Friday, 12 June 2015

Legislation of fiscal surpluses is both unnecessary and unwise.

Our chancellor’s new plan to legislate fiscal surpluses is an attempt to return Britain to Victorian values. He has even revived the Victorian Commissioners for the Reduction of the National Debt (a body that last met in 1860). His justification or rational is that the crisis was due to Labour’s irresponsible borrowing when it was in office. The opposition cannot be trusted unless it admits its guilt and promises to follow Mr Osborne’s guidelines. Social democracy would be neutered, forever. But the fundamental message here that labour has never been able to portray is that Mr Osborne’s accusation is a lie. The reason we have £1.5trillion of debt is not because labour were irresponsible with the nations credit card in order to reduce child poverty, enhance public services, or give young people leaving school with few/no qualifications a better chance in life.

Instead, the vast majority of our national debt, £1.3trillion in fact has come from bailing out the banks, following the 2008 global financial crisis that the banks caused trough their irresponsible lending and activities in the shadow banking market. Worse still, having lumbered the banks debt onto the British taxpayer, the chancellor has failed to impose proper regulations on the banks and allowed them to continue with business as usual. It is because of the banks debts, which they caused, that Osborne introduced the bedroom tax, cuts to welfare benefits, cuts to legal aid, cuts to local authority funding, the freezing of all public sector workers pay, but MP’s are due to receive a £7,000 pay rise despite 88% of respondents to a public consultation carried out by IPSA said no to the pay rise for MP’s. IPSA have said unless they receive compelling evidence against the rise by 30th June, it will go ahead. What more compelling evidence could there be than 88% of respondents in a public consultation saying no? While our MP’s enjoy a 9.2% pay rise, our government are planning a further £30billion in cuts to public sector spending over the next 2 years, including a £12billion cut to the welfare budget. This is not democratic.

The reason our chancellor wants to legislate for all future governments to achieve an overall fiscal surplus, effectively meaning no government can borrow in “normal times” equally applies to the planned law not to raise the main rates of income tax, national insurance and value added tax until 2020. The answer is that these laws are a political ploy. It is political game playing with the labour party. If the government is to achieve an overall fiscal surplus and taxes are not to be raised, then spending must first be cut, and then kept at a level, relative to gross domestic product, achieved only twice in the past 70 years. If Labour supports the Conservative laws, it embraces a relatively small state forever, but if it opposes them, it is condemned as a tax and spend profligate. This is a deliberate political trap. How clever it turns out to be depends on whether enough voters believe the ideas make sense and I believe that here the chancellor has underestimated the intelligence of the electorate.

Mr Osborne and the conservative party argue that the crisis has proven the need for a surplus in normal times. In other words, that we would be better prepared and the effects of another financial crisis would be lost profound if we were not already in debt when the financial crisis happens. However it would have made little difference to the effects of the financial crisis in 2008 if labour had run a balanced budget before it. In both Ireland & Spain for example, they had been running a balanced budget before the financial crisis, yet the financial crisis devastated both these economies. Osborne also argues that the strong recovery of the UK economy proves fiscal policy is not needed. So abandoning fiscal flexibility would be no loss. But the truth is that the UK recovery has been very weak. The return to pre-crisis levels of real GDP per head has taken two years longer even than in the Great Depression. This is so even though the chancellor abandoned many of his planned cuts after 2011-12.

A third argument from Osborne is that a fiscal surplus is a hallmark of prudence. Yet the focus on public debt alone is mistaken. Crucially, it ignores the asset side of the balance sheet altogether. Moreover, all things being equal, the bigger the fiscal surplus, the lower interest rates would be. If that encouraged a run-up of private debt, the economy could end up even more unstable. Alas, the Office for Budget Responsibility already forecasts a big jump in household debt. A more sensible argument would be that, even if fiscal irresponsibility neither caused the crisis nor created difficulty in managing it, as proven by low real and nominal interest rates, public debt must now fall relative to GDP. That would restore the “fiscal space” used by the rise in net public debt from 37% of GDP in 2007 to 80% today.

As Mr Osborne well knows, there are alternative measures that can be taken to reduce our national debt in the long term. It does not all have to be done right away. In fact the ratio of our public debt to GDP is well below it’s average over the past three centuries. Naturally, such considerations including the case for fiscal stimulus apply only if a country has fiscal space. But markets and the IMF agree that the UK has such space. It is clear that the obsession with public debt is unhealthy. Public borrowing is not always an evil. Nor is private borrowing always a good. It is quite appropriate to borrow to invest. Not least, the time to reduce public debt comes when economies boom and interest rates are far from the floor and despite what the chancellor claims, our economy is certainly not booming.

Explaining that a surplus is not, nor should it be the main goal can easily dismiss this trap being set by the government. More important is the nature, strength and durability of an economic recovery. Also important is how fiscal consolidation is achieved and at whose expense. It should never be at the expense of the poorest and those least able to defend themselves in a democratic society.

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