Why “too far, too fast” isn’t enough

In this member post, Stuart Clark argues that Labour needs to improve its strategy for opposing the Coalition’s economic policy.

The details of yesterday’s Budget are still being dissected, but the economic and political arguments are well under way. On the face of it the Chancellor’s measures seemed to offer help to the British public: increases in personal tax allowances and duty rate cuts amongst the most heavily publicised. Yet these measures pale into insignificance given the context of this budget – the weakness in the British economy and last autumn’s Comprehensive Spending Review.

Osborne’s “Budget for Growth” saw UK growth figures for current and future years revised downward. This is where the opposition should – and has – primarily focused: Ed Miliband’s response to the budget was barely three minutes old before we were hearing, yet again, how government cuts were risking the fragile recovery and were going “too far, too fast”.

But this sound-bite is inadequate in contesting the ideological basis of the government’s economic policy.

Ideology was all too apparent in yesterday’s Budget; the country’s economic problems were tackled in a market-orientated fashion by a government determined not to use the state to its full potential to help people.

Labour failed and is still failing to communicate effectively that the size of Britain’s deficit is not the result of overzealous public spending but a calculated economic decision taken to protect Britain’s economy from the loss of private sector demand and investment caused by a global financial crises and severe recession which followed.

Labour made a moral decision to use the power and resources of the state to shield the ordinary people of this country from the worst effects of the recession and in so doing accepted the need to run a deficit. As the private sector recovered, tax receipts would have risen and public spending could have been withdrawn – this was a viable strategy focused at preventing excessive unemployment.

The Chancellor’s rhetoric may be about growth, but if he really cared about it he would spare the country the cuts in public spending and increases in VAT, which will reduce demand and therefore harm our economy’s prospects.

Criticising deficit reduction as “too far, too fast” concedes the argument in favour of some sort of mandatory deficit reduction, something which Labour’s plan to halve the deficit in four years is also guilty of.

Reductions in public spending should be wholly conditional on growth.

Labour, by failing to articulate the success of the stimulus and the continued viability of UK borrowing in the short term, has made it far too easy for the Coalition to argue that cuts are necessary immediately.

And this makes it harder to expose the coalition policy as one of ideology rather than one of economics.

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A ‘maxed out credit card’?

Ahead of the Chancellor’s Budget announcement this week, Young Fabian Member Mark Anderson takes the coalition government to task over its positioning of its austerity measures.

One argument given by the UK government for its vast programme of public sector cuts is that the UK has ‘maxed out its credit card’.  Such a crude and misleading analogy bears no resemblance to the reality of Britain’s financial situation, yet it goes largely uncontested in public debate and serves to legitimise the devastation that is being wreaked on public services, the welfare state and public and private sector jobs and working conditions.

Far from the UK being no longer able to borrow money on the international financial markets, the interest that the UK pays on its debt is currently at a historically low level, as is the UK’s debt-to-GDP ratio. UK ten year bond yields are marginally higher than those for the US and far healthier than those for Australia and New Zealand, for example. In the run up to last year’s General Election, amid scaremongering about a potential debt crisis and the dangers of a hung parliament, yields on government bonds remained stable.

In a September 2010 article entitled ‘Can bond yields fall even further from these historic lows?’, Ross Watson, portfolio manager with Securities and Trust of Scotland told the financial journal Investment Week that:

“For the taxpayer, it is excellent news that the Government can fund its deficit at such low returns.”

Such sentiment presumes against a country close to bankruptcy.

Another argument the coalition government gives for frontloading public sector cuts is that it is unfair to saddle future generations with a mountain of debt. This argument is a perversion of the realities of private sector-induced deficits on several counts.

Firstly, it fails to take account of the fact that over 70 per cent of interest payments on government debt remains within the UK, going into savings and pension schemes – yours and mine.

Secondly, it bypasses the fact that you can’t cut your way out of a private sector-created budget deficit. Trying to do so simply condemns an economy to years of low growth – as seen in Japan over the last decade (when the Japanese government cut its stimulus too soon after recession, before Japan’s private sector had had a chance to recover) or in the UK in the 1930s (the last time that a post-recession public sector cuts programme was implemented in the UK on such a scale). Economic slowdowns make it harder to address structural deficits and repay government debt.

Thirdly, taking demand out of the economy when the private sector has not fully recovered risks a double dip recession which would increase government debt, not decrease it. Despite the Coalition’s best efforts to mislead the public, the UK’s structural deficit is a product not of Labour overspending, but of the collapse in output of the private sector following the collapse of Lehman Brothers in 2008.

Fourthly, at a time when the economy is already on its knees, it leaves the economy ill-equipped to compete against its healthier, better educated and better connected, more meritocratic international competitors.

Ending the previous Labour government’s fiscal stimulus, public sector cuts, a contraction in UK GDP at the end of 2010 and increases in unemployment and associated welfare payments, combined with the damage that the prospect of deeper cuts to come has done to business confidence and investment, have exposed the continued weakness of the UK’s private sector and led to a rise in government bond yields, thus further increasing the amount that the UK has to pay to service its debt.

Austerity is doing the opposite of what we are told it is aimed at achieving, and all this before the cuts have really started to bite.

A version of this post has previously appeared on Left Foot Forward.

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The Budget – Whats in it for young people?

Alistair Darling wants to ‘lead the young back to work’ in tomorrows budget, with incentives for re-training and re-skilling. But with career prospects and job opportunities looking worse as the recession deepens, it will be young people who will suffer the most in the tough economic climate.

Many Young Fabian members may have an undergraduate degree, or like me may be taking post-graduate qualifications to boost their employability, but for the thousands of new graduates leaving university in a couple of months, the employment opportunities that were available only a few years ago are disappearing fast.

Companies that are looking for new staff (and many are not) will be overwhelmed with quality applications from people with experience, knowledge and qualifications to match. Recent graduates and those in entry-level jobs will find it more difficult than ever to push forward with their careers and may decide to stay-put on a lower salary until the recovery starts. Anecdotally, after advertising recently for an intern in my office I received three applications from PhD students who were struggling to find employment which utilised their skills.

But this is not all doom and gloom, it offers Alistair Darling a real opportunity to make lasting changes to the prospects of young people in the UK economy and to release their potential rather than stifle it.

Young people are more likely than any generation before them to volunteer and offer their time to community causes and activities. This should be built upon by Labour and new incentives and rewards should be offered to young people to get involved with rewarding projects in their communities if paid employment is not always an option. Practical and essential skills and experience can be built up through volunteering at a charity shop or in a community project involving financial management skills and other soft skills like communication and presentation which employers are quick to pick up.

But the downturn must not be an excuse for pushing young people out of the classroom and into the job market. Education and training continues to offer a strong route to success for young people – across the board, from accounting to bricklaying – and should not be seen by Government as expendable. The Tories promises to slash public spending smack of knee-jerk reaction to a long-term problem. The most damaging thing government could do in the current climate would be to pull-back from funding projects like Building Schools for the Future, educational maintenance allowances, Train to Gain and other investments in education for young people. Now is the time to invest in future generations, not cut them adrift.

If you want to have your say on how the Government should respond to the recession, why not attend the Young Fabian seminar with Treasury Minister Stephen Timms on 6^th May?

Or if you can’t make it and want to ask a question, then post it here as a comment and we’ll make sure it gets raised.