Aditya Chakrabortty has written a sharp piece about the “ridiculous” tax and spend debate, kindly linking to this blog. I can never match his polemic:
this is the state of economic debate in Britain in the dying months before a general election: politicians of all stripes lie about the economics they are going to practise; the press ducks out of asking any questions, and the public await the bills and the starving of the public realm.
He flatters me to call me an economist. You’d struggle to find any academic papers to my name, just a few pamphlets, a fruitful time doing about a million regressions on financial markets, and several hundred blog posts.
But you really don’t need to be much of an economist to spot the incredible. Just go to the latest Budget document, see what it predicts for “RDEL” (it’s table D.4 on page 109) for 2018/19. It’s in black and white: £289bn. Now go to the Comprehensive Spending Review carried out in 2013 and see what totals the departments are expected to deal with in a year’s time. The rest of the maths is simple. Anyone knows how to apply three years of inflation. My previous posts have probably been too stingy about what the NHS will then need, given the recent news about its current funding gap (which Rick analyses here).
If you wish to use the Tories’ escape valve here of funding all this impossibility with more welfare cuts, first re-read Aditya, then go to Parliament’s PDF about this. Here is an attractive table:
Sorry it is small. (Gosh, that works on both levels. ) What it looks like is that spending under the Welfare Cap is already pretty tight: falling from 6.2% of GDP in 2015/16 to 5.6% in 2018/19. Look hard at that last column. Tell me where you are going to get £12bn out, so that instead £119bn falls to £107bn. It won’t easily flow out of what Daniel Knowles has called Universal Discredit.
Credibility should have something to do with the word Credo, I believe. If it were so believable, the politicians’ reticence on the details is really puzzling.
Economics shouldn’t be dismissed from this discussion; it is everywhere in the stories told around austerity. Notice how setting out fiscal plans is assumed to be something about setting out the foundations for recovery. The Confidence Fairy never died; it just took up residence in Whitehall. So the economy can’t recover until the Government sets out its plan, apparently. Goodness knows how it coped for decades after the war.
Worse is section B in the latest Budget, setting out horribly simple minded set of justifications for what Aditya rightly calls the “amazing feat” of a budget surplus. In just eight pages, including graphs, an attempt to justify a far tighter fiscal stance than is needed, on the basis of the movement of just one variable: debt/GDP. In HM Treasury, it really is as if Reinhart-Rogoff never was debunked. Apparently, the economy can only be robust if debt/GDP is low. Never mind that the debt is being incurred at extremely low rates, or that the UK had a low D/Y ratio in 2007 while clearly being far from robust, or that Spain and Ireland similarly had low ratios, or that debt sustainability is a calculation needing dozens of variables, not just one (including: the nature of the tax base and economic structure, the maturity of the debt, whether you have your own currency, many more). As Ryan Avent put so well, don’t blame R&R:
To me, the most interesting question is why it is so politically difficult to sustain appropriately accommodative monetary or fiscal policy. The demand for Reinhart-Rogoff results, rather than their supply, is the funny thing. Because it’s that which has the rich world stuck in its current mess, not some overzealous academics.
Politicians limit the parameters of the debate not by the answers they give but the questions they allow to be asked. Aditya asks the right one: how do you do this, and when will you say?