Have just been told that my post on the Left Foot Forward on Ed Balls’s speech crashed the site “under weight of people wanting to read it”…so here it is for those of you that may have missed it….
David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit – and was promptly trapped.
That framing goes as follows. We (the government) have spent beyond our means. And the way to pay for it, is by cutting (public sector) jobs, and raising taxation – like VAT.
Ed Balls’s speech concedes (as Labour has done since Alastair Darling’s time at the Treasury) the deficit-reduction-emphasis agenda set by his opponents. And by so doing – implicitly concedes the need to cut public sector jobs.
But I am being unfair. Balls began his speech by mentioning Labour’s “emphasis on jobs and growth” But the speech immediately morphed into Labour’s concession to the Coalition: that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.
But the highlight of the speech – the sound-byte that his spin doctors no doubt intended the media to emphasize- is a call for a cut in VAT “to boost consumer confidence and jump-start the economy.”
Cameron flashed back his retort: “slashing taxes” he argued, would only make the UK’s fiscal deficit worse.
And so Balls is trapped.
The debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand. ‘Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’ – we have to raise taxes, like VAT. “Slashing” VAT – when it’s higher VAT returns that are paying down the deficit – is unacceptable to the Coalition, to the Treasury, to orthodox economists and to the bulk of the British public.
But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’ – i.e. higher taxes – to pay down the ‘credit card’.
But the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.
The only surefire way of paying down the deficit is not by government cutting the deficit – which I and others have argued it cannot do – but by employment.
Put 2.43 million people back to work, and hey presto! the deficit will vanish.
Get 2.43 million people – including thousands of skilled and unskilled workers, clever and talented student graduates – to address Britain’s very real insecurities in energy, food and health – and hey presto, the deficit will be financed.
How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.
However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month).
And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.
Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment.
The only thing that will restore confidence will be: employment. And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security, rising fuel and food prices.
So Ed Balls’ speech should have gone like this.
Jobs will cut the deficit.
Look after unemployment – and the budget will take care of itself.
And if the private sector can only create 88,000 jobs in 3 months – while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits – and causing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.
Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs.
That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.
Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment. Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is REALLY IMPORTANT. For the Coalition it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.
So let’s go on emphasizing the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising!
10 thoughts on “How Ed Balls was trapped…..”
Bravo Ann..clear as always…thank you once again.
Oh also low wages dampens consumption and reduces taxing ability..another chesnut of the Right demolsished.
Whaat did JPMorgan say? no CEO should be paid more than 20 times the lowest paid of his workers?
The list goes on “Capitalism is still off it’s leash”
Could not agree more. We still need the full Green New Deal, not just the ‘Green Deal’.
It’s like you’ve got a mortgage you can’t afford, so you decide to pay half of it off over the next 4 years. Govt policy is like putting out a fire with a flamethrower. Doh
Ms Pettifor, That’s a politically savvy post above. But you’ve missed the distinction between the structural deficit and the part of the deficit (and debt) that derives from stimulus.
I fully agree that stimulus should not be withdrawn. However, the structural deficit is not, and is not supposed to have any sort of stimulatory or reflationary effect. Thus reversing it, or cutting it would not have the opposite effect, i.e. a demand reducing or “anti-stimulatory” effect.
I’ve set out some seminal (?) thoughts on this point here:
Being a simple businessman I am intrigued by your maths. How does public sector job creation reduce debt? If you pay someone £20k and get back £5k in taxes you have still spent £15k plus the admin on taxes. A million times this adds £15 billion a year to debt plus interest on that extra £15 billion.
In the following ways government debt is just like a credit card.
1. The better your credit rating the lower your interest payments. E.g. Germany bond rate vs Greece
2. If you do not pay your debt can get out of hand and builds.
3. If you default on your payments no one will lend you money anymore e.g. Argentina a few years ago
Paul, Thank you for your comment. If a person is unemployed, they do not have the balance of £15k to spend into the economy – on food, fuel, housing etc. As they spend into the economy so revenues to government (from e.g. food, fuel, housing suppliers) multiply. It’s called the multiplier effect. that’s why the government gets more than £5k. Of course if our £20k earner spends the balance of their income on Chinese goods…then most of the ‘multiplier’ goes to the Chinese…but then that is how we have rigged our economy. We Green New Dealers argue for a more localised economy – more self-sufficient in terms of goods and services – because that creates employment, and generates income for the Treasury.
Your second point (on govt debt/vs credit card): 1. Governments only need good ratings if they are borrowing from foreign financial institutions. The Greeks foolishly borrowed from German/French/British banks, in a currency they have no control over. Hence their need to satisfy foreign creditors, and deliver good ratings. Most of British government debt is financed by a) domestic lenders/savers/institutions – in our own currency, sterling; and b) by the Bank of England, which can conjure up something called ‘quantitative easing’ to provide funding, indirectly to government, to pay for the deficit. And because the government, through the BoE can effectively summon up the money it needs to finance its activites….creditors are confident. That’s why the US Treasury is able to borrow from its citizens, and maintain confidence in US Treasury bills (confidence which has been growing, as it is in UK debt since the crisis worsened!).
2. You are right, debt can get out of hand. But the only way for an individual to deal with debt is a) to cut spending, tighten belts and b) increase income. If government cuts spending (on e.g. public works that employ people) it DECREASES its income, and increases its costs (unemployment benefits) – especially in a debt-deflationary recession as we are now in – when individuals/corporates/banks are paying down their debts, and are reluctant to spend…businesses going bust, etc…For an individual to pay down their debt – they need to increase their income. Its the very best way.
3. Not true. In 1998, Russia defaulted on her FOREIGN debts. Simply refused to pay. Wrote them off. Almost the day after (6 months actually) creditors were piling in again – because now Russia (and also Argentina) was once more ‘creditworthy’…and governments, as we all know, cannot go bankrupt (not even Zimbabwe.)
Hope that answers your questions….
In the following ways government debt is not like a credit card:
1. It is issued in bonds, which means it is owed to millions of individuals and firms rather than one – 70% of these are British.
2. None of it is due to be paid at this point in time – the UK bonds have an avg. maturity of 13.5 years.
3. It is valuable to investors as a safe, liquid asset. Without it, the money either stays as cash (otherwise known as a recession) or goes into the far more jittery private sector, causing crises. The elimination of the U.S. national debt in 1871 was a large reason for the Long Depression.
4. Governments can issue their own currency to pay it back if worse comes to worst.
5. Govt. debt is measured as a percentage of GDP, which means if GDP increases faster than it, the interest payments do not spiral.
Bear in mind that the rating agencies are basically a part of the banking cartel (http://michael-hudson.com/audio/Hudson_RatingJunkEconomics.mp3), so what they say is largely worthless. The markets rarely pay attention – downgrades usually follow interest increases, not the other way around.
Also bear in mind that Argentina had a phoenix like recovery after it defaulted. And that the UK will not default because of short term deficits, although it might do in the event of another financial crisis.
As for public sector workers, well, yes, but you are forgetting that government investment can ‘crowd in’ private sector work when we are not at full employment.
That date is completely wrong. 1837.
I think Paul is right to be concerned about debt build up. It is true, as Ann says that recessions can be ameliorated or cured by having government borrow and spend. And the multiplier is part of that process. But the multiplier stops when the borrow and spend process stops. The recession MAY have been cured by that time or it may not, which leaves the problem of debt build up.
My answer to that problem is that it makes no sense for government to borrow something (i.e. money) and pay interest for the privilege when it owns a printing press. That is, why pay for something you can produce yourself for free?
Keynes himself said that deficits can be funded EITHER by borrowed money OR printed money. See 2nd half of 5th para here:
Of course the knee jerk reaction to the idea that we get the printing press rolling is “inflation”. And the answer to that is that additions to the money supply will not be inflationary until they are spent, and spent at a sufficient rate (as David Hume pointed out 250 years ago). In other words print and spend the right amount of money and we get the requisite rise in demand without excessive inflation.
As to the possibility that the additional stock of money will be inflationary in a few years time, why not put the process into reverse: i.e. rein in money via extra tax and “unprint” or extinguish it?
Of course, given the UK’s current level of inflation, the above money printing form of stimulus might be inadvisable just at the moment, but so too is any other form of stimulus.