Five small thoughts on the Autumn Statement

I talked about the big picture here and here, but as ever there is a lot of interesting detail. Here are five thoughts that I have not seen expressed elsewhere.

1) Tax credits. As people gradually began to twig, the U-turn on tax credits is only temporary: most tax credits will become part of Universal Credit when it is introduced, and the cuts there remain. As the Resolution Foundation show, those at the lower end of the income distribution are eventually going to be made a lot worse off.

But it’s still a big victory for those opposed to the tax credit cuts, for two reasons. First, a few years without the cuts are worth having. Second, and perhaps more importantly, Osborne wanted the cuts to come in early so that their memory would be diminished by the time of the next election. That will no longer happen, which might mean that when the time comes they too will be dropped/delayed.

2) Apprenticeship levy. One of the problems economists have with budget/autumn statement commentary is incidence - it is generally assumed that a tax on business is different from a tax on wages. But as the OBR point out, the evidence suggests that higher payroll taxes (‘taxes on jobs’), which this levy essentially is, will be largely met by firms paying lower wages. But if the Chancellor had raised the same amount of money by increasing employees NICs, everyone would be making much more fuss about this tax increase (particularly as he had pledged not to do so).

One point I didn’t hear mentioned is that we used to have an apprenticeship levy - it was abolished by Mrs. Thatcher.

3) Democracy. I’m occasionally told that I’m too critical of this government, and some even suggested on Wednesday that this Autumn Statement represented a move to capture the centre ground. But the Statement included a 19% cut in money provided to opposition parties. The Treasury said it was “time for political parties to pull their weight in difficult times.” I think the chief executive of the Electoral Reform Society was nearer the mark when she said it was “bad news for democracy”.

4) Labour. Talking of opposition, there was a lovely moment at the end of Osborne’s speech where he noted that Labour had suggested maybe a 10% cut in money for police was appropriate, only to announce no cut at all. It was just one more example of how timid Labour has become. Would it have dared increase the stamp duty on second homes/buy to let by so much? And then of course there was the higher minimum wage in July.

I normally try to avoid watching/reading political speeches, and only turned the TV on to see how John McDonnell performed. As I have said before, many on the left are their own worst enemies when it comes to the issue of political spin. They despise it, which is healthy in itself, but they actually need to be far better at it than their opponents because of media bias. Of course some things are so blindingly obvious …

5) Fragile fiscal forecasts. The thing I really dislike about occasions like this is all the emphasis on the aggregate fiscal numbers. Some people seemed surprised that the OBR should make such a big change to its tax take forecast, but as a one time forecaster it did not surprise me a bit. Macro forecasts are very unreliable anyway, and one of the hardest macro numbers to forecast is the budget deficit. Yet people obsess over small changes to the deficit in future years, as if this mattered. It does not.

One final comment on comments. This end of austerity meme is silly. Here is a chart.

Where would you get the money from?

In the recent furore in the UK over tax credits, I do not recall any government minister being asked the following question by a journalist: why don’t you just borrow more? Yet to any economist that is the most sensible, and indeed obvious, question to ask.

I just do not think most journalists (and I’m tempted to write and therefore politicians) have yet realised this crucial difference between austerity in 2010 and austerity now. [1] In 2010 debt to GDP ratios were rising fast, everyone was talking about market panic, so people like me who thought deficits should be larger had some explaining to do (although, as Ben Bernanke recently said, we were right). But now austerity already enacted has stabilised debt to GDP ratios, not just in the UK but in the US and Euro area. Over the next five years debt to GDP ratios in the UK will be falling.

This means that further austerity is no longer about stabilising debt and an imagined market panic. Instead it is about an obsessive need to cut debt to GDP really fast, or more likely a desire to shrink the state. It isn’t primarily about Keynesian economics any more [2], but instead about any kind of economics. Remember there are no economists prepared to defend Osborne’s fiscal charter. In economic terms the fiscal charter itself is the real embarrassment. The issue is no longer do we increase the level of government debt for the sake of the economy, but do we need to raise tax credits or cut vital public services just in order to cut government debt quickly.

Perhaps the most charitable explanation for this failure of journalism is that most people do not understand some very basic points. Governments running surpluses are rare. Unlike individuals, nearly all governments have always had a large amount of debt. Unlike individuals, nation states live for a very long time. Because the amount they produce also grows over time (real growth and inflation) that means that the ratio of debt to GDP (which is what matters) can stay constant even if they run deficits. For example with debt at 80% of GDP, and a conservative estimate of average 4% nominal growth, the UK’s debt to GDP ratio would stay constant with a deficit of 3.2% of GDP.

3.2% of GDP is a lot of money. It means the government could run deficits of £60 billion today (£70 billion by 2020) and not raise the debt to GDP ratio. By comparison, the now derailed cuts to tax credits were worth less than £5 billion, and the spending review is trying to save £20 billion.

So here is a simple exam question for journalists. If any politician over the next 5 years proposes not to cut some item of expenditure, or not to raise some tax, and they are asked where is the money to do this coming from, which of the following answers is most convincing?

1. We would generate more tax receipts by making the economy stronger.

1/10. Every political party thinks their policies will raise growth and therefore bring in more revenue, but they should never rely on this happening. In some cases political parties (pretend to?) believe things that we know are untrue, like tax cuts will pay for themselves. Of course some policies, like cutting tax credits, could well damage the economy by reducing labour supply, but again it is highly unlikely that such damage would make tax credits self-funding. So any interviewer would be quite right to raise their eyebrows at this answer.

2. We would save money by making public spending more efficient.
   

1/10. Same problem as above.

3. We would print more money.
   

3/10. Not as silly as it may sound when central banks have already created a huge amount of money (QE) to buy government debt. So no raising of eyebrows (or worse) appropriate in this case. But in the current UK and US context (but not the Eurozone) where central banks are talking about when they might start reducing QE it looks like an answer which is out of its time.

4. We would cut the following expenditure instead, or raise the following taxes, or get rid of the following tax breaks.

8/10. A good answer, particularly if the funding measures are specified and the sums are realistic and not double counted. Works in all seasons. Right now opposition parties have plenty of scope here, as Jolyon Maugham spells out.

5. We would borrow more.

10/10. In the current UK context the best answer, although if you had given this answer in Ireland or Spain in 2004 you would get 0/10. It may seem too easy to be true, but in the rather peculiar circumstances where you have a Chancellor that is pursuing reckless austerity for extremely dubious reasons it would be utter foolishness to turn your back on this gift horse.

Yet most politicians are incredibly reluctant to give that answer, in large part because they think they will get the raised eyebrow treatment from journalists or worse. So we have the crazy situation that no single economist is prepared to endorse the fiscal charter, but pretty well every journalist treats any suggestion that we should depart from it as unacceptable. That just cannot be right.

[1] Andrew Rawnsley rightly points out that the political reaction to the tax credit cuts over the last five months shows how little most journalists know about ordinary people as well as economics (yes, that Westminster bubble), but he fails to note the critical role of the fiscal charter, and so treats the need to find some extra money as self-evident.

[2] There still is a Keynesian argument about risk, but take that away and the case for a more gradual pace of deficit reduction is still very strong.   

The accidental tax credit cuts?

This is a sort of companion piece to my earlier post about the centre-left in UK politics

I complain a lot about the UK media and its coverage of economic issues, so I should in fairness note the occasions when it does its job well. Here is Newsnight last night - look around 18 minutes in. The House of Lords have just voted to delay Osborne’s cuts to tax credits. We have a discussion chaired by Evan Davis between the Labour peer who helped achieve that vote, and two Conservative politicians: Jacob Rees-Mogg from the right of the party and Tim Montgomerie from the left.

The first good point is when Rees-Mogg trots out the standard government line that although these cuts to tax credits will hurt the working poor (a lot), taken as a package with the increase in the minimum wage and changes to tax thresholds they will not. Everyone, including Evan Davis (who once worked at the IFS), turns on him to tell him he is wrong. That is good journalism: when a government tells lies they should be called out. Rees-Mogg’s response about being naive in trusting his Chancellor is a delight.

In contrast Montgomerie acknowledges what the cuts do and how contrary they are to the government’s rhetoric about helping people into work and reducing poverty. The second, and even better point, is when at the end Davis asks Montgomerie where on earth he thought the pre-election welfare savings the Conservatives proposed were going to come from if it was not cuts to tax credits. It was an excellent question, and the response was I suspect quite honest (as Montgomerie tends to be). The Conservatives never expected to win the election. Instead their manifesto was an initial bargaining position, and things like cuts in tax credits were expected to be traded away in coalition negotiations.

This tells you how weak the centre-right is within the Conservative party right now. If the Chancellor and the majority of Conservative MPs thought the same way as Montgomerie, then their response to their election victory would not be to carry out the elements in the manifesto they expected to bargain away. It would be so easy for the Chancellor after the election to find some pretext not to cut tax credits. Instead Osborne went ahead, hoping that his control of so much of the media (and what the Treasury publishes) would mean that he could get away with the gulf between what he claims and what he actually does.

The weakness of the centre-right in UK politics has been masked for a long time by Cameron’s pre-2010 spin, a few progressive social policies and the restraining hand of the Liberal Democrats within the coalition. As I wrote in that earlier post, I strongly suspect a strong political centre (left or right) is vital for good governance, and that both the UK and Europe is suffering from its absence.The big question people like Montgomerie have to address is why, over the next five years, they will not suffer the same fate as the centre-right within the Republican party in the US.

Linking tax credits and the fiscal charter

I have made fun in the past about Labour politicians and supporters who in public trip up once the word borrowing is mentioned. An interviewer only has to ask ‘but if Labour reverses this cut it will mean more borrowing’ and the interviewee stumbles around in a way that shouts to anyone watching that Labour have a vulnerability here.

It is a vulnerability that helped lead to the disastrous decision under the interim leadership not to oppose Osborne’s cuts in tax credits, and to McDonnell’s embarrassing initial decision (now reversed) to support the charter. But now that Labour has sorted itself out on both issues, it needs to stop avoiding the borrowing question. Take this otherwise assured performance by Owen Smith on Newsnight last night (27 minutes in, HT Owen Jones).

Here is what Owen Smith should have said when asked whether reversing the cuts to tax credits would lead to more borrowing.

“The Chancellor has said he needs to cut tax credits to meet his new fiscal charter. Labour oppose this charter, because it makes no economic sense. Osborne cannot find a single economist who supports his plan. Imposing a work penalty to pay borrowing off more quickly is just counterproductive, because discouraging people from working makes the economy weaker. This was supposed to be a government that encouraged work, yet here is the Chancellor doing the opposite in order to meet a charter that only his MPs support.”

If the interviewer persists with “so you will borrow more”, say

“Labour would not need to cut tax credits because we would balance current income and spending, leaving room for the country to invest. Labour would borrow to invest, whereas Osborne is paying for the little public investment he is doing by cutting tax credits. What matters is government debt in relation to GDP, and our policy would mean that debt relative to GDP would fall under Labour.”

I am sure those skilled in spin could sharpen this, but you get the idea. The days when deficit fetishism gripped voters are coming to an end. Labour needs to change its rhetoric to reflect this, and paint Osborne into the ideological corner he occupies.  

How television fails in its duty to inform

When a Tory voter emotionally complained about how she had been deceived about cuts to her tax credits, it caught the media’s attention. I don’t want to get into the debate that followed about whether she deserved sympathy or not, except to say this just shows up some elements of the left at their sanctimonious worst. What struck me was the juxtaposition of this with another remark I saw elsewhere, which is that everyone who had looked at the numbers knew Osborne would cut tax credits after the election. This remark is correct, if be ‘knew’ we mean highly likely.

That information had clearly not got through to this Tory voter. Conservative MPs know she is not alone, which is of course why the Prime Minister lied about it before the general election, and why he and Osborne continue to try and cover up the facts. It is the media’s job to get information across, and on this it clearly failed. Most in the parts of the print media that see that as part of their job did their best: those in the part who are paid to deceive also did their job well. Whether we should let those who produce news like celebrity gossip and sports reporting use that platform to peddle political propaganda is an interesting issue. But these do not arise in the UK with the television media, which has a duty to inform in an impartial way which it is clearly failing to fulfill.

This is not about the television media’s coverage as a whole, but how information is presented in the kinds of programmes that this Tory voter is likely to watch: the major news programmes, interviews with the Prime Minister or Chancellor etc. Take for example the clip where the Prime Minister lied about cuts to tax credits. There David Dimbleby asks him by saying “some people” have suggested tax credits would be cut, rather than “every non-partisan expert”. This may seem small, but this kind of detailed textual analysis is critical (and it is what many journalists have been trained to do).

Of course this is not an isolated incident. The idea that the deficit was a consequence of Labour profligacy rather than the recession is widely believed (as another pre-election debate illustrated), which means the television media again failed. In other areas where the partisan right wing press do their best to mislead, like welfare and immigration, the average person’s perception of key facts is wildly wrong (in the direction they are misled), which means the television media has also failed. Journalists seem happy to quote large sums of money on magnitudes like government debt in a way designed to make them sound scary, but fail to put them into historical context (it needs just one chart), which would mean focusing on the debt to GDP ratio and pointing out that this will fall even if we run modest deficits. The politically loaded and inaccurate term taxpayers money is freely used, and the term welfare benefits misused. I could go on and on, and have.

Political journalists working in television try hard to be unbiased in a party political sense. They do this partly because there are political machines that try and hold them to that. I would suggest being unbiased towards the facts, and more positively their duty to inform, are at least as important. Unfortunately there are no equivalent mechanisms to ensure this happens.