Sunday 19 September 2010

An Open Letter to the Guardian Letter Writers of 15th September and other anti-Pope visiting schmucks.

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Dear Guardian-letter-signing, so-called, 'public intellectuals'
(and other pain-in-the-ass commentatorswho have expressed or agree with the same arguments),

The Pope's visit has brought out some of the dumbest public and political commentary I have heard for a while. Particularly from yourselves. I'd hoped with the election gone we'd be spared this level of stupid for a while, but no. Though, to be honest, the debate on public spending was already keeping the choo-choo train of opinionated ignorance firmly on the tracks.

You would actually have managed to be more coherent if you just stated you don't approve of the Pope coming to Britain, and simply do not want him to come and process through the streets to cheering crowds. That would at least have been consistent. Of course the response would have been that it was ridiculously arrogant of you to assume anyone cares whether a handful of self-appointed busybodies want him to come, and he wasn't coming to see you anyway.

You could even have said you disagreed with some official positions of the Catholic Church but saw this as a chance to open a rational dialogue and have greater public discussion of issues that are of central importance to mankind. But that would have required an adult disposition and a genuine desire for discussion and understanding, rather than childish name-calling, and that sounds like hard work, doesn't it.

However, sadly, thanks to your faux-liberal commitment you felt unable to state what is pretty obviously actually your wish, and instead claimed you were happy for him to come but merely had a few procedural problems with the form of his visit. Unfortunately these problems are total nonsense, and so you just made yourselves look dumber than otherwise, in an attempt to appear like you were expressing something more generally relevant than your own personal dislike of Catholicism.

Arguing that a generally recognised political state is not a state, just because it is momentarily politically inconvenient for you, is pretty moronic. I personally don't like the fact that Communist China is considered a state, and I wouldn't like the fact that the Soviet Union was considered a state, if it was not that collapsed when I was three years old. Before the Iraq War I was deeply irritated by people arguing that Saddam Hussein's government's held any legitimacy at all, since it was a genocidal, undemocratic, neo-Nazi tyranny. I consider all these regimes to be violent, murderous and entirely lacking in any democratic and popular legitimacy.

However, in none of these cases do my personal preferences affect, one jot, the plain facts of the world. One can only be astonished at the arrogance of a few figures (I'm looking at you Stephen Fry) who have apparently suddenly become experts in International law and early 20th Century Italian History. It is incredible you seem to think the global weight of governments, civil servants, legal scholars and peoples should bow  before your inane and often inaccurate trivia and re-assemble Inter-nationally recognised political facts and realities for your convenience.

The next most ridiculous thing has been the suddenly discovered outrage about waste in public spending, namely the £10 million cost for the Pope's visit. We spend 2/3 of that policing the Notting Hill carnival for God's sake, let alone football matches up and down the country. Not to mention the billions we waste each year on public bureaucracy, spin, pet projects, subsidies for opera and goodness knows what else. Indeed, a whole list of things of considerably less use and public interest than a chance to engage with the spiritual leader of 1/6th of the world's population, the largest popular organisation in the world, and around 2 million people in the UK at the moment. Living in a democracy means that your money gets spent on things you don't agree with, or wouldn't bother spending it on yourselves: Tough. If people don't like it they are free to leave the country, or perhaps blame Gordon Brown since he invited the Pope on a State Visit in the first place.

And let us not forget the sheer hypocrisy of making such a fuss about the Pope coming but not batting an eyelid about, say, the President of China, the King of Saudi Arabia, the President of Ghana, the President of Russia, the King of Jordan, the former President of South Africa, the President of China again a couple of times, the President of Israel. All of whom head regimes that actually officially engage in violent, human rights abuses. One can only get the impression this is more to do with the Pope's religion, and some persons' bigotry towards it (or that he represents one at all) rather than the moral record of the state he leads.

Because God forbid you actually try to open up a dialogue or engage in some adult and rational debate and discussion, instead of just ranting and raving and name-calling like children throwing a temper tantrum. But that wouldn't allow you to feel so self-righteous. Referring to him as "Pope Ratzinger" in your letter is particularly weak. I'd have thought that deliberately getting someone's name wrong to show disrespect was a childish affectation that would have been abandoned in secondary school. If you are actually that ignorant then it's 'Pope Benedict' or even 'Joseph Ratzinger', something that 30 seconds (its called Google) would have sufficed to discover, even if you'd never heard of the Pope before.

Which brings me to my last point. Even if you can not respect the Pope's positions on many of these issues, then you should be able to respect the importance he has, in part, in carrying the hopes and representing the beliefs of millions of good, honest, kind, thoughtful and decent people in this country and a billion more around the globe. But in too many of you this criticism is a poorly disguised front for sheer anti-Catholic bigotry, that comes out into the open in the de-humanising and hate-filled language employed on too many other occasions. Sometimes reaching the insane culmination of blaming Joseph Ratzinger personally for Aids, every individual act of child abuse and the devastation of the planet through over-population, among other paranoid ravings.

In summary, you're all idiots. Rarely has a part of my own country's 'cultural elite' made me want to reach so thoroughly and quickly for the sick bucket. You provide yet further proof of the wisdom of democracy: that no matter how well qualified, publicly acclaimed, or usually charming (looking at you again Mr Fry) a person may be, they are still prone to bouts of being an utter moron. How very egalitarian of you. Please stop embarrassing yourselves and your country. It's tiring.

Yours Sincerely,
Stephen Wigmore

Tuesday 7 September 2010

It's the Budget Stupid! - Part 1

Of Balancing Budgets, Spending Cuts, Fiscal Squeezes, Cabbages and Kings (and why the sea is boiling hot, and whether pigs have wings. - Well, not really).

Whatever one may say about the new Coalition government one cannot accuse them of being lazy or timid. They have moved incredibly quickly, within the first two months of entering government announcing reforms and changes of policy on education, criminal justice and policing, civil liberties, constitutional reform, defence, health care, local government, welfare reform and, most importantly, the economy. It has been a long time since British politics has changed so much so quickly. It is weird to think that only earlier this year we were in the dying days of a Labour government, awaiting the long anticipated 2010 budget from Chancellor Alistair Darling, with the announcement of the election, let alone the actual poll, still merely on the horizon. A lot changes in only a few months. The budget, the long awaited dissolution of parliament, the campaign, the election, Brown's resignation, the formation of the coalition, a Tory and Lib Dem cabinet and then a wave of announcements of the first steps along the road to significant reform of almost every major area of government.

Many of these ideas, like the Big Society focus, are Conservative policies dating from before the recession, back in 2008 when David Cameron was still talking about "sharing the proceeds of growth". Some, like education and to a lesser extent health care, are effectively continuations and intensification of Tony Blair's attempted public service reforms. Others have come to prominence due to the dedication of a single cabinet minister, such as welfare reform. Some, like Constitutional Reform, have been added due to the mix by the addition of the Liberal Democrats. Some, like reform of Defence, have come about due to the pressures brought by the credit crunch and the coming spending cuts. And to this mix, financial radicalism has been added due to the need to respond to the affects of the recession and Britain's huge budget deficit.

Without a doubt, amidst the all of these plans for change, the question of the economy looms over everything. It is the big one, the question that most affects the lives of every voter and dictates pretty much everything else the government can do. The government has committed itself to a radical approach to Britain's financial problems, and this will either work or not. Either way it is almost certainly the issue that will determine the government's future. Right or wrong, no one will care what other changes they bring in for better or worse over the next few years. If the Coalition gets this call right, then re-election in 2015 seems almost certain. Get it wrong, and Labour will almost certainly return in 2015, if not earlier, with a working majority. This is the one issue that can't be fudged or ignored, because the effects are so massive and so widely felt.  And so there is no running away or hiding, for the government, from the decisions it has committed itself to now. Considering politicians' usual preference for avoiding blame or any possible chances for negative assessment, it is almost brave.

To be more specific, the question is: How to secure the economic recovery from the 2008-2009 recession and respond to the monumental budget deficit it left the UK with? Or, in other words, Cuts: How much and How soon?

Just for reference at this point so you definitely know what I'm talking about.  (Including minor cuts already made) the Budget deficit currently stands at 11% of GDP, some £156 billion a year, or about 22% of public spending planned for this year.  This is the money the government must borrow from international investors this year alone, in order to meet its spending commitments, and which goes onto the total National Debt we've been building up since 1700, which is currently about £900 billion pounds.

In this regard the 'emergency' budget announced by George Osbourne in June has got to be the most important act of the new government yet, setting the tone of the new government's policy for securing both the recovery and dealing with the deficit, and hence the funds available to other parts of the public sector and the entire tenor of government policy until the next general election. It is a mark of how central this issue is considered that the Coalition went to the effort of producing an entire new budget within less than two months of taken office, and only 3 months after the previous government had released its own budget for the year. It is also remarkable to compare the completely different feel of those two budgets, so close in time but which couldn't be further apart in political thrust. it is a far cry from the 1950-51 Butskellite budgets that cemented the post-war consensus, or the '97-'98 Clarke, Brown budgets that saw the acceptance by Labour of the overwhelming majority of the Thatcherite consensus. This is rather a step change in political intention, if in terms of actual measures only a deepening of the same policy.

The Budget raises a few key questions, most loudly and obviously, was it right? And, was it fair?

Though these themselves raise a whole host of questions about the direction of our politics and nature of our political discussion over the last few and next few years, the main part of these questions breaks down, quite easily, into a few political issues. Firstly, is this the correct decision to deal with the budget and support economic growth over the medium term? (which I shall deal with in this part) Secondly, does the impact of the budget fall fairly across the population? (part 2) And, thirdly, is the ratio of tax rises and cuts, and the choice of tax changes, the correct one? (Part 3)

So, what does the budget actually contain . . .

Answer: A lot.

Real Answer:

RPI, by freezing public sector pay for all workers on over £21,000 and by capping and cutting housing benefit, disability benefit and restricting tax credits to poorer workers. Departmental spending cuts are the equivalent to cutting unprotected departments by an average of 25%, as compared to 20% under labour's plans. The budget also announces extra money for pensioners and poorer children, via old-age pensions and increases to child tax credits. An additional net £8 billion in tax rises. This is a bit more complicated. The big and most controversial change is the rise in VAT from 17.5% to 20%. There will also be rises in Capital Gains Tax (18->28%) and a new tax on the Banks, along with hikes in the allowance for entrepreneurs, cuts in corporation tax (28->24%), cuts in NI for businesses outside the south, a one year freeze on council tax and a large increase on the personal allowance for income tax by £1000. The government also keeps Labour's 50p tax band and the rest of Labour's tax rises announced in March (apart from the NI rise).

That about covers most things. The net result of this is an additional £40 billion of deficit reduction, on top of Labour announced plan to halve the deficit in 4 years. The result of this is that in 2015-2016 Britain is forecasted to eliminate the structural deficit and achieve a (cyclically adjusted) balanced (current) budget for the first time since 2002. Unsurprisingly the budget has released a torrent of commentary on the wisdom of its measures. The Conservatives have welcomed it, Labour have excoriated it, and the LibDems haven't really been entirely sure what to think about it.

The Budget represents a number of dramatic moves by the government. The rise in VAT has proved perhaps the most individually controversial measure, mostly over its supposedly 'regressive' impact, and especially since all 3 major parties effectively denied pre-election that they were going to raise it. The sheer scale of the fiscal tightening announced, though, is the most remarkable thing about it. it was widely expected that the Coalition would aim to cut the deficit faster than Labour, but few expected that they would attempt to balance the budget, even in 5 years time (and only the current budget). The scale of spending cuts, totalling some £99 billion by 2016, is bad enough, a further £32 billion of spending cuts over the first 5 years and £8 billion net of tax rises. But the most eye-watering figure is the fact that this translates into 25% cuts to all government departments outside the NHS and International Development, ring-fenced under the coalition agreement (up from 20% in Labour's plans). To be quite frank, it has never been done before.

This table explains the scale of the cuts and tax rises announced to cut the deficit over the next few years, and also gives the comparison of Labour's plans announced in March with the Coalition's plans.

Total consolidation plans over the forecast period

One things that is important to note though is that these figures for spending reductions are in real-terms and compared to the totals if all departmental, welfare and capital spending was to continue at current real levels, including all plans for future expenditure already agreed and trends in aging population etc. In nominal, cash terms (i.e. the actual numbers of pounds the government will spend), government spending actually rises by £60 billion over this period, going from £697 billion in 2010-2011, up to 700, 711, 722, 738, 758 in the subsequent years. In (forecast) real terms this is equivalent to a 1% fall in current expenditure over the period. An additional £30 billion of this total is expected to be absorbed by interest payments on government debt over the period, International development will rise by around £5 billion in real terms and the NHS probably by a similar amount, an aging population makes up most of the rest of the room between these figures and the totals for cuts given above.  Nor does this mean that the government is cutting spending by 25%.  That is only the average cut in departmental spending in un-protected departments.  With the addition of welfare spending and Health, the two largest items of government expenditure, which aren't facing the same cuts (and ID and capital spending), the cuts are equivalent to a 13% cut in public spending.


So, is the coalition's plan the correct one for dealing with the economy?

One thing that the budget certainly doesn't lack is ambition. It is a remarkable statement of intent, and this intent can be read as a thread that runs through the measures announced by the chancellor. This is an aim to, not only, balance the budget, but also re-balance the UK economy in the direction of the private sector. This can be seen in his reliance on cuts, rather than tax rises to cut the deficit, as well as tax breaks on corporation tax, on allowances for entrepreneurs, on cuts in NI, especially for businesses outside the south. All these tax breaks are counter-intuitive in the context of a purist deficit cutting strategy. The Chancellor is putting his eggs in a basket, so to speak, and cutting back hard at the public sector, while simultaneously trying to incentivise the private sector. It is a 'brave' decision.

There is some evidence that the recovery is gaining strength and that the UK economy does look in increasingly good shape after the recession. Osbourne is betting that his measures will reinforce the private sector recovery just as it is gathering speed, and he can ride the up-tick all the way to a balanced budget and general prosperity for all. Now, obviously, this is a pretty optimistic plan, and if it all does goes to plan then Mr Osbourne should consider himself a very lucky politician. Realistically, though, it is no more optimistic than Alistair Darling's plan of just borrowing loads of money and hiking taxes and hoping everything magically turns out alright. Both these two plans that the respective chancellors unveiled are real commitments to a certain, possibly risky, approach, with the hope this will pay dividends. The difference in the two can be seen by the fact that Darling said that should the economic news be unexpectedly good, and tax revenues higher than expected, he would use any extra money to cut borrowing faster. Osbourne, on the other hand, said that should this occur then he would use any extra money to cut less. Both men knew they were out on a limb, with both probably inwardly praying that this 'extra revenue' would in fact emerge.

The main criticism of the budget is based on the sheer scale of the fiscal tightening planned. This is large. The extent to which it is the budget's main priority can be seen in the above table, which shows that, the above points notwithstanding, over-all the budget not only significantly increases the spending cuts planned but also puts taxes up quite a lot. This heaps more taxes on an, already, quite highly taxed economy, and one would have thought, something that a Conservative chancellor would be loathe to do. The fact that he has brought in more taxes than labour, even with the greater proportional reliance on spending cuts, demonstrates the scale of fiscal tightening. The criticism to this approach is very simple and has been widely adopted by swathes of the left-wing media and labour Party. The policy outlined by the budget involves taking a considerable amount of demand out of the economy over the next 5 years, equivalent to about 8% of GDP. It is deflationary, meaning that it removes money from the economy and reduces the flow of transactions. The risk is that with the recovery fragile and demand weak that this removal of demand will have a magnified affect, potentially tipping the economy back into recession. The counter argument to this is that the deficit itself poses a far greater danger to the economy. This danger includes crowding-out private investment and lending through pushing up interest rates, and more immediately the risk of a collapse of lender confidence, as has most dramatically occurred to Greece, and the sharp rise in the already serious cost of paying the interest on such a large quantity of borrowing.


But will it work?

There is a risk. No-one suggests that removing more than £100 billion of demand from the economy over the next 5 years does not have the possibility of going wrong. The question is, however, how likely is it to go wrong and, how does this compare with the danger of not cutting? The plight of Greece on the continent highlights the real danger of a collapse of lender confidence. In the EU this led to the necessity of the emergency announcement of a colossal €800 billion pot of funds from the EU governments to cover the debt of at risk nations such Greece, Spain, Portugal, Ireland. Partly following on from these events George Osbourne announced his austerity budget with loud cries of his measures being both "inevitable and necessary" and that he had no choice. This is, of course, not true. People always have choices. People only ever say that they has no choice as a cover for the choices they have already made. Is it a necessary choice, though, and is it a justified one? Osbourne is putting all his money (almost literally) on getting the public sector out of the way of the private sector, of balancing the budget, and betting that the boost this gives to business and international confidence, and the pressure this removes from the lending markets, will keep interest rates low and provide the space for higher growth in the long term.

Britain faces continually expanding and higher liabilities, both in terms of the national debt and the wider off-budget sheet liabilities that we are developing. With an aging population and decreasing relative economic importance, borrowing to make up the difference over the long term and even the medium term becomes a less and less sustainable strategy. Over the long term we need to see a commitment to balanced budgets, or at least borrowing below our rate of growth, to keep these liabilities down and ensure we do not drown in our own debt again and again. Furthermore, in economic terms, the less public sector debt the state is burdened with the better for the government and economy in general, all else being equal. Cutting now means that we are not reliant in the long term on higher taxes to maintain the level of spending we are engaging in until growth entirely eats away the deficit. There is also international evidence to suggest that fiscal consolidations that rely on spending cuts are healthier for the economy than those relying on tax hikes, and by supporting confidence can even be expansionary in the short term. This is due to the general, dispersed depressionary affect of tax rises during a weak economic period braking the momentum to economic recovery, whereas the benefit for maintaining spending is concentrated in only a few points. Also, the less debt, the less money we waste on interest payments, the less the government crowds out private investment by placing upward, the more room the government has to manoeuvre in any future crisis.

The question is how quickly this can be done without causing too much collateral damage to growth in an economy recovering from the recession. There are, however, other possible arguments against accelerated deficit plan the chancellor introduced. Obviously tax hikes cut very directly into people's standard of living, at a time when so many people are already suffering wage cuts, reductions in working hours or lower investment incomes. Spending cuts impact on vital services, health, education, welfare, defence, etc and undeniably impact on the poorest and most vulnerable the hardest. There is also the affect on the labour market. At a time when jobs are few, spending cuts will lead to hundreds of thousands of job losses, risking more knock on social damage and suffering in a weak job market. There is hence an argument for keeping consolidation down to an absolute minimum necessary and waiting for growth to cover the deficit, without the cuts in living standards that greater fiscal consolidation will inevitably entail.


However, it honestly does not seem that the minimum realistically necessary over the next 5 years, to avoid the serious risk of a decline in lender confidence and higher interest rates, among wider detrimental effects on the recovery, which would outweigh the benefits of marginally higher spending, is very much less than the target the coalition has set. There are a number of reasons for this.

One of the effects of the experience of Greece has been to scare numerous other countries and unease the markets, leading various other nations, including those in considerably better shape than the UK, to announce stronger action to cut their own deficits. For the UK to bring itself into a position whereby it does not stand out as a particular liability among international investors, has become harder than it was at the start of the year, and hence the need for considerably stronger action is magnified. This wider trend is an unfortunate one.

Part of the problem that caused the credit crunch and the collapse of Greece was a world economy whereby some countries were running large consistent trade surpluses and some countries large consistent trade deficits. The way this was continuing was for the surplus countries, such as China, to lend ever increasing amounts of money to the deficit countries, like the USA or the UK. This has occurred in a smaller way in Europe with Germany and Greece. Part of the reason why Greece got in so much debt was because Germany was lending them money at cheap rates, so they could then purchase German products. One of the remedies the world economy needs is for this situation to be reduced, so surplus nations, such as Germany, buy more of their own products and deficit nations such as the UK sell more products. The situation we have now though, is that the more prudent nations are continuing their prudence and slashing their own much smaller budget deficits, in a similar proportion as the more indebted nations. This means that aggregate demand is being cut across Europe, increasing the risk that cutting demand by so much within the UK will cause economic problems. Ideally, the nations that can afford to would increase, or at least maintain, their smaller deficits in order to help prop up demand to help cover the gap caused by more indebted nations slashing theirs. Behind Portugal, Ireland, Greece and Spain the UK is in the worst financial position of any European nation and, hence, it is right that it should be engaging in the greater fiscal consolidation. There is little the government can do about the fact that other countries are also slashing deficits when they do not, in fact, need to, and thus increasing the danger for us, as well as the relative need for us to take action, so as to not appear a particular liability.

Current estimate put the structural deficit at £85 billion a year. This is the part of the deficit not due to the temporary effect of the recession and which will not disappear with post-recovery growth. Any deficit reduction plan must, over the long term, entirely eliminate this figure, at the very least. Arguably this amount should be eliminated entirely through spending cuts as well, as because this is a structural problem rather than a temporary recession provoked problem, any taxes raised to help fill it will need to remain permanently as an addition to the tax burden to cover this figure. Of course this is not to suggest that there is not an argument for raising taxes generally. But if we regard any of the tax rises since 2008 as a temporary measure due to the recession we cannot use them to fill this portion of the deficit. This figure is so high for a number of reasons. Even in the boom years from 2002-2007 Labour was running a deficit that averaged about £30 billion a year, sticking a total of £160 billion extra onto the national debt. This action goes totally against Keynesian policy and doubtlessly had a role in stoking up the credit bubble and boom that led to the recession. Obviously the actions of the banks had a larger role, but it is interesting that very same people who are now claiming that withdrawing £20 billion of demand from the economy a year will cause economic disaster seem intent on claiming that £30 billion of effective stimulus a year had no serious role in pumping up the boom in the first place. Obviously this, roughly, £30 billion will not go away after the recovery from recession, as it was there before the recession. Another factor is that on top of this is that tax revenue before the crash was artificially buoyed by corporation tax from the financial sector due to the banking bubble and stamp duty from the housing bubble, as well as the wider economic affects of these. We cannot assume that this tax revenue will re-appear, and indeed it would be a dangerous sign that we were merely reflating the same bubble if it did. Quite simply, Government pre-crash was a junkie spending big on pro-cyclical borrowing and asset bubble tax receipts, in direct contravention to Keynesian policies. The last factor is the obvious fact that since the recession broke we have already borrowed some £300 billion pushing the interest we must already pay up considerably, by about another £30 billion. And all these are before we even get onto the subject that the economy has shrunk by 6% thus reducing the tax basis. For these three reasons we cannot just hope to return to the status quo ante.

These factors together contribute to the £85 billion structural deficit and the fact that it would require a considerably larger proportional tax hike than many people may think to even remotely cover the deficit. Even if we raised the tax level by 7%, to cover the 6% fall in the tax base, this would only raise around £37 billion a year, and the Coalition is almost but not quite doing this, raising taxes £29 billion a year. Though this itself takes no notice of the negative economic impact, mentioned before, of raising taxes during a period of weak economic activity. It is also not the case tax were not raised by 'New' Labour to cover increased spending (which would presumably then leave plenty of room to raise it now) though they were obviously not raised enough to cover their plans. Compared to the plans left by the Conservatives in 1997, Labour raised an extra £1 trillion in tax over the decade between 1999 and 2008, meaning that although the UK is certainly not the highest taxed economy in the world, especially after the changes announced and confirmed in the budget it is not a low tax economy at all, meaning there is comparatively little space to raises yet further.

There is also a good argument here for the necessity, in the long term, of governments pursuing a balanced budget, if not a surplus in the good times. This is not just good Keynesian policy but also because governments trying to push spending as high as possible are incapable of deflating a bubble because, as in this case, they are reliant on the taxes that bubble brings, and the borrowing it makes cheaper, in order to fund their spending plans, which means they are incapable, or at least strongly incentivised, to not look at where that bubble revenue is coming from, nor take any move to restrict it over the medium term, i.e. the period they are likely to be in office. Only a government committed to maintaining a balanced budget has the possible ability, and will, to react to control a bubble because they are not staking their reputation on raising spending as fast as possible under their tenure, as Labour was after 1999.


One way of analysing the feasibility of the various deficit plans as a course of action is to look at the end results of those plans. Under Labour's plans, outlined above, we would have £52 of cuts starting next year and spaced over the 4 years after that, with the intent of halving the deficit. Their plan marginally over-achieves this, but, including forecasts for growth, still leaves the UK with a 4% deficit in 2015. This means at the completion of the deficit reduction plan we would still be borrowing £60 billion a year. This figure is one which, in any other situation, would have been considered as cause for serious worry, and is certainly not sustainable in the long term when growth is expected to be 2.5%. Even after cuts had been completed, under this plan, it would have been necessary for public spending to be frozen (in real terms) for years more for growth to bring the deficit down to a level where it would be acceptable to start increasing public sector spending again (in real terms), possibly for an entire further 5 year parliament. Something that would have prolonged the pain of public services already smarting from the £53 billion of cuts planned by Labour. In the long term 4 years of cuts, followed by 5 years of real term freezes, followed by annual rises of 2% (or so) would probably feel like a lot more austerity than 5 years of deeper cuts followed straight away by a return to (hopefully slightly higher) real-term increases.

This is itself assuming several generous assumptions. Mainly, that such borrowing would not cause any decline in business confidence, would not place undue upward pressure on interest rates over the next few years, and would not lead to any decline in lender confidence, causing a hike in the interest costs on such borrowing, as occurred to Greece. Realistically, this is unlikely. Partially, because there is reason to doubt that the figures that the treasury based their predictions on, under this model, would have held out if labour had actually won the election and implemented this plan. Quite simply put, the interest rate on government debt and associated business confidence was partially based on the assumption that labour would lose the election and whoever won (probably the conservatives) would implement a tougher deficit reduction plan. The treasury could only base their projections on the interest rate on government debt as was in March, but there is every reason to think that this interest rate was artificially lowered by the market factoring in that a tougher deficit reduction plan was the one that would actually be implemented, and indeed when this expectation became a reality this has led to a fall in the interest rate on government debt, as well as an increase in confidence in the UK economy, shown by a rise in the pound against the euro and dollar. If Labour had managed to scrape home it seems likely that they would have been unable to implement this less ambitious plan and would have been forced into stronger action.

On the other hand, confidence in their commitment to implement even this weaker plan is questionable. The trove of post-defeat revelations by senior New labour figures have revealed, among other things, that Gordon Brown was essentially forced into this deficit plan by Alistair Darling, his less tribal chancellor, and that he himself did not believe in it. Something that can be seen by his previous insistence of lines of 'Labour investment vs Tory cuts', long after it became apparent that all parties would have to cut, the ludicrous spectacle of announcing 0% increase in departmental budgets in the House of Commons, and the fact that Ed Balls, Gordon Brown's mini-me, has now repudiated this plan as part of his pitch for labour leader. He would presumably have favoured a plan that would have left us with, perhaps, £80 billion of deficit after 5 years and would almost have certainly led to another economic crisis, or if we were really lucky just crippling long-term interest payments.

This possible idea of slowing deficit reduction down over 7 or even 10 years has a further danger, in addition to all those mentioned previously. Financial crises and recessions, of one sort or another, have a habit of coming along every ten years or so, though obviously this isn't a physical law. Between the 1976 and 1980 recessions there was only 4 years, between coming out of recession in 1982 and the next crisis in 1991 there was only 9 years. A deficit reduction plan that still has debt rising as a percentage of GDP almost a decade from now risks not having stopped paying for this crisis when the next one hits. This would inevitably leave the government at that point with very little space to further stimulate the economy, should it be needed, and could be deeply damaging by removing a future government's room to manoeuvre in a crisis, especially considering the likely very high interest payments.


Neither is it the case that there is any real evidence that increased fiscal consolidation is likely to tip us back into recession. The official response to the budget has seen cuts in expectations for growth over the current parliament, but of a few tenths of a percent, they still forecast growth of on average around 1.9% a year. The cuts are forecast to cost some 1.3 million jobs over the next 5 years, but the private sector is forecast to produce 2.5 million jobs over the same period leading to a net decrease in unemployment of 1.2 million. Now you can quibble with that figure. But even if the picture is not quite that good, it is still considerably less than a disaster. Growth over the first three quarters since leaving recession has been reasonable, totalling 1.9%. A figure boosted by the extremely good news for the recent quarter of 1.2% growth. What is more this figure came almost entirely from growth in the private sector, including a sizable figure for the construction industry, but also good performances for manufacturing and various other areas of the economy. In other good news, the money supply is growing steadily, dispersing any fears of deflation, and both banks and large businesses are well stocked with cash, making any further major bankruptcies unlikely. Also there is evidence that the government's policy has had a positive effect on international confidence in the UK economy. The Interest rate on government debt has fallen from 4% before the election to 3% now, and the pound has risen against the dollar and the euro. There has even been talk of the UK as a safe haven for investors after the troubles encountered by both the EU and the USA, talk unthinkable at the start of the year.

What is more, the package of consolidation announced is, as previously said, spread over the next 5 years. This year only a very small fiscal tightening is to occur, cancelling some of the more unfunded and unnecessary spending commitments of the previous government. The arguments about this depressingly dominated much of the election, and were generally tendentious. The argument that cutting £6 billion from a £700 billion budget, about 0.8%, would cast the economy into the abyss was always ridiculous. Not that the conservative insistence that a £6 billion national insurance hike would destroy the recovery was much more sensible. It will be 18 months after exiting recession that the fiscal squeeze really begins, giving the economy more time to get onto a stable footing. Even then, as can be seen from the above table, the majority of cuts occur during the latter stages of the parliament. Up until 2013, 3 years from now, only £42 billion of cuts are to be made, taking demand equivalent to 3% of GDP out of the economy, and the most the cuts reach in one year is £21 billion, or 1.5% of GDP in 2013. Cuts for next year are planned as £18 billion or 1.3% of GDP.

The degree of consolidation, though undoubtedly large, is also proportionately smaller than that announced for countries in even worse financial situations, though larger than that in countries in better situations. Greece has and is enacting a consolidation about twice the relative size. In Ireland, another country in a poor fiscal situation, and just across the sea, they removed 10% of GDP (worth of demand) in 3 years, including starting while still in recession and removing 6% of GDP in a single year. This is a truly extreme plan, brought on by the sheer desperation of their circumstances, whereas we are removing a relatively modest 8% of demand over 6 years, almost all starting 18 months after leaving recession, and not totally more than 1.5% of GDP in a single year.

It must be noted that removing 1.5% of GDP worth of demand from the economy does not cut GDP growth by 1.5%. Supply to a degree creates its own demand, and the balance of reduced demand is filled by lower inflation, by other purchasers who have a space due to easier borrowing, lower interest rates, lower prices etc. It is also important to remember that these are just forecasts, they can be changed as things go on, should it appear that they were unnecessarily pessimistic about the economy or the recovery is weaker than hoped, though in fairness this was also true about Labour's plan. In a way they are more like 5 day weather forecasts than necessary facts about the future. Anyone who doubts this, and feels like a laugh, should try taking a look at the 5 year forecasts of treasury plans from 2006 or 2007, and see just how precisely they panned out. What is significant about them is rather the intent and direction of policy they represent rather than the precise numbers.

There is also another interesting comparison. As the recession got going in 2008 labour introduced a deliberate stimulus package, on top of the automatic stimulus caused by rising welfare payments and falling tax receipts. This was only short-term though and wound down in early 2010, around the same time as the debate over the initial £6 billion of cuts, and in fact was one of the main reasons why that argument was so ridiculous. In other words, the Labour government effectively withdrew £23 billion of demand from the economy in early 2010, just as the economy came out of recession. This was VAT going back up to 17.5%, this was the 50% tax rate, this was a £1.2 billion hike in fuel duty. And this actually counts as a slightly larger withdrawal of demand than in any single year in the Coalition's plan. And, did fiscal Armageddon ensue? No, of course it did not, since then we have seen 1.5% growth in the following 6 months. And, this withdrawal of demand took place at the point where, arguably, the recovery was at its weakest.

One of the sublime/ridiculous aspects of this whole debate around the time of the election was the fact that the political dynamics meant that both sides had reason to hope for/fear good and bad statistics as to economic growth immediately coming out of the recession. For the Conservatives good growth meant that, on the one hand, the case was stronger for the economy being able to stand earlier spending cuts, but on the other hand it obviously made Labour's handling of the recession look better, which was bad for them. On the other side, good growth figures undermined Labour's case that it was too risky to chance early cuts, but also vindicated their handling of the recession. A heads you win, I win, you lose and I lose situation. What it came down to then was obviously who won the wider battle for public credibility for their position, which was mostly won by the Conservatives. They also seemed to get the luck on the economic growth figures though, as the first two quarters out of recession were both announced as anemic 0.1% growth, before being later revised up, the 2nd quarter on the very day that Gordon Brown resigned, precisely too late for Labour to benefit, and then the next quarter came through with significant growth figures, from a period that Labour were in charge, just in time to help support George Osbourne's case for deeper cuts. Thus Labour got the opprobrium heaped on them from the announcement of low growth under their tenure, and the Conservatives seem to have the benefit of their position being reinforced by the better than expected revised and later growth figures, almost a perfect storm. As one commentator said, maybe God is a Tory after all.


What will be likely is that over this period these measures will produce lower headline growth figures than perhaps would otherwise be projected, and since the budgets announcement we have seen a number of growth forecasts for the UK downgraded for the next few years. This is the other main argument against the economic benefit of quicker attack on the deficit and it is a serious risk. The likely affect of the accelerated cuts program is lower headline growth for the next few years. These forecasts are dependent on the above possible negative externalities on economic performance not emerging, however, that these economic bodies cannot necessarily take into account in their calculations. There is also little argument that over the longer term the potential for growth for the UK economy is enhanced by lower levels of borrowing, and the costs associated with it, which I have repeated ad naueseum above. Furthermore, like treasury forecasts, these predictions are certainly not infallible, these bodies fail to see things coming as much as anyone. Their glorious failure to see the credit crunch itself coming, for example. Another point is more subtle: Assuming these bodies are correct, for the public finances we are faced with a trade-off between the lower debt interest we are racking up with the tax income gained through higher growth. Obviously though, this does not include the wider economic benefits of higher growth, nor the social benefits of higher government spending, but neither does it include the negative possibility of the previously mentioned financial and economic externalities. Nor the fact that these figures are crude measures. They can take into account the reduction in government spending (reducing GDP) but not the underlying increase to the health of the private sector this may be supporting, which in the end supports the private and public sectors.

All this is not to claim though that the plan that the Chancellor announced is itself necessary for the economy.  It may, as it turns out, be the best plan to secure long term growth and financial health for the UK, and furthermore he may have read the financial runes perfectly and timed it with a recovering economy.  Possibly.  Like I said though, if this is the case then he will be a very lucky politician.  However, I believe there to be clear risks associated with Labour's considerably more gentle deficit reduction program, especially after both the Greek crisis and wider drive to prudence that this has launched.  An approach that would probably take ten years or so to get the UK's public finances under real order, if everything else goes as plan, just seems completely insufficient.  This is not to ignore, however, the difficulty faced with introducing large real term cuts in public spending and the difficulty this will cause many individuals and communities.

Considering all these factors I believe it is possible to consider an alternative fiscal plan that hopefully goes someway to combine these elements, or less diplomatically, just takes the middle ground between the various alternatives.  I hope to introduce and explain this idea in the final part of this little mini-series.

Sunday 5 September 2010

My Masters Dissertation - The Philosophical Nature of Human Relation to other Human Beings

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After 2 months of solid work I have finally finished the Dissertation for my Masters.

It was one hell of a rush at the end, and during a difficult period of my life, but I'm proud of what I've done. After a month of reading, three weeks of note making and then 10 days of frantic writing, editing and referencing I have finally got 11,000 words, 4 sections and 111 references of Dissertation, all done and handed in.

That's my MA in Continental Philosophy finished. And now I only have to wait two weeks to see if I've passed. I'm hopeful, especially since I finally got some of my marks back and I got 71, 67 and 59 for the three essays I have got back so far. This is alright since a pass is 50, and I knew the 59 wasn't my best work. My dissertation is at least as good as that essay I reckon, so I should be fine.

My Dissertation is on the subject of the nature of Human Inter-Personal relation. This is the idea that the most important feature of human existence is not what we know, or what we earn, or what we think,but rather, it is the way we relate to other people, and also the rest of the world we encounter.

How and Why did Levinas consider Buber's Philosophy Insufficient as a Philosophy of Inter-Personal Encounter?

More precisely it is an investigation of the work of one Philosopher, Martin Buber, from the perspective of another, Emmanuel Levinas. Two of the great figures of 20th Century philosophy. Especially in the considering the nature of being human, and the choices in life that we all must make.

Buber and Levinas had a lot in common. They were both Jews who lived through the horrors of the middle of the 20th Century and the 2nd World War. They both held a fierce devotion to the Bible and the message of Judaism and saw their work as an attempt "to translate the Bible into Greek", meaning to express the ethical and spiritual message of Judaism, and especially the fierce call to justice of the Old Testament Prophets, in the language of Philosophy.

They share a deeply optimistic commitment to the worth and importance of the individual human being and the vital importance of considering the way we relate to other human beings for our morality and the priorities with which we structure our lives. They took the ideas of devotion and respect, of commitment with one's whole being, which the Bible described in relation to meetings with God, and daringly applied this language to meeting and interaction with God's images, human beings.

Levinas described a radical phenomenological approach to providing a philosophical justification for ethical duty while Buber concentrated on describing the two possible modes of human relation to other persons and also nature and Art. Their work is a genuinely enriching experience for anyone, challenging them to truly consider the manner in which they approach the world we all find ourselves placed in. I know I have learnt a lot from studying their ideas and the writing about them and the thinking that lays behind them.

Anyway, I can barely believe it's all over. Not just my Masters, but also my entire University career. It's been a long 4 years. I can barely say how long a time its felt. Or how different I feel than I did 4 years ago, when I first faced coming to University as an 18 year old kid, or how amazing an experience it has been thanks to many, many people. And now soon I'll be looking for a job. Scary.