Debating economic policy with Fabians & Christian Socialists

I spent Saturday speaking at two events on economic policy.  The Christian Socialist Movement held a unique conference, The Devil's in the detail, looking at the basics of how our economy works.  The idea was to help people debate economic policy by knowing a bit more about the background.  I spoke at the beginning outlining some of the things we've been doing in CSM on this theme and plans for the future.

I then headed to Witham in Essex to take part in the Fabian Society's Eastern Region conference.  The theme was Defending the state and I spoke in a seminar on how to develop a fairer economy, sharing the platform with Patrick Diamond.  It was a good debate with conference attendees.

I developed the theme I looked at with the Richmond Fabians last Thursday.  We looked at the current stresses and strains in markets that governments are having to deal with.  And we debated what role government can play in such circumstances - which links to the need for Labour to regain economic credibility (the theme of my Fabian pamphlet).

My main concern is that many countries are in austerity death spirals, cutting spending and raising taxes too far too soon, and so cutting growth, which in turn hits tax revenues and requires a higher welfare bill.  To be credible, you need a credible plan for cutting deficits which is linked to a credible plan for growth.  In the UK, the government has no credible growth plan (not really any growth plan) and it's deficit-cutting plan is losing credibility too.  This is why we need a Labour Party on the front foot on economic policy.


Stephen Beer, 28/02/2012

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Saving and investing now rather than later

Social Market Foundation suggests switching spending

An interesting SMF paper, Osborne's choice, just out suggests that the government can boost investment by spending the money that will be 'saved' by the £15bn of unspecified spending cuts it promises after the next election.  The reasoning is that given the spending cuts have to be found at some point, and probably before the election, the government might as well identify and implement them now and use the £15bn per year to raise the capital budget.

The author, SMF director Ian Mulheirn, proposes examples of where the money could be saved: cuts to winter fuel payments and free TV licences for the better-off elderly , halving the high rate tax relief on pensions, limiting ISA holdings, folding child benefit into the tax credit system, and scrapping free bus passes for the over 60s.  The funds saved would then be channeled into capital spending eg on infrastructure.  Capital spending can raise the productive potential of the economy and so help boost growth in the short and longer term.

The central point here is that rather than just debate about austerity vs growth we should look at where we spend; some items are better for promoting growth than others.  This is a point I made in the Fabian Society pamphlet The Credibility Deficit last year.  It does mean hard choices ie cuts to current spending (which people usually notice) to shift to capital spending (which most people, apart from those directly employed on projects) will not, at least at first.  For Labour this is just a debate we need to have.

I do have some doubts about the reliance on the £15bn future cuts.  That amount, £15bn, in a few years time, is neither here nor there in the context of the public finances.  It is a meaningless figure.  Sure, the government has not explained where that cut will come from.  But it doesn't really have to as the figure will be different by the time we get there.  It could well be larger.  The government will hope it is smaller or even non-existent.  Its current presence in the OBR and government figures is a way of saying the government will meet its target (later than expected) - honest.  But no one knows.

That doesn't mean we shouldn't look at reallocating some current spending, even £15bn.  Finding it will not necessarily be politically easy.  But the scale of the economic crisis we face means we have to be radical in reorientating our economy towards growth.

Stephen Beer, 21/02/2012

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Should we stimulate economic growth?

As the Budget approaches, is it right to increase borrowing to try to stimulate growth by

The poor performance of the UK economy has prompted discussion about how the government can stimulate the economy.  Its record here is abysmal.  Various growth plans have promised more in the anticipation than they delivered in print, let alone in practice.  We are still awaiting news of George Osborne's plan to get credit to small and medium sized businesses for example (when he should have put pressure on the Bank of England to act).  The Budget is due next month; hence debate about the alternative options available.

Shadow Chancellor Ed Balls has entered the debate with a call for tax cuts.  He is keeping with his previous call for a VAT cut but suggests alternatives.  These include raising personal allowances to take more people out of tax, or a temporary 3p income tax cut.  The downside with these, he points out, is that they would not help the poorest.  However, he urges action of some sort to avoid years of low or no growth.  Meanwhile the LibDem leader has signalled that he wants the pledge to raise personal allowances to £10,000 accelerated.  And there are calls for tax cuts from Tory backbenches.

Strange that everyone is suddenly seeming more relaxed about relaxing fiscal policy.  Especially just after a credit ratings agency - Moody's - announced it was considering downgrading the UK's AAA debt rating.

Moody's main issue was that it was worried about UK economic growth - if this did not recover as expected the government would have trouble meeting its fiscal targets.  That's because lower growth means lower tax revenues than expected and also if it means continuing or increasing unemployment levels, that means higher than expected government spending on welfare (which forms part of annually managed expenditure ie not part of departmental expenditure plans).

So you can see why people are worried about growth.  But can we afford action?

There is actually some room in the finances for some sort of action.  That includes cutting debt faster of course.  The room comes partly from the better than projected borrowing figures for the current year.  It also comes from where we are compared to the projections by the Office for Budget Responsibility (OBR), made in November.  One of those is borrowing costs, which were perceived to be at low levels at the time but are now even lower.  Ten year gilt yields were 2.5% in October.  They fell below 2% and are not far above that level now.  That means new gilts can be issued for cheaper interest cost than had been expected.  The saving may not be huge in the grand scheme of things but it might be enough to do something.  But what should that something be?

In my year ahead piece last month, I wrote about a lesson from Japan.  Japan faced (and faces) a large debt burden.  It tried various measures to stimulate growth but these tended to be of a temporary nature.  My concern was and is that governments, worried about low or no growth, finally succumb to calls for action but not really getting it propose half-hearted measures.  The good thing about the Balls proposals is that they suggest a degree of scale.

My view is that governments in these circumstances have to send a clear message out about investment and growth.  Even a clear commitment to actively promote or lead investment for the next decade, together with a simplified tax system and clear market incentives, and a message that the UK's infrastructure (including IT) will be steadily and continuously upgraded.  That should be combined with a jobs scheme which will guarantee work for all or almost all.  The reason for tackling the problem this way is that the real issue is still one of confidence.  Temporary measures can be second-guessed by people.  They respond in different ways than they do to changes they regard as permanent.  If your boss gives you a one-off bonus, you are less likely to take out a bigger mortgage than if he/she gave you a pay rise.  If businesses (and credit ratings agencies) believe government means business itself about growth, they are more likely to invest themselves.

Stephen Beer, 20/02/2012

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Are shareholders to blame for low investment?

It's ultimately a matter of demand

In his Observer article this week Will Hutton tackles the question of why the business sector is not investing more.  He refers to a report by City investment manager Andrew Smithers entitled UK: Narrower Profit Margins and Weaker Sterling Needed.  Martin Wolf referred to it recently too.  I've not been able to read it but the essential argument appears to be that businesses need to be making lower profits - by spending more on capital expenditure ie investing.  A reason why they may not be doing so could be that executive pay is linked to share price performance.  That leads executives to focus on higher profits, boosting share prices and therefore pay.

There might be something in that.  However it does seem to rely on the assumption that shareholders simply demand higher and higher profits in the short term.  Short termism does exist of course.  But I would contend other forces are at work too.  If a company is profitable but cannot find further areas for profitable investment, shareholders will eventually want that company to stop hoarding and give funds to its owners (ie the shareholders) so they can invest elsewhere.  This, when it works well, is how the stock market channels funds to (hopefully) profitable investments.  If a company decides that in fact it has found a profitable investment opportunity itself (eg a new technology or a new market), shareholders will often or usually back it - if they are convinced.  It is after all their money (even if their wishes are mediated through investment managers).  And most fund managers do not forget times when they have backed company plans that have gone pear-shaped (no investment is without risk).

Large and large/medium sized companies appear to have in general better balance sheets than, say, three years ago (there are always exceptions).  Net borrowing is lower (ie they at least have more cash to offset some borrowing).  Why is this?  One reason is - well look no further than the Eurozone crisis and the injection of €489bn gross into the European banking system.  That was to solve a problem - banks were under strain.  The experience of the post Lehman's crisis has not been forgotten and no finance director wants to be in the position of relying too heavily on banks again.  So better to have a stronger balance sheet.

But another reason investment is not happening (it's not recovered in the UK since the post Lehman's fall, as a % of GDP) could be that confidence in the future is low.  This is what Keynes talked about.  Interest rates can be at extremely low levels but little investment takes place.  At such times, government has to step in.  It has to boost confidence and even fill the gap with its own investment.  Otherwise the risk is economic depression.

Stephen Beer, 19/02/2012

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