Wednesday, 11 March 2015

The election and cutting the deficit

What is it all about and does it matter? The general election that is. It is often remarked about the main political parties that 'they're all the same'. It is certainly true that increasingly they have come to sound the same.  This is in large part, not because the policies are the same, but the pitching of them is similar: the same target audiences, the same cliched lines, the same sort of sound bite. It is also the case that policy differences are often nuanced rather than substantial. But the differences are none the less real. The impact of these differences is not so much through individual policies but through overall strategy.  We here the same soundbite about 'cutting' the deficit, 'dealing' with the deficit from all main parties. We 'must' cut the deficit has become a mantra, almost unquestioned -  a kind of political truism.  But is it really the case that we must? And do all the parties really agree? What's the real alternative in the general election? A better understanding comes from a consideration of the deficit.

We need to look at the deficit and the Total Managed Expenditure across a cycle.  It is clearly the case that holding TME constant it will fluctuate as a % national income.  During  a boom when growth in national income is high then spending will fall as % of that income; during a recession or period of slow growth then TME will increase as % of national income.  Given that we wish to increase spending on capital investment, in infrastructure or house building that helps the economy to prevent a recession, then again we should expect TME to rise as a percentage of national income.  During a recession, with increased unemployment, the welfare bill increases., increasing expenditure..

All this is why cutting the deficit should be seen across an economic cycle.  Simply setting targets for spending cuts without considering the consequences would do more harm than good.  We need a balanced view to cutting ‘the deficit’.

The Tories it seems are, if their coalition partners are to be believed, itching to cut the deficit by slashing spending.  It has become no longer a question of economics, but a question of political philosophy. – rolling back the state. Come what may, the Tories have an instinctive dislike of public spending.  The good that it does is, for them, outweighed by the harm they consider it does.  Not for them the ‘nanny state’ and ‘welfare dependency’.  Labour on the other hand instinctively believe in public spending, not as an economic principle so much as a social principle.  They believe that the good that it can do outweighs the potential harm of ‘dependency’.  The Tories ‘dependency’ is Labour’s ‘support’.   Labour in more recent times has been more in the centre ground of that divide.  If Labour is moving to the left of New Labour it is because the centre of gravity in that divide is shifting.  Experience teaches a lot, and the experience of the last five years has pushed many Labour supporters to reassert their belief in the role of public spending.

This political emphasis is reflected over the long term – although not necessarily in the short term where events blow governments off course..  The average real rate of increase in spending during the Conservative years of 1979 to 1997 was 1.5 per cent, and under the Labour government from April 1997 to March 2009 it has been 3.2 per cent.   It reflects the tendency for Labour to seek social solutions to what it considers to be social problems.  The Tories on the whole seek ‘market’ solutions to what they consider to be distortions of economic reality. – profit driven efficiency with somehow lead to the solving of deprivation in a trickle down – greater wealth creation by free spirited entrepreneurs leads to more jobs and everyone benefits.  To some extent New Labour blurred this divide – it recognised to a greater extent the role of market forces.  Since the banking crisis Labour has taken renewed stock of its position and has begun once again to think ‘social’, if not socialist.

All this means that the lines of the coming general election are more clearly drawn than appears at first glance.  Much more is at stake as a result.  A Tory government will as a matter of political belief cut spending.  Labour will make sounds about cutting the deficit but will resist massive cuts in spending.

The Liberal Democrats adopt a positon that holds something like  ‘we will prevent the Tories an excessive rightward shift an we will prevent Labour from a lurch to the left’.  Frnakly I suspect the voters are fed up with such a balancing act.  The LibDems are likely to be punished at the election.  But they won’t be punished as much as some polls suggest.

I expect we will hear much more about dealing with the deficit in the election - each party trying to outbid the other.  The Tories will say that Labour will spend more and won't cut the deficit. Labour will say that the Tories will slash spending.  The choice is real.  They are not all the same.

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