The Politics of Economics

Yesterday’s Comprehensive Spending Review will have been well analysed by all the papers and commentators with lots of questions about whether the cuts are “fair” or not and if they are necessary at all.

What was more interesting to me (or dismaying) as an economist (but very much lapsed one) was the extent the political aspects decided the economic decisions. This is never unusual but given the unique financial situation interesting.

2010 Comprehensive Spending Review being delivered

I won’t touch on if the cuts are necessary or not except to say that as Labour were overspending when the economy was in a boom, therefore not saving for a rainy day, when the recession struck our borrowing rocketed and we ended up with the worst structural deficit of the G20, and gave us less room to carry out some of the fiscal expansionary policies of other countries such as Germany and France.

So on the political aspect, the key was the Prime Minister was determined to stick to as much of his electoral promise as possible, this makes sense politically to ensure manifesto promises were being kept. However, this causes a few economic problems:

  • NHS, one of the largest government spenders, was ringfenced
    • This meant other departments cuts had to be increased
  • Universal benefits were not looked at
    • I really felt, as Vince Cable said, that everything must be reviewed (this was in relation to tuition fees) then the idea of the well off receiving Winter Fuel Allowance, free TV licences, free bus passes and even a state pension to be absurd. However, the grey vote are more likely to vote and have strong lobbying powers so this was always a dangerous territory
  • Income tax would not increase, under any party
    • One way to fill to ensure spending could be protected, but seen as deeply unpopular, even though it could pay for Higher Education and protect some of the social housing
  • Due to the above welfare was targeted, which although needs to be reviewed, was taken further than expected
  • The child benefit political hit was in exchange for the Liberal Democrats hit on tuition fees, even though tuition fees was much more symbolic to the Liberal Democrats than child benefit to the Conservatives

So what did I make of it?

Well I really felt the Conservative need to protect the NHS and universal benefits restricted the options available. I would have:

  • Ringfenced no department except International Development (peanuts in the grand scheme of things)
  • Scrapped universal benefits for well off pensioners
  • Put a little bit more money into capital investment projects
  • Ensured a coherent plan on housing, both private and social, as the new proposals are clever in encouraging more housing associations to build property at commercially viable rates, there is no proposal to ensure enough housing does get built. One of the key problems of the past 30 years.
  • Probably would not have brought forward the rise in pension age for everyone to 2020, fundamentally wrong for women in their 50s.

I was a little surprised that more was not made of the fact:

  • Total government expenditure is still rising to 2014/5
  • The rate of growth is declining
  • Total public sector expenditure as a % of GDP will be at the same level as 2006/7.

The problem with all the above points is the NHS is growing in real terms so everyone else gets less of the pie. What I can’t work out now is how we’ll get enough money to increase the income tax threshold again, although it is in the coalition agreement so should happen.

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A Budget Bore for All

Yesterday’s Budget from Labour was another non-event, it offered a little bit for businesses and first time buyers but was effectively an hour long political speech

What is lacking from both the Labour and Conservative Party is how the huge deficit would be cut. Lots of rhetoric and wait until after the election, but it’s not being very straight with the electorate who are expecting some kind of action.

The Liberal Democrats have identified £15bn of cuts already, which doesn’t go all the way, but shows we at least have a plan and we’re telling the electorate up front. This will come from ending government contributions to Child Trust Funds to removing the top 20% of claimants from the tax credit system, cancelling the ID card programme, no like for like Trident replacement and abolishing the Government Offices for the Regions.

The other notable absence in the Budget was any plans to deal with the banks, which are fundamentally still operating in the same environment as pre-credit crunch. The Liberal Democrats would split every day retail banking from casino investment banking and protect the voters savings and investments. Yes retail banking will be very boring, low margins and pretty risk averse, but it’s important that people can trust where they put their hard earned money.

In an IPSOS MORI poll Vince Cable was seen as the most capable Chancellor of the Exchequer, followed a long way back by Alastair Darling and George Osborne bringing up the rear. You can decide for yourself if you watch Channel 4s “Ask the Chancellors” Monday 29 March 8pm

A long term perspective is important for economic issues such as the strength of sterling

As I was travelling up from London tonight I read a great article by Anthony Hilton, the Evening Standard’s City commentator, regarding sterling’s decline, but how it wasn’t a cause for concern. In fact he rather celebrates it. He identified 3 reasons why there is such noise and media coverage for the short term decline in sterling: financial, political and emotional.

“Financial first. For months, hedge funds have been placing their bets against sterling, for the simple reason that it is overvalued in trading terms…

…And having bought their fire insurance, hedge funds start fires. The past few days have seen them queuing up to make inflammatory statements about the disaster about to overtake sterling in the hope that they can profitably bring about its collapse. In an earlier age they would have been dismissed as simply talking their book. These days, the 24-hour media circus is often naively complicit in helping them spread panic.”

“The second reason is political. Most people have no idea what a run on sterling means nor what causes it but it is easy to present it as a loss of confidence in this country by overseas investors which, in turn, can be laid at the Government’s door. One must expect the Tory party and its supporters to do all they can through their rhetoric to make sterling’s slide appear more serious than it is because, if nothing else, it further undermines the reputation of the Government they hope soon to defeat.”

“That brings us to emotion. People like to see their currency as some sort of virility symbol. They want it to be Clint Eastwood not Donald Pleasance. So when the currency weakens people take it far too personally as if it is a national disgrace — a confirmation of national decline. Well over time it can be; in the long run competitive nations get strong currencies and flimsy nations get weak currencies. But eight hours of trading on Monday is hardly long term. It is just noise.”

He then finishes with a comment on the trust in the same ratings companies which backed the banks right up to the credit crunch and praise for Vince Cable.

Full article here

“It’s the economy, stupid”

In continued recognition of Liberal Democrat’s economic competence, The Financial Times and Economist in the last few days has criticised both Conservative and Labour’s honesty and openness on the necessary actions to control the budget deficit whilst commending our plans and approach.

George Osborne get’s a particularly strong attack from the Economist

“One explicit difference between Mr Brown’s plans and Mr Cameron’s is that the latter wants to start cutting this year, despite the risk of stalling the crawl out of recession. In that, he is probably mistaken, just as he was wrong to oppose Mr Brown’s fiscal stimulus. In both cases, the Tories may have subordinated sensible economic thinking to political positioning.”

The Liberal Democrats have been explicit in some of the actions necessary to cut the deficit identifying areas like Trident, ID cards, scrapping child trust funds and a 10% tax on banks profits. However, unlike the Conservatives, the cuts will be made at the right time when the recovery is clearly happening, rather than straight away and derail the recovery.

As I’ve said in the first Focus of 2010, do we want Vince Cable, with experience in industry and a PhD in Economics to run the economy or George Osborne with his lack of expertise and experience and would be learning his trade at the country’s expense…

Chance of a hung parliament is exactly the time to vote for the Liberal Democrats

The long pre-election campaign has began, with both the Conservatives and Labour wooing Lib Dem voters as neither side can win outright based on current polls. The Conservatives are peddling the line that a hung parliament means a weak government and so people (especially Lib Dems)should vote for them to prevent this and get rid of Labour

In fact a hung parliament is exactly when people should vote Lib Dem. The (lazy) argument for not voting Lib Dem amongst those sympathetic to us is “it’s a wasted vote” or “…never get into power, so doesn’t matter about their policies”. Well in a hung parliament we could be involved in a coalition government, so our policies are more likely to be adopted.

If you believe in fairer and greener taxes, want to scrap tuition fees, letting teachers teach, smaller primary school classes, more local powers to your council, want electoral reform and Vince Cable to guide the UK economy then vote Lib Dem to achieve this!

Choice and representation

On a separate note the Conservatives believe in giving people choice in terms of service provisions such as involving private health and parents running schools. Interesting that for provision of government they are clinging to first past the post even though it clearly reduces choice and is hugely unrepresentative of what people want… Virtually all modern democracies in the world have proportional representative voting system, but not in one of the oldest Democracies in the world, the UK.