John Hemming's Web Log John's Reference Website
Saturday, January 15, 2011
  Ed Milliband, Lib Dems and Coalition
The real problem with Ed Milliband's approach to Lib Dems is that it ignores those aspects of the coalition policy which are simply a rational approach to reality with him trying to pretend they are ideological.

There is no uncertainty about the underlying need to reduce the size of the structural deficit. This can easily be quantified and we now also have the Office of Budget Responsibility to look at this. We can monitor the interest rates on sovereign debt and it is very clear that the overall financial envelope of government policy is not something where there are real alternative options.

There is, additionally, a more ideological question as to the size of the state. This of often measured in terms of the proportion of the GDP which is spent by the state.

After the cuts the state will still be spending over 40% of GDP. Historically this is higher than the first two Blair governments. Hence ideologically from this aspect the proposal about the same (and possibly a bit more statist) than Blairism.

Hence the Labour position is transparently not based in a proper understanding of reality.

Labour almost bankrupted the country and the worst aspect of this is that they do not recognise that. Hence they cannot be trusted.

In Birmingham we face some real challenges maintaining public services in the context of reducing resources. It is possible, but not by attempting to hold back the tide of changes like King Cnut - a la Labour Party.

Labour wish that things were different. I wish that things were different, but at least I recognise that they are not and we have to get on and deal with the situation.
 
Comments:
Apparently Simon Hughes was at the same gig! I shouldn't be gobsmacked that the BBC didn't report his retort but....!
 
John, Ed Miliband has an egotistical view of the coalition and I think he is way off the mark, so far off the mark he will need a map to find his way back.

Looking at the Oldham East By Election results on Friday it shows that the Lib Dems still have a a larger majority of support and its the conservatives who should be worried, taking into account several factors the Lib Dems gained on Fridays result, notwithstanding a governing party candidate hasn't won a by election since I think was 1982 during the Falklands war, so much should be taken from the results, the media have classed the Lib Dems as a washed up party, well with 11,160 votes this clearly shows its not the case, The calling of the election at this time might not have been the best Idea but with a Turn out of just 48% support for the Lib Dems from the folks in Oldham is clearly still there.

Elwyn and his Team in Oldham worked tremendously hard when faced with all the negativity that surrounds the Lib Dems and also it showed how the Lib Dems fight for fair and honest voting and challenge successfully underhand tactics which is a clear winner in my eyes


2011 By Election Results

Labour: 14,718 (42.1%)
Lib Dems: 11,160 (31.9%)
Conservatives: 4,481 (12.8%)
UKIP: 2,029 (5.8%)
BNP: 1,560 (4.5%)
Green Party: 530 (1.5%)
Monster Raving Loony Party: 145 (0.4%)
English Democrats: 144 (0.4%)
Pirate Party: 96 (0.2%)
Bus Pass Elvis Party: 67 (0.1%)
Share:


2010 Results


Phil Woolas
Labour 14,186 31.9 -10.7
Elwyn Watkins
Liberal Democrat 14,083 31.6 -0.5
Kashif Ali
Conservative 11,773 26.4 +8.7
Alwyn Stott
British National Party 2,546 5.7 +0.6
David Bentley
UK Independence Party 1,720 3.9 +1.8
Gulzar Nazir
Christian Party 212 0.5 +0.5
 
Hi John,

On your original post - there are alternatives - close the tax gap, implement a "robin hood" tax on banking transactions, invest in green industries, scrap trident..
Any Keynesian economist (and you should pay attention to what two nobel prize winners are saying [Stiglitz and Krugmann]) will tell you that at this point in the economic cycle, with slow and importantly jobless recovery from a recession, it is not right to be cutting spending so quickly and savagely.

Yes it is true that public spending as a % of GDP will still be higher than under Blair, but it should be higher at this point in time.

The effect of the cuts will be to move the economy back into recession, as has happened with Ireland. We can see this starting to happen, with forecasts for growth in Q4 2010 being much lower than Q2 or Q3 (figures are released on Tuesday so it'll be interesting to see what happens).
Q4 should be a period of strong growth with Christmas and New Year providing boosts to spending.

You blame Labour for nearly bankrupting the country, but even if we accept that they did nearly bankrupt the country
UK borrowing as a % of GDP has remained under 100% - bear in mind that it was over 300% after WWII, and we created the welfare state and NHS then.. Repayments on borrowings are historically low and the credit rating agencies recognise that the government debt is sustainable (in the short term)

But that is beside the point.. If you are to blame Labour for the increase in public borrowing, then you must explain what you would have done differently following the banking liquidity crisis at the end of 2008.
Both Labour and Conservative parties face some of the blame for that - Conservatives for deregulating the banks in the first place and Labour for failing to re-regulate them.
But this is all part and parcel of a monetarist/neo-liberal paradigm that both parties adopt in relation to economics.

I do not believe that the Liberal Democrats have a different view on economics, and indeed the economic strategy that the coalition is following supports my belief.
If you are going to blame Labour, tell me what your party would have done differently following the collapse of the banking sector.

It was not Labour that "nearly bankrupted the country", it was the banks' gambling that did it.
(I am not a Labour party member or supporter btw, I think they made huge economic policy mistakes - but in this case I think they reacted to events in roughly the right way)
 
It is accepted by Tony BLair and Lord Turnbull that Labour allowed the structural deficit to baloon from 2005-8. Note that I am quoting the GDP percentage after the cuts in 4 years time. I don't have the figure to hand today, but it is a lot higher.

What people are missing is substantially the government's proposals are neokeynseian.


They only cut the structural deficit and that is done gradually. The speed is dictated by interest rates.

The proposals on tax gap etc are essentially possibilities. We need some certainties whilst working on the tax gap. There already is a robin hood tax on equity transactions. That needs extending internationally.
 
I think it's around 60% at the moment, and was around 40% just before Northern Rock went tits up.

I absolutely agree Labour should have been running a surplus from 2002-2008 instead of borrowing. Basic keynesian economics would tell you that, this is one of the major mistakes I think Labour made.

Ballooning is an emotive word though, it increased from around 30% to a bit under 40% in 6 years.
By comparison, in the 18 months following Northern Rock it went from ~40% to ~60% - that's when the ballooning happened.

I think I may have misunderstood your original post in light of your reply, I thought you were saying that there was no real alternative to cutting spending to reduce the size of the structural deficit.

I disagree about the word "gradually" and surely the speed of the decrease of the structural deficit is affected by many more things than interest rates? The speed at which you cut spending, the effect this has on the economy and especially on the number of claimants on the welfare state for instance all affect the speed of the reduction of the deficit.

Maybe I'm missing your meaning there.

I don't agree that this governments economic policies are essentially neo-keynesian either, to me keynesian and neo-keynesian both require government spending money to employ people in order to stimulate demand, until the private sector is growing employment itself. Keynesian doesn't recognise the value of changing the money supply, which neo-keynsianism does

Monetarism however focuses only on the money supply and interest rates as tools for affecting the economy, and seems to go hand-in-hand with an ideological belief in the free market and a small state providing the best outcomes for people.

This is what I see the current government doing - believing that by reducing spending you create space for the free market and private companies to create wealth.
Personally, I think that Hayek and Friedman are more influential amongst this government than Keynes or Galbraith.

re: the tax gap, what is your opinion on Richard Murphys Tax Justice Manifesto?

http://www.taxresearch.org.uk/Blog/2010/11/15/a-manifesto-for-tax-justice/
 
Interest rates on government debt matter as they demonstrate the extent to which the government has fiscal credibility. Labour's strategy has the problem of a complete loss of fiscal credibility which leads to a sovereigh debt crisis. That results in greater cuts.

The tax justice manifesto is like many of such proposals and ignores the realities looking for simple solutions.

One area that I agree with, however, is the need to deal with tax havens.
 
I wasn't saying that interest rates don't matter - they are obviously important - I was just disputing your claim that the speed of the reduction of the structural deficit is dictated by interest rates, when in fact there are many other factors that are equally important.

What is your evidence that "Labour's strategy has the problem of a complete loss of fiscal credibility which leads to a sovereigh debt crisis"

Are you talking about what they did before the general election, or what they would do if they were in power now?
If you are talking about before the GE, then please explain because none of the credit rating agencies have reduced Britains credit rating from AAA, nor have we seen a run on the pound on foreign exchange markets, indeed I don't think the pound has even weakened against the Euro or Dollar in any significant manner.

As I said, interest payments as a % of GDP are historically low at the moment, the deficit the government has is large but not excessive in a way that would produce doubt at our ability to repay it - as demonstrated by the fact that we have maintained our AAA credit rating.
Always bear in mind that after WWII when government debt was around 300% of GDP we created the welfare state and NHS, so with a far, far smaller debt we should not have to cut spending..

And the figures for GDP came out today - a drop of 0.5% as I'm sure you are aware.
This is the effect of austerity measures - a shrinking economy, which will in turn lead to lower tax receipts and higher benefit payments, and that in turn will lead to an increase in debt.

And we haven't even seen the effect of VAT rise or many of the biggest cuts come in yet - this is about confidence in the economy and peoples personal circumstances, and about the end of the effect of monetarist stimulus provided by the quantitative easing.

Again, if you are to blame Labour for the problem of the deficit, you have to explain what you would have done differently.
Would you have let the banking system collapse to avoid ramping up government debt?
 
The debt is not as important as the deficit. The interest rates are also the key driver in this as you can see from the problems in Ireland and Greece.

The reduction in GDP was mainly caused by the weather. The government cuts did not have an effect in December.
 
Greece was (and is) in a far worse situation than the UK with debt at well over 100% of GDP following the banking crisis, and not far off 100% gdp before iirc. It's not very comparable with the UK, but cutting spending there hasn't helped.

Ireland was doing ok before the bank crisis but afterwards collapsed, and then introduced austerity measures, which hasn't helped at all. They've dropped 5 or more ratings in the last 6 months. Austerity measures hasn't helped there, I think their total debt will be higher once they've borrowed that €100Bn than it was when they introduced austerity measures in 2008.

The general state of the economy is the key driver of a deficit, not interest rates - though interest rates are part of the equation obviously in terms of how much the government pays back in interest on it's debts.

In terms of BoE set interest rates there's nowhere to go now to stimulate the economy and with rising inflation there's likely to be a rise in interest rates soon, which will do nothing to help the economy. This will certainly act to increase the deficit, so in that way yes interest rates are a big driver of the deficit - but in making them the prime factor you reveal yourself as a monetarist, not neo-keynesian.


The proof of the weather theory will come with reports from other European countries of their Q4 GDP, and in 3 months time what happens in the UK in Q1 2011.

Cuts haven't really started happening yet so I agree this isn't about the cuts directly, but it is in part about peoples perception of the future and they are worried about what the cuts will do next year, whether they will be losing their jobs or services etc..
Plus if it isn't about the cuts at all, then that doesn't bode well for the next year as the cuts actually start to come in.

It could also be about the end of the stimulus effect produced by quantitative easing, though that is much harder to measure, and I'll leave that analysis up to the professional economists who have the time to do it.

I'm not saying the weather had no effect, but I don't think it is the only factor, or the prime one.
 
Monetarism is about the money supply not deficits.

What you ignore is that the causal factors for the fiscal problems operate over a number of years. For example Ireland had a big problem in relying on a large stamp duty on property transations.

That dropped massively with the property crash.
 
Monetarism is about controlling/affecting the economy using the money supply and interest rates, rather than taxation and spending rates (primarily in both cases - Keynes advocated using the money supply and interest rates alongside tax/spend changes depending on the particular situation).

It is about supply-side economics rather than Demand-side economics.
The primary aim of a monetarist in a recession is to stimulate the supply side of an economy, primarily through lowering interest rates and easing the money supply, but also in practice by lowering taxes.

Yes Ireland has/had problems specific to Ireland, and of course no country can be translated directly to another country, but the question has to be asked, what has the effect of Austerity measures been on the Irish economy? Have they helped?

What has the effect been of Austerity measures on other economies?

Can we find an economy in the last say 20 or 30 years which has been in trouble, introduced austerity measures and these have got them out of trouble?
 
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