out: the rise of right wing populism.

In many of the major economies, the main political divide is increasingly between one or more right wing populist parties and more mainstream parties of the centre or left. Of course from year to year political popularity can be volatile, but the trend is also unmistakable. This is happening either because of the growing popularity of an insurgent populist party (Rassemblement National and Reconquête in France, AFD in Germany, Fratelli d'Italia in Italy and Reform in the UK) or the transition of a mainstream party of the right into a populist party (the Republican party in the US and the Conservatives in the UK).

Of course democracy can survive the election of a right wing populist party into government. There are plenty of examples of where it has (Trump’s first term as POTUS, Poland and the UK, for example). But the nature of right wing populism also means that there is a significant chance it may not. Populism is about a political party proclaiming that it alone represents ‘the people’, and that other parties or institutions represent ‘elites’ that work against the people. As a result, populist right wing governments tend to dismantle the key elements of a pluralistic democracy, such as an independent media, judiciary and civil service. They are autocratic, usually placing an unprecedented amount of power in one individual’s hands. In those circumstances, elections can easily cease to be fair, such that a democracy is effectively replaced with an autocracy.

If the key electoral contest in most major countries is between right wing populism and more mainstream parties, then right wing populists are likely to win at least some of these contests. If that sometimes leads to the end of democracy, or steadily erodes the possibility of fair elections, then unless autocracies collapse into democracies at an equal rate the number of democracies will steadily decline and the number of autocratic governments will increase. This process will be accelerated if autocracies intervene in other democracies to support right wing populism, as Russia has been doing and as Trump has started to do.

Why are right wing populist parties growing in popularity? This is an issue that I have discussed many times, most recently here. I think it is helpful to make a distinction between what some (not just economists) describe as the demand and supply sides. The supply side relates to politicians, the media and money: why for example mainstream politicians may choose to adopt populist policies, or why billionaires may fund populist politicians or parties. In the past I have talked about why right wing parties wanting to push unpopular neoliberal ideas might choose to focus on more social issues like immigration. The demand side is about why right wing populism is increasingly attractive to some voters. It is the latter I want to focus on in this post.

It is familiar territory that the politics of class, that used to be the central divide in most major economies, has and perhaps still is being gradually replaced by divisions between social liberals and social conservatives. Of course economic issues remain very important in elections, but increasingly the settled patterns in voting behaviour are not related to class but rather to age and education. Socially conservative voters tend to be older, and socially liberal voters are more likely to have been to university. A central issue that divides liberals from conservatives and which is becoming more and more important in elections is immigration.

To look at why this is happening we can focus on either the declining importance of class-based economic issues, or the growing importance of predominantly social issues like immigration. On the first, the decline in manufacturing employment in most major economies and its replacement by service sector jobs is part of the story. [1] This is one reason for the declining influence of trade unions. In the UK I think the triumph of Thatcherism and the end of incomes policies was more important. You can also add into the mix the decline in the Soviet Union as an alternative to capitalism.

Immigration has become more important as an issue in part because there is more of it. Immigration has been on the rise in all regions, and pretty well all countries within any region. However it is far too crude to suggest that higher numbers automatically generate higher concern. Worries about immigration are often greatest in areas where immigration is relatively low and vice versa: London relative to other areas in the UK is an obvious example. A much more important determinant of attitudes to immigration is where people are situated on the social liberalism/conservatism spectrum (e.g. here).

Key determinants of where people are on this spectrum are age and education. Two general trends in most societies have amplified these divisions. First, over the last fifty years more people have received a university education, and this increases the extent of socially liberal views. As graduates tend to form most of the political and broadcast media elites, this may be one reason why social attitudes have become increasingly liberal in most countries since WWII, although with the rise in right wing populism this trend may be ending or even reversing. .

Second, the number of older people has been steadily rising because of medical and other advances. A crude measure of this is the old age dependency ratio, which divides the number of people 65 or older by the number of people of roughly working age (20-64). In 1960, the dependency ratio for the OECD as a whole was 16%, but by 2020 it had doubled to 30%. By 2075 this ratio is expected to be nearly 60%. This means that a growing proportion of voters are no longer in work, so work-based economic issues will have less salience, although this effect is moderated to a minor degree by any increases in the retirement age. In addition, older people are more likely to vote. All this creates a growing pool of socially conservative voters which politicians can appeal to.

While these trends may help explain the growing importance of social and cultural issues in elections, we need an additional step to explain why political parties that aim to attract socially conservative voters are also likely to be populist and autocratic. Socially conservative views tend to go with authoritarian opinions: social scientists often refer to the social conservative/liberal axis as the authoritarian/liberal axis. Authoritarian views will generate an impatience with independent sources of power (or indeed democracy itself). It also means that socially conservative voters are more likely to be attracted by ‘strong’ (charismatic) leaders, of a type that generally lead populist parties.

All this is a very broad brush account, and please tell me of any important demand side factors I have ignored. But to the extent that it is valid, it suggests that the factors that have created a growing demand for socially conservative populism, and further down the line the trend away from democracy, are unlikely to be reversed anytime soon. 

[1] An alternative story about the rise in populism focuses on those ‘left behind’ by this and other aspects of globalisation. This economic mechanism appears very different from the social/cultural discussion that I focus on. These two alternative perspectives regularly compete when right wing populism triumphs. When Trump was first elected, for example, there was plenty of debate between those who wanted to essentially blame racist attitudes among the white majority and those who wanted to look at the left behind in once prosperous industrial states. Brexit saw similar discussions. Exactly the same tension can be seen in discussions about Poland’s recent presidential election.

I have taken a similar line to Dani Rodrick on this, which is that this tension can be at least partially resolved by distinguishing between levels and changes. Social/cultural issues provide the bedrock of support for right wing populists, but it is often economic issues that can tip the balance between these populists winning or losing electoral races. As this post is about the steady rise in right wing populism, rather than why right wing populists sometimes win, I naturally focus on social/cultural explanations.

Why following the path of the last Labour government will not work this time

 

The Blair/Brown government waited until they had won a second general election before raising taxes ‘on working people’ to accompany a significant increase in the proportion of GDP spent on public services. In the initial years after becoming Chancellor Brown stuck to Tory spending plans, which together with unexpectedly buoyant tax receipts meant debt to GDP fell substantially. This was despite eighteen years of Conservative government leaving public services in a very poor state. Many argue the reason why the last Labour did this was because they felt they needed to demonstrate prudence to the media and markets.

Are Starmer and Reeves following a similar path? In one sense not: Reeves increased tax significantly in her first budget and was therefore able to substantially increase public spending relative to the previous government’s plans. In terms of aggregate numbers rather than previous plans total current public expenditure fell from 33% of GDP to 32% in the first two years under Brown, whereas under Reeves it is projected to be slightly better than roughly flat.

Unfortunately keeping public spending roughly flat as a share of GDP when starting from a position which is awful (and arguably considerably worse than the one Brown inherited) is not going to please anyone. Does Reeves, like Brown, feel constrained because she worries that more substantial increases in public spending and taxes will upset the media and markets?

The Rock and Roll politics podcasts of Steve Richards are always worth listening to, and recently he suggested an alternative Labour government that we could compare today’s to. Not Harold Wilson’s, but that of MacDonald (PM) and Snowden (Chancellor) of 1929-31. He is not predicting the Labour party will split in the same way it did back then. Instead he points out that the 1929-31 Labour government, in the face of an economic crisis, chose to stick to economic orthodoxy because it wanted to appear ‘economically responsible’, even though it had promised voters change. This was despite a clear but radical (at the time) alternative path available, and in retrospect one far superior, which was the Keynesian path that the New Deal in the US eventually took.

He suggests that Starmer and Reeves also hunger to appear economically responsible by following orthodoxy, and that this is preventing them fulfilling their promise to voters of change, just as it did for MacDonald and Snowden. Once again economic ‘respectability’ defeats real ambitions for change.

It is a very provocative comparison, but one that loses some of its appeal once it is examined in more detail. Reeves is indeed insistent that her fiscal rules are not negotiable, just as Snowden insisted on a balanced budget, but today we do not have a global recession caused by inadequate aggregate demand. A balanced budget made no sense in the 1930s depression, just as Reeves’ golden fiscal rule wouldn’t, but we are not in or close to that kind of recession today. The golden fiscal rule does make sense in the situation the UK is in today where demand is strong and inflation is above target. In other words it was George Osborne, not Rachel Reeves, that was making the mistake that MacDonald and Snowden made.

Perhaps this is taking the comparison too literally. The current UK economic crisis is a dual one of crumbling public services and stagnant growth, and a key mistake the Labour government is making is keeping taxes too low. But is their reluctance to raise taxes primarily due to a hunger for economic respectability? It seems to me it is more about a hunger for electability, and thinking (incorrectly in my view [1]) that higher taxes will lose them votes because it will add to the current cost of living crisis.

Perhaps a better way to make the comparison work is not to think about particular types of economic issues, but think instead about radical change versus incremental change. Here orthodoxy means incremental, slow and hardly noticeable change, of the kind that the MacDonald government did do. Change that will not upset the horses of the establishment media and the markets. That might include one-off but not so great tax increases, of the kind that Reeves made in her October budget. It is also consistent with modifying the dreadful falling debt to GDP supplementary fiscal rule rather than abolishing it completely, as she should have done.

Where I do agree with Steve Richards is that incremental change is not what most people want. Voters recognise the huge hole the UK is in, both in terms of living standards (past and prospective growth) and public services, and they are impatient to see a government leading the way out of that hole, rather than just ensuring the hole doesn’t get any bigger. This is why the Labour government has become so unpopular so quickly, because it has shown no sign of the radical actions that voters were looking for.

But I still think the more relevant comparison is with the last Labour government, because the question those like myself, who want something more radical in terms of tax increases and additional public spending, have to answer is why incremental change worked (in electoral terms) for Blair and Brown but cannot work for Starmer and Reeves. Here Steve Richards makes the key point. In 2001, when Labour won a second term, there were effectively only two alternative parties: the Conservatives and the Liberal Democrats. The continuing problems with public services did cost Labour in the run up to the general election, where they lost many votes to the Liberal Democrats. But they lost far fewer votes to the Conservatives, because the opposition was the same party offering similar policies to the one Labour had replaced, and it made little sense to replace Labour with the party that had run public services down in the first place.

In addition, two other factors meant that in 1997 Labour could get away with keeping to Tory spending plans in the first years of government. The first is that obviously Tony Blair had more charisma and better presentational skills than Starmer, and arguably a better communications team behind him. The second is that Labour’s inheritance on growth and living standards was far better.

Economic growth, and therefore growth in living standards, was steadily rising during Labour’s first term, after stalling in the mid-1990s following the ill-fated ERM entry and subsequent recession. [2] In that context. Blair and Brown’s argument that they were ‘fixing the foundations’ in their first term to prepare for better public services later on made some sense to voters. In contrast Labour’s growth inheritance from Sunak and Hunt has been dire, so they will be very unlikely to replicate what happened in the first term of the last Labour government. Forecasts show very modest growth in living standards over the next four years. [3]

So the key differences between the 1997-2001 Labour government and now is that today Labour’s inheritance on growth is very different, and voters today can vote Reform. [4] This helps explain why, while Labour held its 1997 vote share for the first two or three years in government, Labour today have very quickly lost theirs. While xenophobia may represent the core of Reforms popularity, right wing populism generally only wins when that is combined with economic disenchantment. Incremental change will still leave Labour at the next election defending weak growth in living standards and seriously underfunded public services, and those are the conditions in which right wing populism thrives.

[1] The ‘cannot raise taxes because of the cost of living crisis’ idea is fundamentally flawed because it misunderstands that crisis. The UK savings ratio, the average proportion of income UK consumers are saving, has been steadily rising since mid-2022. That indicates that plenty of consumers are able to buy what they need and still increase their savings. The rising cost of food and energy has created a crisis for those poorer voters who are not able to save. There are plenty of consumers who can easily bear higher taxes, while still avoiding increasing taxes on those who cannot.

[2] GDP per capita growth exceeded 2% in every year from 1993 to 1996, following the large devaluation and lower interest rates as we left the ERM. Initially the devaluation hit living standards because of the higher cost of imported goods, but this effect was largely over by 1997.

[3] The first term of the last Labour government also saw a concerted effort to reduce poverty, but that didn’t really start until 1999.

[4] The threat on the left is probably not very different. It is true that the Greens are now a more feasible choice for those on the economic left, while social liberals can still vote Liberal Democrat. However the LibDems in 2001 were more left wing in economic terms than they are now.

The IMF on the UK’s fiscal rules

 

Press coverage of the IMF’s annual report on the UK economy in both the FT and Guardian chose to headline their comments about ‘refining’ fiscal rules. Those headlines might have been interpreted as saying the IMF thought Reeves could raise spending without raising taxes. If you thought that then you would have been disappointed. Nothing the Fund said does that. The Fund effectively endorsed the current fiscal rules, which for reasons I will discuss below is a little disappointing coming from one of the few institutions that has expertise on these matters. But for those wanting higher public spending (which is most voters), their message is one I would agree with: its tax, not the fiscal rules, that has to change.

What they do comment on is how what happened in March might be avoided in the future. Reeves has sensibly committed to just having a tax changing budget in the Autumn, but the OBR is legally obliged to do two forecasts a year. Unfortunately, Reeves and the Treasury believe that each forecast has to show the government meeting its fiscal rules. After the Autumn budget those rules were only just met, so that meant that the OBR’s March forecast had a good chance of showing the government breaking its rules. Reeves decided, wrongly in my view, to make disability payments the residual item of spending that would adjust to make sure the rules held.

Singling out any one item of public spending to be the residual to be adjusted to ensure your rules hold in the OBR’s March forecast is a daft way to make fiscal decisions. Furthermore, adjusting spending or tax on a six monthly basis to get a fiscal forecast to hit a target is unnecessary. I noted at the time Charlie Bean (ex BoE, MPC and OBR) saying that a grown up approach would just promise to adjust policy in the Autumn budget to meet the fiscal rules, but following the Truss debacle politicians and civil servants were so scared of the bond market this didn’t happen.

The IMF mentions some ways of avoiding what happened in March happening again. I can interpret them as involving three possibilities. The first is to formalise this grown up policy. The OBR could still produce two forecasts each year, but in March they would omit their final chapter on assessing whether the fiscal rules were met. Instead the Chancellor would simply commit to making the necessary policy adjustments in the Autumn. The second option is to get the OBR to forecast just once a year, to coincide with the Autumn budget. A third possibility mentioned by the IMF involves “de-emphasizing point estimates of headroom in OBR assessments of rule compliance”.

The second option, the OBR producing just one forecast a year, is the one favoured by The Institute for Government (see Gemma Tetlow here). I have no problem with this, because issues involving fiscal sustainability are about the long term, not short term. I find the media’s discussion of monthly deficit numbers alternatively funny and exasperating. However the Treasury might want a six month OBR forecast to at least frame the pre-budget discussions. While plenty of other macro forecasts exist, the OBR’s detailed analysis of the public finance data is unique. It would be politically impossible for the OBR to do a forecast for the Treasury in secret.

I’m also not sure how de-emphasizing point estimates would work, because they could always be derived even if the OBR hid them. As Gemma Tetlow points out, the Bank has done this for some time and everyone still focuses on the point forecast. Saying that the fiscal rules would be formally met if there was a 40%, rather than 50%, chance of hitting the targets would rightly be seen as a major change in the ruIes.

I still think a viable option is to formalise the grown-up policy, because at some stage politicians and the Treasury need to start treating the bond market as grown-up too. (The media, I fear, never will.) By March next year Reeves should feel she has established enough credibility to be able to say that she would make the adjustments needed to meet the fiscal rules in the Autumn, without fear of spooking the bond market. To be honest I don’t think the bond market would have been spooked even if she had done this last March.

The two issues that I was disappointed the IMF didn’t comment on are the supplementary fiscal rules, and the change to a three year horizon.

The main fiscal rule, and the one driving policy at the moment, is the ‘golden rule’, which says current spending must be matched by taxes at some date in the future. The IMF rightly says that this rule “helps preserve space for investment”, which is one reason why it is a good fiscal rule. But there are two supplementary rules: a rule for welfare spending and a rule saying the debt to GDP ratio must be falling at some date in the future. In my view both are a waste of time.

Yet the IMF says that the falling debt to GDP rule “safeguards fiscal sustainability”, implying that the golden rule alone fails to do that. By fiscal sustainability they mean that debt to GDP remains stable or falling in the longer term. This is just incorrect, as the IMF must know. Getting debt to GDP to be falling in a few years time does not ensure sustainability. It is quite possible for the rule to be continuously met and yet for debt to GDP to rise steadily, because current increases more than offset any expected future falls.

As I have argued consistently (and to my knowledge no one has established otherwise) the golden rule is the best we can do to ensure sustainability, as long as taxes matching spending is defined sufficiently to allow space for an average level of investment spending. Periods of unusually high public investment never threaten fiscal sustainability. The falling debt to GDP rule therefore adds nothing useful. Yet what it does do, if it happens to bind when the golden rule doesn’t, is encourage governments to cut back on useful investment. It therefore partially negates a key advantage of the golden rule.

Putting the same point another way, any rule that looks at government debt is just looking at one side of the balance sheet by ignoring government assets. It is like saying that when you take out a mortgage on a house your financial position has reached crisis point because your debt level has exploded. If instead you required the GDP share of public sector net wealth to fall over time, you can formally show that this is simply double counting the golden rule. Again, you don’t need a supplementary rule.

The IMF does note that the fiscal rules are changing from looking five years ahead to instead look just three years ahead. All the IMF say about this is that this change is “expected to make the rules more credible, while allowing time to adjust gradually to shocks.” I agree that the Treasury expects this three year horizon to be more credible, but the IMF ignores the basic problem in moving from five to three years ahead, and that is the business cycle.

The current deficit target in the golden rule is not cyclically adjusted. This is potentially a problem because in economic downturns the deficit rises and vice versa. However as long as the fiscal rules looked five years ahead, this cyclicality was never going to be a problem, because the OBR would always be forecasting a return to trend output after five years. But that is no longer true if the target is just three years ahead.

You don’t need a full blown recession for this to become a problem. For example, at the moment the OBR is forecasting steady growth from 2026 onwards. But supposing Trump’s tariffs or other factors depress the global economy in 2026, and this is expected to continue into 2027. This impacts the UK, such that the OBR forecasts made in the Autumn of 2026 show the UK economy still 1% below trend in 2029. In 2026 the fiscal rules will apply three years ahead, which is 2029.

That may well mean that the current balance will not be expected to be at target in 2029, but will be by 2031. To cut spending or raise taxes in those circumstances, just before an election, would be crazy from both an economic and political point of view.

Did the Treasury not think about this possibility? If they did, why did Reeves still take this risk? One of the features of fiscal rules under the Conservatives was endless tinkering for short term political gain at the expense of economic logic, and unfortunately the change from a 5 year to a 3 year horizon is I believe another example. To be quite frank, I just wished they had asked me about this change before they did it. [1]

The scenario above might not happen of course, or it may happen at some other time in the future. But that it might well happen means this rule change is another example of Reeves erecting hurdles that she might fall over in the future. Labour’s tax pledges are the biggest of course, but at least there was a political justification for those. Changing the target horizon from five to three years has no such excuse. The bond markets were never going to be spooked by her October budget with its small adjustment to the falling debt to GDP rule, so she didn’t need to throw them a bone, particularly one they have no interest in. [2]

[1] If that sounds pompous, I am one of the very few in the UK who has written an academic paper about both the theory and practical issues behind fiscal rules.The paper recommends using the golden rule, with a target five years ahead. I advised the previous Labour Chancellor but one to adopt this rule, advice he accepted. Even if the current Chancellor was determined to make this change to ‘enhance credibility’, I would have pointed out that it should have involved moving to a cyclically adjusted target for the current deficit.

[2] Bond markets don’t really care about the details of fiscal rules anyway. Just look at the number of times the last government changed those rules, none of which produced any reaction from the markets. As I set out here, markets are mainly interested in where the central bank will set interest rates in the future, and how uncertain those expectations are.

Is the centre right doomed?

 

This post is not about whether the UK Conservative party will be replaced by Farage’s Reform as the main opposition to Labour. As long as the Conservative party sees its future in emulating Farage’s politics, then the Conservative party is no longer centre right, but a right wing populist party. Which of these two right wing populist parties will win out mainly depends on how good a politician and leader Farage turns out to be. If he plays his hand well, then it is quite possible that after the next election Reform will be Labour’s main opposition, but I have no idea if he will play it well. [1] Alternatively a merger is possible, because as Tim Bale, the UK’s leading academic expert on the Conservative party, has shown the membership of the two parties is pretty similar.

Instead I want to discuss why so many parties of the centre right across the West seem either to have been squeezed out by populist right wing parties (as in France for example), or have transformed into populist right wing parties (as the Republicans have in the US), or have done both (as in the UK). This is the topic addressed in this article by (in my view) one of the best political and policy analysts in the UK right now, Sam Freedman. It is also something I have written about myself, sometimes under the label of neoliberal overreach or plutocracy, most recently here.

At first sight the story Freedman tells is rather different to mine. He first talks about a middle class, then managerial class and finally (following Badenoch) bureaucratic class, that includes “civil servants, psychiatrists, compliance officers and risk managers, most lawyers, and everyone working in HR”. Once, alongside the capitalist class, this group was the bedrock of Conservative support, while the centre/left represented the working class. The political affiliation of this class became more contested as the centre left looked beyond the working class for support (e.g. under Blair in the UK), but initially the centre right still competed for their votes.

However, Freedman argues, a strand of thinking that saw this class as the enemy began to emerge on the right. The capitalist class saw the bureaucratic class as frustrating enterprise and profit, while older socially conservative voters became resentful of the social liberal ideas prominent within the middle/managerial/bureaucratic class. This coalition is exactly what you see behind Trump’s presidency today. (These two paragraphs cannot do justice to Freedman’s account, and I strongly recommend reading the article, particularly if you are interested in some of the thinkers behind this movement.)

My own account lays much more stress on the role of neoliberalism, and its capture of the centre right in the 1970s/80s. After an initial honeymoon period under Thatcher and Reagan, neoliberalism became much more problematic for voters. While politicians on the right wanted to go further in reducing the role of the state, voters clearly didn’t. Rather than compromise their neoliberal beliefs, right wing politicians and the media that supported them turned to culture wars (particularly immigration outside the US), as a vote winning tool.

This shift to social conservatism was largely instrumental: it was a means of keeping or obtaining power rather than a matter of principle or conviction. In areas like immigration and trade when it came to a conflict between neoliberalism and social conservatism, centre right governments when in power chose the former. That in turn led to a revolt by social conservatives (financed by particular members of the capitalist class), leading to either a take over of the centre right party (the US) or the emergence of a competitor party (the UK). Once competition or division emerged on the right, plutocratic elements (including media owners) could gain power and influence by playing one side against the other, and a neoliberal ideology could be subverted (but not completely overturned) with the help of particular monied interests (think Dyson over Brexit, who clearly didn’t speak for business as a whole.)

Although these two accounts sound different, I think there is a lot of common ground. Both involve the radicalisation of social conservatives. The centre right has always been a coalition between social conservatives and a more socially liberal but economically right wing middle class. But Tory MPs were typically much more socially liberal than the party’s members, and partly for that reason in the UK and elsewhere social liberalism has made great advances. Although there may also be specific national reasons, this is one common factor behind the radicalisation of social conservatives in many countries. However I would argue this radicalisation also reflects campaigning choices by neoliberal politicians on the centre right. (In the UK, contrast Edward Heath’s sacking of Enoch Powell with the Conservative party and its press after 1997.) But as my recent piece admits (see ‘critique’) it remains unclear to me how important these campaigning choices were, and whether the advance of social liberalism alone was sufficient to create social conservative radicalisation.

Indeed it could be argued that the transformation of centre left parties from being made up largely of working class voters to containing more middle class, typically university educated voters (what Piketty calls the Brahmin Left) is part of the same dynamic as growing social liberalism. While until recently centre right parties didn’t try to reverse this trend because their leaders were relatively socially liberal compared to their voters, it is still clear to social liberals that the party of the centre left is the one implementing socially liberal reforms, so it will attract their votes. The advance of social liberalism causes increasing middle class support for the centre left, which in turn facilitates further social liberalism.

In addition, the members of the capitalist class wanting a smaller state emphasised by Freedman (eg Musk) and the politicians pushing for a smaller state that I sometimes focus on (eg Osborne) have similar effects. As I argue, the move of the centre right to become more populist follows naturally from the emphasis on social conservative (sometimes called authoritarian) ideas.

We also agree that, to use Freedman’s words, their current strategy is

“hopeless for the Conservatives, many of whom were either in or adjacent to this bureaucratic class before becoming MPs themselves. For those who wish to rebel against the establishment, Reform is a much more attractive choice. Meanwhile the Tories are gifting professional graduate voters to parties of the left and centre, as demonstrated by the ongoing destruction of the Tory party by the Liberal Democrats in long-held heartlands like Oxfordshire and Hertfordshire.”

In my view they would be much better advised to fight on this second flank where they have more chance of winning, but whether their membership and their press will allow them to do this is doubtful. I also agree with Robert Saunders who in 2019 argued that Brexit had helped rot the party’s strategic mind. He shows that before 1997 the party was always receptive to new ideas and thinking and this helped it become such a dominant force, but it no longer has that ability unless those ideas come from Nigel Farage. To quote:

“As John Stuart Mill well knew, the Conservative Party was never truly “the stupid party”. Yet what was once an insult has become an aspiration. It may yet prove the party’s epitaph.”

The parties of the centre right that survive best may be those that don't put all their focus into trying to copy populist right wing politics, and instead fight these populists head on. 

[1] That does not necessarily mean the death of the Conservative party, particularly if Reform does so well that it forms the next government and that proves to be predictably bad for the UK economy.

Reeves is not following in Osborne’s footsteps

 

I often see the claim that Reeves is just doing a version of George Osborne’s austerity, or that Reeves is following Osborne in being obsessed with fiscal rules. As Osborne’s period as Chancellor is increasingly seen as a disaster for the UK (as a few of us shouted at the time, but were ignored by a media that thought austerity was common sense), such comparisons serve a political purpose, but they are very misleading. The big mistake Reeves is making has little to do with Osborne and rather more to do with the folklore that emerged from Labour’s eighteen years in opposition between 1979 and 1997.

If anyone was following in Osborne’s footsteps it was Jeremy Hunt, who promised if a Conservative government was re-elected an additional period of significant spending cuts. In reality, as Will Dunn reminds us, he was repeating the trick played by Osborne before the 2015 election: set impossibly tough targets for spending after the election to limit what Labour could promise. Osborne was re-elected, and promptly moderated the decline in spending (as a percent of GDP). Hunt wasn’t re-elected, but Reeves raised government spending to be roughly flat (as a percent of GDP). From 2010 Osborne cut public investment (as a share of GDP) substantially, while Reeves raised Hunt’s plans to keep public investment roughly flat (as a share of GDP). As regular readers will know, Reeves has done much less than I would have liked, but it is not because she is following in Osborne’s footsteps.

Reeves appears obsessed by her fiscal rules, but in this she is following Gordon Brown rather than George Osborne. It was Gorden Brown that first created the ‘golden rule’, that current public spending should be matched by taxes. (It’s form was different because Brown’s rules looked backwards over a complete economic cycle, while today’s rule looks forward a number of years, but that is a detail compared to the rule’s basic principle.) The context in which Reeves is operating is also more similar to Brown’s than Osborne’s. Osborne’s principle macroeconomic error was to cut spending hard at the bottom of the deepest recession the UK had experienced since WWII, when interest rates were at their floor, going against standard macroeconomic theory and evidence. Reeves inherited a far weaker economy than Brown, but its weakness represents supply side stagnation rather than deficient demand. Overall, if Reeves is following anyone it is Labour’s most accomplished Chancellor, while any obsession about following rules on her part can unfortunately be laid at the door of Liz Truss.

As I have argued many times (most recently here) Reeves’s main error has been a failure to raise tax sufficiently. This is partly the result of commitments that Labour made before the 2024 general election. But Brown and Blair also committed not to raise the standard and higher rates of income tax before the 1997 election, as well as pledging to exempt some items from VAT. That the 2024 commitments covered more areas on tax than in 1997 may just reflect that the Conservative government had changed these additional taxes. Gordon Brown did eventually raise personal national insurance contributions (NIC) to partially fund higher health spending, but only after winning a second term of office. Even in this case I remember him telling me that they were really worried about the media and public reaction to this tax increase, and spent months carefully preparing the ground for that announcement. (Preparations that were, apparently, blown out of the water by Tony Blair in a media interview.)

Labour’s fear of tax increases is therefore longstanding, and owes a great deal to a belief that the public's distaste for tax increases was key in keeping Labour in opposition for eighteen years before 1997. In particular, their defeat in 1992 is often put down to a shadow budget which involved increasing taxes on high earners, which John Major described as Labour’s ‘tax bombshell’. 1992 was an election Labour thought they were going to win, but where they were soundly defeated yet again.

Are Labour’s fears about the electoral impact of tax rises justified? I’m not really qualified to answer (and I’m not sure anyone really knows), but some things are clear. First, many more voters favour higher taxes and spending compared to lower taxes and spending, although in recent years that large gap has been closing. However, the link between the two in many voter’s minds may not be clear: voters know that they pay taxes, but may be unsure that additional tax revenue will go to the kind of government spending they favour. In addition, those with high incomes and wealth tend to have an outsize influence in the media.

What does seem clear is that Brown’s concern about the reaction to his NIC increase to fund additional health spending proved unwarranted. Even a majority of Conservative voters supported it at the time. One difference between then and now, of course, is that back then real incomes were growing, whereas today they are not, such that those on low or modest incomes are already stretched. However, even if that concern is valid, the case for not increasing the top rates of income tax today looks rather thin.