The Longest Day.

Elections have consequences. Today we see an awful lot of briefing on the Budget, the most interesting of which is “Treasury insiders” briefing that their own budget will result in higher unemployment and lower growth.

“Treasury ministers accept that the new and independent Office for Budget Responsibility will mark down the growth and jobs forecasts as government spending falls and taxes rise.

But insiders who have seen the forecasts said that because the OBR will assume this is just a temporary shortfall of growth, the effect will be to increase spare capacity in the economy (!!!!!!! – HS), creating room for a faster growth forecast just before the next election.

Conservative aides expect that the OBR’s assumption that deficit reduction has only a temporary effect on the economy will take the edge off Labour attacks that rapid deficit reduction will undermine the recovery.

Treasury insiders also pointed out on Sunday that a simple Budget day comparison of the forecasts before and after the spending cuts would not be fair because the OBR’s pre-Budget forecast last week was artificially too high.

The FT misses a story on that last line, not least because it establishes a new world record time for briefing against an independent body you created. The “artificially too high” line is just left hanging there. Does Osborne really believe that the OBR projected growth rates are too high? If so, does that suggest to many people that a good strategy is to deliberately reduce them further?

So what should Labour do in response?

1. There is an alternative The Conservatives and Cleggite Lib Dems will be desperate to estabish that this is unavoidable, harsh medicine.

To rebut that attack we have to suggest the outlines of an alternative. That choice needs to be built on creating growth, so we therefore need to be talking about measures to support private sector job creation and these can’t be simply extensions of State Aid. I’d be looking at capital and R&D tax allowances, the creation of special enterprise zones in high unemployment areas, increased support for high skill employers for training, and infrastructure investment in transport, research and housing provision.

4. We need to get to Jobs, Jobs, Jobs. Here’s the big political divide for the next year: We need to create jobs to grow vs. We need to slash spending to grow.

But we only get to that argument if we can show that fiscal plans are sustainable. The OBR gave us a huge hand with that, with its projections for future interest rates, debt spending and employment. We should sieze on that opportunity to produce alternative economic models that show lower unemployment and higher growth within a sustainable fiscal framework.

That means we have to be responsible on spending commitments in the public sector, which leads me to suggest

3. Hold fire on Pensions and Pay – The right question for Labour isn’t whether public sector pensions and pay should be restrained, it’s whose public sector pensions and pay should be cut.

There is a huge difference between protecting the interests of part time care workers and junior police officers and that of senior management. In my limited experience, there is very little gold plating of pensions at the lower end of public sector employment.

4. Doing Welfare reform right costs We should also be strongly in favour of Welfare reform to reduce long run costs, while opposing blind short term cost savings. The Treasury is already eyeing Transfer payments as a way to reduce expenditure fast. After all, if you’re going to create an extra couple of hundred thousand unemployed, DWP budgets will rocket.

At the same time, all IDS’s work at the centre for Social Justice involves an implicit recognition that short term higher costs for familiy and social intervention pays off in the long run in lower costs. There will be a huge battle to come between DWP and the Treasury here. We should be on the side of the DWP. There is no point in artificially embracing short term pain, when the correct way to reduce long term costs is to support families in the short term.

If I were to advise a medium term Labour strategy it would be along the lines of – We can’t take growth for granted, so we need jobs, jobs, jobs, so boost the private sector (especially outside London) to create them, to pay for which requires public sector restraint, but focus should be on reducing long term costs, not cutting to get an accounting saving, which causes real pain without saving real money.

Ironically, the OBR could provide the right hook to implement this strategy while showing fiscal responsibility. We should consider demanding that the OBR be moved to the Commons with a broader remit, so that political parties can develop costed spending plans while seeing their impact on unemployment, costs and growth against the central projection. Indeed, we should argue that MPs should be allowed a chance to road test confidential fiscal projections on various scenarios.

I’m sure various Lib Dem MPs would welcome this opportunity to develop their understanding of the economic consequences of short term cuts.

18 Responses to “The Longest Day.”

  1. donpaskini

    “We should also be strongly in favour of Welfare reform to reduce long run costs, while opposing blind short term cost savings.”

    IDS isn’t proposing policies which will reduce long run costs of welfare, though. His big idea is to pay billions of pounds more in benefits to people in low paid work + billions more to private contractors to get people who are suffering from everything from cancer to depression to apply for jobs which they won’t get.

    There is no way in a million years that this will cut the costs of welfare in either the short or long term.

    The CSJ Dynamic Benefits report had a lot of handwaving about how if you spend £3bn more on benefits, you will immediately save about £1bn on lower health and crime costs because of cough, cough, mumble, mumble. I don’t think the Treasury will be persuaded by this approach.

    If you want to reduce the costs of welfare without massively increasing poverty, you need more jobs which pay enough for people to live on without their income being topped up by the state and which people can do without making themselves ill.

    That actually fits nicely with your jobs, jobs, jobs message.

    Reply
    • hopisen

      You’re right to point out that without high Job creation rates, welfare reform tends just to add to the pool of people looking for work. Compare and contrast Clinton and Bush II Welfare reforms results on poverty- look at the second graph here:

      http://delong.typepad.com/sdj/2008/08/income-and-pove.html

      (this is partly why I had trouble ordering my points!)

      However, I’m trying to combine a political with an economic analysis. Politically, what I find interesting is that

      a) IDS has massively promised on poverty
      b) His proposals would reduce poverty short term by spending more – with justification of lower spend later
      c) Treasury is, as you say, nowhere near this position & wants to reduce costs now.
      d) IDS has no need to suck up to Cameron or Osborne, and indeed might actually benefit from being a putative Tory refusenik.
      e) I see trouble ahead….

      In other words, I think job creation is required to make welfare reform work, but if we’re not getting job creation due to macro policies, then I’d rather be on the IDS side of spending more on those out of work in “positive help” than the Osborne side of squishing the pipsqueaks.

      I’m also never too averse to lighting the blue touchapaper and standing well back.

      Reply
  2. Matt

    Good post. I’m sure having point 4 on your list twice was a subtle dig at Osborne’s numbers not adding up in the Budget…or something ;)

    Reply
    • hopisen

      I re-ordered the points as I wrote, then forgetting to re-order all the numbers…

      It’s harder than it looks, this blogging malarky. I had to throw away a whole post on friday because it turned out not to be very interesting…

      Reply
  3. Newmania

    Dear Hopi ,
    Creating Jobs by borrowing , using monopoly money to inflate demand, and feather bedding public Sector is what you did already already already …already
    You accept that this was misguided but given that you are advocating a high(er?) risk strategy known doesn’t the claim to possess competence look a bit more 1970s than 1930s . Sounds awfully familiar to me . Like Footy saying “Like any Company we will have to borrow to expand “… Tony Benn ( who dandled Millband s upon his knee) and his ‘white heat of technology’.
    Still any help is worthwhile so me and the guys were wondering how you were going to help us create jobs in this Company?

    Pop it in the suggestion box sweety

    Yours
    (in a spirit of compromise and inclusion )

    Newmania

    Reply
  4. tory boys never grow up

    Oh dear – it’s beginning to look as though it’s Groundhog Day 1979. How long before we hear if it isn’t hurting it isn’t working, real jobs and similar garbage all over again.

    And where have all the Keynesians who used to belong to the LibDems disappeared. I’m sure I heard some of them in May talking about not cutting now so as to avoid a double dip recession? Can I presume that being men of honour they will resign if the double dip happens. In the meantime perhaps they can explain how a rise in VAT ties in with their concept of fair taxation. Of course if you subscribe to the Manchester School of Liberalism (a bit like Manchester United i.e not supported by anyone who lives there) then you will have no such problems.

    Reply
  5. tory boys never grow up

    @Newmania

    Creating Jobs by borrowing , ……..blah blah etc…

    Perhaps Newmania could enlighten us as to which major corporates do not borrow in order to finance their activities and create jobs??? Yes you can overleverage – but I don’t think you will find many business experts who argue for no leverage whatsoever.

    Reply
  6. Edward Carlsson Browne

    All well and good, but let’s not get too carried away. You’re developing a complex and nuanced message, but for opposition at this stage we may need much more simple framing.

    As far as the alternatives go, by all means talk about capital and R&D allowances and stress private sector job creation so that we’re able to make the necessary cuts at the appropriate time, but don’t shy away from the notion of state aid.

    Sure, we’re going to get attacked for overspending, but that’ll happen anyway. We shouldn’t cringe, because that validates the attack. We have to attack right back and ask exactly what sort of cretin cuts the Future Jobs Fund when youth unemployment is nudging 20%. We have to not just point out that we aren’t going to be Greece, but also point out that the real threats are Ireland (ideological cutting making the deficit worse by shrinking the economy) and Spain (mass unemployment.)

    In the run-up to the election we cannot be promising to magic new jobs out of thin air and we need to be ready to transition more into talking about private sector job creation (including creating more opportunities for small businesses to be created, incidentally, which is something that ought to play well with aspirational voters we’ve lost) but for now we have to talk about state aid to at least some extent.

    As far as pensions go, holding fire would most likely have been the best idea. But unless somebody has some photos of John Hutton in a compromising position and is up for a little blackmail, that’s no longer possible. With him providing bipartisan cover, the inevitable badly-costed mess that the report turns up will be hard to refute – we’ll look like cheap political hacks for doing so.

    At the same time, we’ll need to oppose it, as it’ll likely end up ripping off those who put a lot into their pensions and leaving them worse off than if they’d just spent profligately throughout their working lives. But if that looks like political gamesmanship, we’ll get no credit for doing the right thing.

    So whilst it shouldn’t be the centrepiece of our argument, we do need to keep up a constant artillery barrage here, suggesting that people paid in on the promise of specific rewards, and it’s wrong for the government to break those promises and decimate their pensions. A theme of responsibility cutting both ways and needing to pay debts owing could be worth pursuing here.

    As for welfare reform, we need to try to put a human face on it. Thankfully Purnell isn’t an MP and Field has essentially swapped sides, so we won’t have to negotiate around the barely disguised contempt those two tended to project. But we need to frame welfare reform as an economic project to lower government bills and improve the lives of those on welfare, not as compulsory flogging for the undeserving poor.

    That means that we need to combine shrinking the incapacity benefit rolls with an emphasis on making work pay and on rewarding the hard-working. More carrot, less stick. Themes worth exploring here include lessening the rate of benefit removal (and we should back IDS here), the living wage (to save us money on income support and the like), promoting union membership (because it’s a good Labour policy, because picking fights with them constantly isn’t grown-up and because they tend to raise wages for their members) and the idea of dignity in work (if Ed Miliband bothers to spell out what he means by this, rather than using it as a fairly meaningless shorthand).

    But in general, we need to punch back against their policies first. It’s only when they sarcastically ask what we’d do instead that we should be pulling out the 15 page briefing documents…

    Reply
  7. Newmania

    Not sure any major corporations ( who form a relatively small part of the economy) would be advocating that we waste money T-Boy. There is cross Party recognition , ,even by a dog-on-string palaeozoic marxist street warrior like chairman Sen that the pubic sector is bloated inefficient and in dire need of reform . Care to taste a little humble pie ? Its awfully good …
    On fair taxation the second it became a real issue New Labour admitted that for big money you need big numbers , and income tax was done to death. That was also the conclusion of the IFS so the poor will inevitably suffer .
    That is the fact jack. It would be sweetly endearing of you to admit that you , yes you T- Boy , Hopi and the other auto erotically addicted spenders have lead the poor and weak over the debt cliff . Good job guys ,really good job
    Yes , brother Tea Boy , there will be suffering, yes homes will be lost, lives blighted whole communities destroyed , cat and dogs living together , locusts , boils and Flares back in fashion .
    Its going to be bad , and its all your fault ( and Hopi`s ) and why ? You failed to heed the Economic advice of the Black Eyed Peas .
    It goes BOOM BOOM POW….not boom boom boom boom boom boom boom boom …..

    Everyone else knew

    Reply
  8. tory boys never grow up

    Newmania

    I’ve never advocated wasting public or anyone else’s money for that matter, and I never argued that the deficit doesn’t need to be reduced eventually. But perhaps you might wish to compare what happened in Japan where they tried to cut public spending against a background of low/negative growth and Sweden/Canada where the cuts were made when those economies were growing. As Mrs Thatcher also demonstrated in the UK cuts against the background of a shrinking economy only lead to a bigger public debt. Just go and look at the facts.

    And if you think that it was over involvement of the statement in financial markets, rather than a failure to regulate properly and sufficiently, that actually caused much of the problems in the first place, then you really need to go and think about it a little more deeply.

    Yes, there are valid criticisms as to whether State expenditure was used to best effect and regarding the best means for regulation of financial markets – but I’m afraid they don’t justify a reversion to the old failed Thatcherite economics. Tory boys who never grow up fail to appreciate that they have to learn from their past mistakes and need to move on in their economic thinking. In the meantime those of a social democratic bent will hopefully try and learn a few lessons.

    Come on Newmania where is your analysis of where Thatcherism got it wrong? I promise to produce my analysis of where New Labour went wrong at least 20 years quicker?

    Reply
  9. Newmania

    Cutter … shmutter spending increased 55% in adjusted terms before the bust over ten years so we go back to about 1997 its not 1397 and I mostly got wasted anyway .No problem for those of us working that extra nine years with no pension and having no nanny to cry to

    Japan Shmapan ( its stretch) its an exotic no-one knows what it means.

    Thatch got it all right , the standard complaint was that she was nasty to the Northerners but the Unions had to be beaten by unemployment if necessary .All this violent disruption was in any caused by the failure of Callaghan et al to tackle underlying supply side problems ..( familiar ?) …… care to defend Callaghan , Foot Benn ….?
    Nowt changes does it ? Who owns the Labour Party now , the Public Sector Unions and Hopi’s merely a bit of posh they hire to do the talking …like a sort of escort .

    Anyway I am part of the Lib Con , moderate majority its you out on the extremist far left cold with your nose pressed up against the window ..Get away Dickensian urchin , shoo shoo , no scraps for you today !!

    Reply
    • Edward Carlsson Browne

      To paraphrase the above: I have no coherent arguments, I will therefore repeat my previous arguments ad nauseam and ignore the rebuttals. Why won’t you all acknowledge how wonderful I am?

      Reply
  10. Charles Barry

    If that report is true, in that the new government line is that the OBR forecast last week was “artificially high”, I think I might just lock myself in a padded cell.

    To the economist, the term “artificially high” is totally meaningless.

    If prices or growth are/is high, that is because there are economic forces at work – be it gvt policy or new fads etc. There is nothing artificial about them – they are the causes.

    If an economist says something is “artificially high”, what he actually means is something is “unsustainably high” – eg the price of oil is high, due to ‘yadda yadda yadda’, but these causes will burn themselves out, meaning the price of oil will come down shortly. But there is nothing “artificial” about whatever ‘yadda yadda yadda’ is.

    When a politician says something is “artificially high”, he is either tacitly conceding that he doesn’t like the cause behind it (normally ideological), or he is just being thick.

    If George Osbourne says growth is “artificially high”, either he has an ideological opposition to the causes of growth – I’m guessing consumer spending, exports or (shock!) government expenditure, or he is just being thick.

    Reply
  11. AB

    Hopi, here’s me with my stuck record again. There remains a really simple question that neither you nor any of the Labour leadership candidates has answered. You accept that spending has to be cut/taxes raised in the medium term to achieve deficit reduction, *even when the economy has recovered*, but three out of your four suggestions go in the other direction, involving spending more money or cutting taxes. And the one about public sector pensions and pay, if I understand you, appears to be suggesting no change for the moment.

    So, looking ahead to the medium term when the economy is recovering towards full capacity but we still have a huge underlying deficit, what do you want the state to be doing less of?

    George Osborne’s policies, at least the orientation of fiscal policy, are wrong for the short term but in the right direction for the medium term. Yours are vice versa. Unless there is a such a bad recession that the short term endures until the next election, if you see what I mean – not impossible, but not the most likely scenario – your strategy is going to look irrelevant and outdated by then.

    All this wildly ambitious welfare stuff that suggests we can spend more in the short term and get more b

    Reply
  12. AB

    …ack in the medium term is vulnerable to the simple attack: if this was such a great idea, why didn’t you do it over the past 13 years?

    Reply
  13. Steve R

    “We should consider demanding that the OBR be moved to the Commons with a broader remit, so that political parties can develop costed spending plans while eeing their impact on unemployment, costs and growth against the central projection. Indeed, we should argue that MPs should be allowed a chance to road test confidential fiscal projections on various scenarios.”

    Not a bad idea, but it’d need to be handled very carefully. In the long term, I’m not sure we want to end up in a position where policy-making is primarily assessed on the basis of the output of the OBR model. Once steady economic growth has been established, it would be hard to push a policy initiative that would incur any sort of economic/ fiscal cost if we have spent the previous x years suggesting we form policy on the basis of the differential on the OBR readout. We could end up stuck with a rather technocratic view of government that would limit the capacity to sell much beyond a straightforward pro-business agenda, whereas there are real, values-based choices to be made by government. In other words, it could play into the Tories’ hands in the long-term if handled poorly: would it have been so easy to sell the minimum wage if we were committed to a model suggesting it would cut economic growth, even by a fraction of a percent?

    Reply

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