Well they would be drinking their own poison.

Yes.

Oh, were you expecting a longer answer?

Yeeeeeeeeeeeeeeeeeeeeeeees.

I remember a Tory acquaintance telling me just after 2005, “well, we didn’t really want to win it – there’s an economic crisis looming.” He was a prick anyway, but this comment incensed me: how dare any political party wish not to take office? If you don’t fancy the tough times, don’t stand. If you stand, be prepared to get stuck in, whatever the circumstances.

That said, I now find myself wondering whether, in fact, the Tories are better equipped to make the necessary cuts – emotionally they’re cold enough and philosophically they want them badly enough. The fear, of course, is that they’ll protect the well off at the expense of those in need. If the fear factor has gone, this is no longer the corporal Jones election (“don’t panic!’) but is rapidly becoming the private Fraser one – whoever wins, “we’re doomed.”

How much of the deficit would be cut by 2014 in the case of an economic recovery? I understood that almost half the deficit could be dealt with by then if growth returned to pre-recession rates over the next year.

[3] Richard, I don’t think it’s possible to implement “tough – even savage – cuts” (as PS puts it) without protecting the well off at the expense of those in need. By and large services aren’t delivered to the well-off – apart from genuinely public goods like road repairs and there seems to be a consensus that they will be the first under the axe. It’s not like taxation policy.

Something can be done with back-office services – does each and every local authority need its own HR department? – but we are basically looking at a once-for-all reduction in our GNP of 10-20% at a time when our demographics are about as adverse as they could be – the average age of the population is now in the mid-fifties.

The idea that, against this background, any government could get re-elected is, to put it mildly, bizarre.

I agree with Richard Y’s first paragraph wholeheartedly. We shouldn’t be focused on winning power for power’s sake – let’s leave that to the Tories.

But I don’t agree that a Labour win would be a poisoned chalice anyway. Yes, there will no doubt have to be unpopular spending cuts. But there will also be a return to growth after the recession – whereas 1992 was just *before* a recession. It’ll be a mixed bag, but with plenty of room to show a spirit of fairness in how the burden of the cuts is spread.

If the Tories get in, though, we could get vicious cuts not just to reduce the deficit, but also to pay for their promised tax cuts, alongside a possible double-dip recession from their fetish to reduce the deficit as soon as possible, and the entire time they – supported, no doubt, by the Murdoch press, the Telegraph, and the mid-market tabloids – will be blaming everything on Labour. “Oh, the finances are much worse than we thought.” “We don’t want to do this, but we have to.” “We’re just cleaning up their mess.” It will give them a get-out-of-jail-free card for all their economic decisions. It could be the worst of all possible worlds.

Labour would need a clear plan about how to tackle the deficit and stimulate economic growth

Don’t they have one? If they don’t, oughtn’t they inform voters of this?

In short, the danger is that a 2010 win for Labour would be the equivalent of a 1992 win for the Tories. It could spell 5 years of disaster

I agree with most of what you say, Paul, but were Labour somehow to get in, I can’t see them lasting 5 years. The huge cuts that will have to be made, allied to Brown’s continued cravenness to the city will split the party: the cracks are there and even his infamous imposition of allegiance won’t paper over them.The influx of new MPs will be interesting: too many are spinelessly on message (going by the PPCs I’ve met) but will be in for a very rude awakening from constituents as services get axed, and without much by way of history of service to their constituency, I think some will simply have to rebel against a Brown administration’s cuts, or be turfed out very quickly by ‘their’ voters. For them it’d be a cakewalk opposing Tory cuts, but defending labour ones could end their political careers (not that that would necessarily be such a bad thing, given the poor calibre of those I’ve encountered).
My prediction:
a) Hung parliament = new election within 2 years
b) lab govt = new election within 3 years
c) Tory govt = 5 years of cuts and austerity,while protecting the cliques. Actually,little different from New labour, but as they’re more commonly associated with cuts etc, they’ll get a longer run at things,should they get in.

Well, for Labour to get a majority would require a dramatic further turnaround in the polls. Remember, thanks to boundary changes, there needs to be a swing to the Tories of only in the region of 1-1.5% for Labour to lose their majority. Given that the Tories have polled 37+ since, and have mostly been polling in the band 38-41 there would need to be seriously substantial moves in the polls for that to happen.

However, it is possible for Labour to become largest party in a hung parliament – most probably only just the largest party though. In this scenario you’re looking at 1910/1974 – a double election year. This, surely, is Labour’s worst nightmare. We’ve already heard that they have only £4m to pay for their entire campaign. How on earth would they be able to fund two in a year? The Unions have also published their ‘warchests’ (a lot of which they’re going to want to retain for possible industrial action in the ‘era of austerity’). Where would Labour find another £5m?

Add to this the probable extremely poor market reaction to a hung Parliament – especially one where Labour remain in office – and you have a potentially horrendous scenario, where the pound slumps (as it did yesterday on just this worry), the cost of international borrowing soars (as it has to an extent already – 10 yr gilts now trade at the same level as Portugal’s) and we go down into a deeper recession. If Labour are in office then, they’ll get a right thumping second time round.

In any case, I still think a Tory majority is the most likely outcome. Labour are largely trading on the ‘it’s a lovely day tomorrow’ platform. That won’t survive a realistic budget, and Darling tells us that’s what he’s planning.

emotionally they’re cold enough and philosophically they want them badly enough

As the William Golding showed, whether or not your teeth need drilling, the one thing you don’t want is a dentist that enjoys the job rather too much.

If Labour wins, will Brown stay on? If he does, it’s a poisoned chalice. If he doesn’t, there’s a chance for some change. I think Labour need a spell in opposition to work out what they stand for and what makes them different from the Tories, from the ground up.

do people really believe that people vote on the basis of doing things like actually working out what the public spending budget is likely to really look like under the alternatives? Blimey. I must be a cynic, I see the whole process as being a lot cruder, dumber, and based on intangible emotional stuff, than that.

whether or not your teeth need drilling, the one thing you don’t want is a dentist that enjoys the job rather too much.

I’d say that a dentist who pretends you don’t need fillings for so long that you end up needing root canal would be worse.

Who ever wins , we need to transfer resources from the non-productive to productive sector which means training craftsmen, tehcnicians, scientits and engineers for industry.

[11] “I think Labour need a spell in opposition to work out what they stand for and what makes them different from the Tories, from the ground up”.

Look what happened last time this happened – we got Blair, managerialism, and oodles of spin.

What DO Labour stand for nowadays – whatever Gordon Brown & Mandy tells them, I suppose is the short answer?

[15] Well, this is the heart of it – a debate we’ve had here before, methinks.

The activist base is “old Labour” – it doesn’t like the market (or more accurately, it doesn’t like the kind of people who succeed in a market economy) and without it, Labour can only fight an “air war” – which presupposes a Blair or a Cameron. But with it, Labour is vulnerable to charges of theft – and remember many people vote not on the basis of where they are but on the basis of where they would like to be in a few years’ time. It’s only fantasising that keeps a lot of people going – look at the libertarians who come on here and act out for a start!

The tightening of the polls has helped people focus on what Labour might do if they regain power and as we all know it won’t be pretty on any level. Even their own activists appear terrified when they realise the awful reality of the possibility of Labour getting back in.

I don’t think it is healthy for any particular party to be in power for too long, unless the party concerned changes and renews itself sufficently to be essentially a different beast. Hence the blair/brown era needs to come to an end, and the labour leadership needs a new generation – this will only happen in opposition.

Is this even a question? Obviously it’s a poisoned chalice, next few years are going to be hell. If Labour win they’ll have to make all the hard decisions they’ve been putting off, the questions about Brown’s leadership will return within months, and they’d end up loathed by the electorate. They’d be out of power for a decade or more, and we’d be stuck with a Tory government dominated by the right-wingers who feel vindicated in their theory that Cameron was too liberal and namby pamby to be electable.

If the Tories scrape in, there’s a good change they’ll be so hated they’ll be out again within five years.

Tom @6

So Tory cuts will be an orgy of blood-letting whereas Labour cuts would have room to show a spirit of fairness.

Yesterday, John Denham was on the Today Programme to answer the research finding that, in light of all the things that Labour wanted to protect local government faced cuts of 10-20%. Evan Davis (hardly a rottweiler) asked him what level of cuts he thought local government should prepare for.

He refused to answer, the question – essentially hoping that the recovery would render cuts unnecessary. To pretend, even now that even those elements of government spending which have not been protected will remain OK is not compassion or fairness, it is insane. If the recovery does not come huge cuts will be needed and yet, the Secretary of State for Communities and Local Government will not say even what levels of cuts they should plan for. Now, if you won’t plan for cuts then you get no say in what those cuts are. If you won’t wield the knife yourself, how can you guarantee fairness. Of course, if the economy does rebound, the cuts won’t be necessary but that is no reason not to be ready if they are.

The most Denham would say is that whatever cuts did come would be in the form of “efficiencies” in the back office that would protect frontline services. This is nonsense. Let us at least acknowledge that, if 10-20% efficiency savings could be made with no impact on frontline services then it would be a truly dreadful indictment of Labour’s record.

You simply can’t argue that you can make huge cuts without affecting frontline services whilst at the same time saying that you have been managing the public finances effectively for the last ten years. That is to say that you cannot simultaneously claim to be compassionate and competent in this matter.

The Tories have more flexibility – they can argue that there is waste to be eliminated for which they have no responsibility and which they can cut. This does not make them “enthusiastic” cutters or “cold” it is simple honesty. They can and should work to identify the cuts that will have the biggest impact on the deficit whilst having the least impact on services. If the economy picks up strongly, the cuts will probably remain largely unimplemented – after all, cuts are hardly a vote-winner in times of plenty.

Unfortunately, I doubt either party (or even the LibDems) will have the guts to concentrate the cuts on those who can take the hit: i.e. the middle classes.

So effectively what you are saying is that Labour shouldn’t win power this time around, as they’ve made such a horrible mess of the economy that whoever has to fix it in the next parliament will have to make so many hard choices (which, by inference, Labour are unwilling to make in this one) and cuts that they will make themselves deeply unpopular?

Is that it?

By inference, what you are saying is that the current Labour government are not acting in the best interests of the country at the moment, and are more intent on maintaining their popularity?

Tyler, thats what all political parties do

This is a godawful post in so many ways.

I think it is much better that the necessary cuts to deal with the deficit are performed by Labour.

The Conservative party will be reducing taxes at the same time as cutting public expenditure. The public will see that the public expenditure cuts are being made not for the deficit but to facilitate tax cuts for the wealthy. I think this will lead to a great deal of trouble.

Sorry for not getting stuck in, I’m just way too busy today.

I should have made thus clearer in the article, but the above is predominantly a summary of what the panelists last night said generally, and then what Dr Gamble said specificaly (as best I remember him).

Thus the piece isn’t primarily about what I think – though I have to say I found prof Gamble very convincing.

Luis: yes, good point – but does anyone really gave a plan?

To person pointing out that 1992 came before a recession: good point, but i think the overall comparison is still worth making.

Surely it is not just about cuts ? A smaller version of what we have now is a country stillm heavily dependent upon financial services in SE England . How are we going to change expenditure se we can develop manufacturing in the industrial parts of the UK and produce goods he rest of the World can buy? When comparatively few students study maths, physics and chemistry A Levels how are we going to to develop green energy? If we are going to grow out of this recesssion what are we going to make which the rest of the World wants to buy?

Paul,

yes I appreciate that … it’s just part of the every day reality of politics, nobody has a plan but everybody will claim they have. Did you read Mr Euginides on this? almost same analysis from other side … nobody wants to win!

No idea how it will go, but I would not look forward to 4 years of trench warfare between a Labour govt and essentially Tory local govt in England, with the one using the other as a scapegoat.

Not good .

Wonder if Brown would maintain his electoral reform idea if they won? Is it in the manifesto?

Luis:

no, I missed Me E. But I saw obnoxio the clown saying he wanted Labour to win as it would destroy them. (see link at my place)

When UKIP tell you to vote Labour, something is up.

Is there a Labour manifesto at all?

Part of the problem is that large deficits decrease long term growth, through a number of different mechanisms. There is no way we can simply grow our way out of this deficit – not least because so much of it is structural – Labour spending too much. Ad to that the union’s power over Labour, and the effects of the “client state” of civil servants who owe their jobs to Labour (and thus vote Labour), and you can see why the market gives no credence at all to the idea that Labour will cut the deficit markedly. After all, they are the ones who created it.

People know that the UK cannot indefinately go on like this. Both parties will be faced to make huge cuts, but Labour will be reluctant to do this, even if it the right thing to do for UK growth prospects, as it will alientate their core vote. The Tory party, I’m sure, aren’t looking forward to doing it either, but it will affect their vote less, thus there is more of a chance things will get done.

Putting it into perspective: the million new civil servant jobs labour created since 1997, if cut entirely, would only save approx £30bn (plus some for pensions, but UK public pensions are off balance sheet anyway). To get the budget back to level, ALL the extra spending since 1997 will have to go.

Grr, iPhone = typos

‘almost same analysis from other side … nobody wants to win!’

Well, I’ll have a crack at it if nobody else wants it.

Doesn’t matter to me if I don’t get re-elected in 5 years time.

[31] Tyler, do you think it would be good for the economy if public sector workers didn’t have a vote?

This may sound a ridiculous idea, but there is a view that the Tories will want to do something about the Lords in order to recover their majority there – and the mass creation of peers is not necessarily the most attractive way forward for them.

Since there is at present a near-zero democratic input to the Upper House, even a limited franchise (e.g. excluding public sector workers, perhaps, or tenants) in the spirit of Disraeli’s “fancy franchises” might well appeal to the Tories as an alternative – and it would re-assure the markets too.

Grr, iPhone = typos

Yep.

I think you’ll find Obnoxio is a fine upstanding member of LPUK not UKIP.

@ {34} Mike

When did I ever say that? All I alluded to is that Labour aren’t very likely to cut the budget deficit, because it means cutting a lot of the public sector non-jobs they’ve helped create – not least because those people tend to vote Labour. That’s before you consider the effect of the union’s on Labour.

The real problem has come because growth under labour came on the back of debt, and it’s left us with an uncompetative private sector and a burgeoning public one. Parts of the public sector are utterly vital, but it has to be said, that efficieny has plummetted and many roles are not vital to public services.

As for the Lords; Labour have pumped the upper house full of their own peers. In a lot of way the hereditary peers were much better, as though they tended to be conservative in outlook (small C) they weren’t beholden to any particular party, and thus acted as a good balance to the commons. These days that role is left solely to crossbenchers.

31. Tyler

‘ Part of the problem is that large deficits decrease long term growth, through a number of different mechanisms. ‘

Professor David Hendry looking at 150 years of data can find almost no relationship between debt and growth.

‘ The UK became a dominant world power with [debt/GNP] ratios between 1 and 2; and the UK grew at its fastest when its debt/GNP ratio was highest, not that any causality can be ascribed to that. But essentially there is almost no relationship I can find, having tried over many years, between debt/GNP (or changes etc.) and growth, unemployment, or inflation over 1860-2000. (see Hendry, DF (2009) `Modelling UK Inflation, 1875-1991?, Journal of Applied Econometrics, 16, 255-275; and Castle, JL and Hendry, DF (2009)`The Long-Run Determinants of UK Wages, 1860–2004?, Journal of Macroeconomics, 31, 5-28 ). ‘

http://blogs.ft.com/undercover/2010/03/maybe-debt-doesnt-matter-after-all/

Reinhart and Rogoff produced a paper that says when the national debt to GDP ratio reaches 90% then there is a 1% fall in growth. However, what they show is a correlation rather than causality. It is just as easy to imagine that debts were growing because of weak growth and the government was not generating enough revenue, than it is to say that the government debts was causing the weak growth. When someone like David Hendry can find almost no relationship surely that is a finding worth noting.

[36][37] Yes, the relationship between debt and competitiveness needs to be explained – it isn’t intuitively obvious.

And I know you didn’t say that, Tyler, in your original post. I was asking a question. But your argument at [36] comes very close to saying that the country would be better off if no one supported the Labour Party – and if that is what you think is true to-day presumably you think it’s always been true. The logic of that is a set of constitutional arrangements designed to minimise the influence of left-of-centre voters, as I suggested in my previous post.

@ Richard W

Debt is deffered taxation.

High debt economies suffer lower trend growth because;

higher taxation (as mentioned)
debt crowding (harder for corporates to issue debt)
higher real interest rates
lower business confidence

these are all linked to some extent.

remeber also, that all the periods of super high debt we have had before now were linked to large necessary wars, not just for flagrant spending as we have had over the last 10 years. wars end – and people can understand deficits for those reasons. Running up massive debts because you can’t manage the economy is a completely different story though.

regardless, if you look at the UK’s REAL debt/GDP ratio (i.e. if you take into account the cost of public sector pensions, PFI) we have around 200% to GDP. Japan, with ~200% debt/GDP INCLUDES their public sector pension liabilites. It is rather disingenuous to say we started the crisis with low debt – the truth is we started it with a low stock of Gilts. The accounting trick Brown uses to keep it off balance sheet might fool some economists, but it doesn’t really fool the market. Those pensions still have to be paid, and are coming out of future (deferred) taxation – the same place as Gilt interest payments are coming from. To all intents and purposes, Gilt payments and pension payments are near enough identical.

back to your point though – a 1% fall in growth when your prime growth rate really only can average 2-2.5% is a HUGE fall in the GDP growth rate. Labour are relying on absolutely massive growth to reduce the deficit, and by your own arguments, it simply won’t happen.

look around the world – high debt economies everywhere are struggling, and low debt economies are doing better. Japan is the best example – its been deficit spending (+QE) for years, and all they’ve got to show for it is huge public debt, deflation and sub-par growth since the 80s.

Tyler, there is about twenty different points in your post so I will not respond to them all.

; regardless, if you look at the UK’s REAL debt/GDP ratio (i.e. if you take into account the cost of public sector pensions, PFI) we have around 200% to GDP. Japan, with ~200% debt/GDP INCLUDES their public sector pension liabilites. It is rather disingenuous to say we started the crisis with low debt – the truth is we started it with a low stock of Gilts. The accounting trick Brown uses to keep it off balance sheet might fool some economists, but it doesn’t really fool the market. Those pensions still have to be paid, and are coming out of future (deferred) taxation – the same place as Gilt interest payments are coming from. ‘

I don’t know what Japan includes in their national debt so I can’t respond to that point. You are implying that Brown changed the method of counting national debt compared to how it used to be calculated. That simply is not the case. The reason that PFI and pension payments are not part of the national debt is because they are contingent liabilities. Therefore, you can’t count a contingent liability as part of a stock of debt.

People generally go about the contingent liabilities because they want to come up with a big scary number. However, why stop at pensions and PFI, why not include the NHS budget for the next thirty years as part of the national debt? It is a fair assumption that we will have a fire service in the future. Why not include the next thirty years fire service budget as part of the national debt. The funding comes from the same source so there is no rational reason not to include them. Why not include all future government spending as part of the national debt? Moreover, PFI spending leads to an asset. You would need to offset the PFI liability with the value of the asset usually a building. Moreover, the cost of servicing the PFI liability is also a financial asset for whoever provided the financing. Do you see how absurd it gets thinking of other things other than the stock of gilts as part of the national debt. Gilt coupons and principal are known and are not contingent so only they are counted in the debt/GDP ratio.

If you made the point that Brown expanded PFI rather than borrowing from the gilts market to keep the spending from going on the national accounts I would agree. However, to suggest it was some sort of accounting trick is not the case. To me it suggests they were serious about joining the euro and trying to stay within the EU Stability and Growth Pact. At the same time they were increasing capital investment expenditure without borrowing it from the gilts market. If they had borrowed from the gilts market they would have been in breach of the Stability and Growth Pact.

‘ To all intents and purposes, Gilt payments and pension payments are near enough identical.’

Not actually true. Pension payments are part of the primary budget. Interest payments are not part of the primary budget. When the country’s structural deficit is calculated it is always the primary budget excluding interest payments.

*sigh*

Firstly, PFI does not result in an asset for the government at the end – after a certain period of time the buildings are handed back to the private sector – its a leasehold effectively.

Pensions and PFI are NOT contingent liabilities. They are defined liabilities. Whilst they are not debt in the form of Gilts, they are most certainly liabilities, which should sit on the debt side of the balance sheet. The government knows it will owe a certain amount each year, and has little or no control over those costs. Your example of fire service/NHS etc is not valid. The government has no long term legal obligation to keep funding them and there is no long term, well defined structure to those payments.

By grouping pensions (long term, defined liabilities) with everything else, and paying for it out of tax revenues, you are effectively pulling the same trick as the government, and not calling the liability what it really is – debt. Japan has part monetized that debt in the form of JGBs, but that doesn’t change the fact that in reality THE UK HAS ROUGHLY THE SAME AMOUNT OF DEBT AS JAPAN AS A % OF GDP.

Let me ask you this; is it fair that pension funds are forced to hold assets against their liabilities, whilst the government doesn’t account for its very similar liabilites at all?

(hint: a bank or pension fund would hedge one with the other….)

37. Richard W . What concerns me when people talk about debt is that in past times , Britain had a industrial and trading capability to produce goods people wanted to buy. We also had a coal industry which supplie our energy needs. To increase our industrial acapbility needs investment . If money is spent paying off debt , then there is less for investment.

A main reason for our debt in the 18c 19C was that we constructed major infrastucture projects – canals, railways, docks, a Royal Navy, Merchant Navy, water supplies, sewers, roads,steel furnaces, factories ,gasworks, electrical power stations, coal mines etc. Half of Labour’s expenditure appears to be on white collar administrators.

A major reason for PFI was the past experience of governments failing to complete projects on time and to budget. France appears to have a better ability to complete large projects on time to budget because of a a better technically educated and trained civil service.

Peter Scheef ( I think the name is correct ) has pointed that the USA ( Like Britain ) has greatly reduced it’s industrial capability . It would would appear that the middle class , in both countries have turned their backs on science , engineering and technology. Unless there is cultural change , such that the middle class enter technological and scientific careers , then how are we to expand our export industries? Japan spent 25 yrs after 1945 , developing their industrial capability – I cannot see the UK spending a similar length of time developing businesses which can earn money?

A lot of Public Sector spending was conducted as a PFI when none of the rationale for it was applicable . The argument that contingent Liability is not debt might be a nuanced one but not in this case . The state insured the loans and thereby moved debt off balance sheet .Just as the banks did , with AIG …perhaps you have noticed the results. That is why AIG had to be bailed out .The risk is the thing that should be on balance sheet.
This was gleefully and endlessly documented by Private Eye as well as they shenanigans surrounding changes in accounting procedures resisted by New Labour.
It seems bit of doleful joke now but this all surrounded the supposed 40% rule , the golden one .The logic of some of these comments appears to be that anyone so foolish as to think such a rule mattered is unfit to run a whelk stall..mmmm
I think the point about the levels of debt we are in as compared to the Second World War can use a little contextualizing . The UK entered the War still a great world power and the US lent the money so we could fight the Nazis on their behalf . These are not conditions likely to be repeated and despite the obvious fact such a debt is not the same ( we have no war we can stop fighting ) , this still hung over the country into the 70s .

New Labour did not ever think that the redistributive efforts of its surges in public spending were helping growth. Clearly removing spending from the efficient parts of the economy and pushing them into the least efficient does not do that. They thought they were sacrificing growth for fairness ,in fact that phrase was often seen until recently when it became clear that this was a dreadful mistake .

@ Thersites

I think you have hit the nail pretty much bang on the head.

Even Labour are planning over 130 billion of cuts. Halving the deficit in 4 years means cuts of 90 billion (Half the deficit) On top the debt bill will increase by 46 billion to service the extra borrowing. 136 billion of cuts? People should be told.

However there is a solution for the Tories.

1. A doomsday book of all liabilities
2. A hypothecated tax to pay for it (Other taxes can be reduced).

This tax needs to appear on all payslips, and show a cumulative figure. It needs a snazzy name, and since its a tax on working, labour tax is a good choice. Small l so no confusion with the Labour party, capital L

People won’t let Labour back in and there will be real preasure for cuts. Even better give people direct control. ie. If its the will of the people, it can’t be argued with.

41. Tyler

*sigh*

‘ Firstly, PFI does not result in an asset for the government at the end – after a certain period of time the buildings are handed back to the private sector – its a leasehold effectively.’

Pensions and PFI are NOT contingent liabilities. They are defined liabilities. ‘

There are different PFI contracts. Some are finance lease contracts and some the economic ownership is the public sector. They are contingent liabilities because the liability is conditional on the obligations in the contract being fulfilled. How can you tell who will meet their obligations and who will breach them? Here is a note describing the difficulties of including PFI on the national accounts and showing that some are included.

http://www.statistics.gov.uk/articles/economic_trends/ET636Chesson&MaitlandSmith.pdf

Future public sector pension payments are dependent on future RPI. Do you know what RPI will be Q3 2022? So how can you assign a monetary value today for an unknown in the future. Since pensions are financed out of the same general taxation as all other government expenditure there is no difference between them and all other government spending.

‘ Let me ask you this; is it fair that pension funds are forced to hold assets against their liabilities, whilst the government doesn’t account for its very similar liabilites at all? ‘

The pension fund might not exist in the future so they are forced to hold assets. Uncertainty over the future existence of the state is not the same as the future existence of a pension fund. That is the fundamental reason why governments in general are able to borrow more cheaply than the private sector operating in the same economy. Governments have an ability that the private sector does not enjoy and that is the ability to raise taxes.

“New Labour did not ever think that the redistributive efforts of its surges in public spending were helping growth”.

I don’t entirely agree with this. You may recall that year after year, Brown’s growth projections were more optimistic than the City’s, and that he tended to be more accurate. However, the budget deficit was always much bigger than predicted, and it was also accepted that Government spending was adding growth (temporarily at least, with Judgement Day to follow years later). I’ve always assumed that Brown based his growth figures on the planned rather than the published budget deficit.

Pagar.

My iPhone prempted UKIP, clearly taking my fatfingered typing to equate UKLP with UKIP (or LPUK, whatever).

Turns out apple has effective political aggregation software. Someone should tell wikio.co.uk

Strategist: fancy offering any, y’know, arguments in support of that statement?

Could I just say I’m not arguing in favour of PFI. I think it was an expensive and opaque form of funding. They should have funded this spending from general taxation or the gilts market.

Regarding cuts, the following point cannot be made strongly enough: we are not going to grow our way out of the deficit.

A return to growth may eventually remove the extra burden created by the recession, but we were already spending beyond our means. It is the structural deficit that needs to be removed.

There are those that say that debt can be increased, that we can afford it etc etc, but this is a pretty selfish attitude to take. It’s spending future revenues now (ie someone else’s money).

Many of us could “afford” to increase our personal debt level: it doesn’t make it a good idea. (However, at least with personal debt it’s you that has to pay it back).

Perhaps, actually I’d bet, that our pathologically self-centred PM thought along these lines:

1) If I borrow £50 billion, annual repayments will rise by £5 billion per year (for argument’s sake)
2) If I borrow £50 billion a year over 5 years, I’ll have to pay 15 x £5 billion over that period (£75 billion)
3) Thus I’m left with £175 billion to splurge on pet projects, votes, non-jobs, votes, etc.
4) My successors then pick up the bulk of the tab.

Thanks Gordon.

“Could I just say I’m not arguing in favour of PFI. I think it was an expensive and opaque form of funding. They should have funded this spending from general taxation or the gilts market”.

Out of taxation, not debt. Building a hospital is expenditure, not investment (there is no asset to sell at the end, so cannot be justified in the way that a personal mortgage can be). PFI appears to have been an accounting trick primarily.

If you, the Government, don’t feel that the required standards for hospitals, schools etc, can be met from revenue, then you have to raise revenue (ie higher taxes).
If you don’t feel that you can raise taxes sufficiently, for whatever reason, then you already have the best that you can afford (assuming that you’re not spending too much elsewhere).

The most potent poison in the chalice if there’s a really narrow Labour majority – in terms of seats – surely won’t be the fact that they’ll have to deal with the deficit and make cuts.

There could very easily be a situation – as in current opinion polls – where they are the largest party in seat terms, but win substantially fewer actual votes than the Tories. As ‘winners’, they would be expected to try to form a government. But the public would see them as having lost. Any attempt to form a government would be widely seen as undemocratic and dishonest. It would be monumentally unpopular, and the Lib Dems couldn’t co-operate on votes, let alone join a coalition, without buying into that unpopularity.

So realistically, a Labour win in that situation wouldn’t actually be a Labour win, since they couldn’t realistically form a government capable of doing anything. They’d have to cede defeat despite winning (if that’s constitutionally possible), or risk becoming the most unpopular politically entity in recent memory.

Looking on the bright side, it might finally force electoral reform…

PFI liabilities are small.

The real liabilities are pensions.

The civil service have racked up around 1.1-1.2 trillion.

The accrued liabilities for the state pension are about 1.5 trillion. However, this is a deceptive figure. If people don’t get a state pension by and large they will be on benefits. ie. Lose on the pension, and you have to pay out on benefits and vice versa.

However, you still got the state second pension.

Then PFI

Guarantees for nuclear decommissioning

Guarantees for banks

General run of the mill bills to be paid.

All manipulated off the books.

Even when quoted there is the discount rate fiddle. Assume that you have money invested. The government has no investments. ie Invest in speed humps and you’ll get a great return. Need cash in a hurry? Go do speed hump converters.

With no investment, what’s an appropriate discount rate?

Options are zero. Not unreasonable.

Use the RPI rate. After all the government is effectively borrowing from future generations.

Use the GDP-RPI rate. Assumes that GDP grows more than inflation. It isn’t at the moment.

Conclusion, its scewed. The government needs to cut 38% within months.

Nick

@ Paul

Turns out apple has effective political aggregation software.

Yeah it’s damned annoying.

Every time I type Gordon Brown it comes up with David Cameron……….

WhatNext?! :”PFI appears to have been an accounting trick primarily.”

I think it goes a lot further than that. It’s also at least partly ideologically driven, by a fairly simplistic “private sector = efficient / modern / future” mentality that doesn’t really consider *why* the private sector can be efficient at providing services (i.e. real competitive markets, which can’t exist in PFI).

There’s also the fact that the main beneficiaries of PFI (primarily the corporations that get the contracts, as well as the many PFI consultancies) are people the government finds useful to have “on-side” politically. The sector also offers pretty nice post-government career prospects.

As if that wasn’t enough, since PFI and privatisation have proved hugely profitable (at taxpayer expense), the financial markets scream blue murder and go tumbling downwards when politicians even talk about the possibility of slowing down the rate of increase of PFI.

[53] A fascinating economic ding-dong – but, Nick, if you really believe that

The government needs to cut 38% within months

Then you must also believe that there needs to be a military coup d’état.

Just out of interest (and since we are in fantasy land now), suppose the parties got together in a national government, cancelled the next election, announced such a cut together with a promise of “firm” measures to deal with any disorder – how do you think the ForEx markets would react?

Richard W, Tyler,

Lots of fun to be had deciding what the government should call debt and what it should call something else. However, you could look at it the other way around.

Japan’s debt hangover is widely agreed to be a problem – instead of adding UK pension liabilities to our debt, is it worth asking how national debt levels would compare if we took Japanese pension liabilities out of the Japanese debt. If the answer is that on this basis the UK and Japan have equally problematic levels of public debt then we have a problem – whether it is correct to count pensions as debt or not.

The other piece I saw recently was a graph put together by McKinsey showing aggregated public and private debt levels against GDP in the OECD countries. What that showed was Japan at the top – rising from 400% of GDP in 1990 to nearly 500% today. All the other countries go from about 180% of GDP in 1990 to about 300% today (Spain goes from 120% to 360%) The UK however goes from 220% to 460% of GDP, ending up only fractionally below Japan. Our problem is not primarily public debt but private debt.

The difference between us and Japan is that Japan uses the money to create first class infrastructure (and jobs) whereas Britons ran up the debt buying and selling the same houses to one another and now have little to show for it.

The poisoned chalice Labour thought they were passing to the Tories to drink, ie, the Prisoners Votes Case, may now be a bitter potion which Labour will be forced to swallow before the election!

57.George V . Last para good point. The point which is rarely made is ” What was obtained by running up the debt?”.

@ 57. GeorgeV

Sometimes just aggregating does not really tell us a lot. For example aggregating will always lead to those economies with a large financial sector as a proportion of GDP showing high indebtedness because of double counting in the finance sector. One debt can be counted a multitude of times in aggregate although the notional outstanding remains constant. Moreover, high household debt will be inevitable in any economy with high owner occupancy compared to an economy with high rented accommodation. However, does mortgage debt really matter?

Imagine an economy where everyone had a mortgage and paid X per month in mortgage payments. That economy would show the total outstanding on mortgages as total household debt.

There is no doubt that there is in the UK high debts in the household and corporate sector that will need to be reduced and this has negative implications for the macro economy. However, aggregates do not give any indication of debt-to-income ratios or the interest-payments ratio – the flow of interest payments relative to pre-interest disposable income.

Another economy everyone rents and pays in rent per month the same X that the first economy pays in mortgage payments. That economy would show in aggregate zero debt. There is essentially no difference to the macro economy between what is being consumed in mortgage payments and rentals. One high debt and one zero debt but no difference.

The paragraphs seem to have been mixed up in in 60
@ 57. GeorgeV

Sometimes just aggregating does not really tell us a lot. For example aggregating will always lead to those economies with a large financial sector as a proportion of GDP showing high indebtedness because of double counting in the finance sector. One debt can be counted a multitude of times in aggregate although the notional outstanding remains constant. Moreover, high household debt will be inevitable in any economy with high owner occupancy compared to an economy with high rented accommodation. However, does mortgage debt really matter?

Imagine an economy where everyone had a mortgage and paid X per month in mortgage payments. That economy would show the total outstanding on mortgages as total household debt.

Another economy everyone rents and pays in rent per month the same X that the first economy pays in mortgage payments. That economy would show in aggregate zero debt. There is essentially no difference to the macro economy between what is being consumed in mortgage payments and rentals. One high debt and one zero debt but no difference.

There is no doubt that there is in the UK high debts in the household and corporate sector that will need to be reduced and this has negative implications for the macro economy. However, aggregates do not give any indication of debt-to-income ratios or the interest-payments ratio – the flow of interest payments relative to pre-interest disposable income.

There is no doubt that there is in the UK high debts in the household and corporate sector that will need to be reduced and this has negative implications for the macro economy. However, aggregates do not give any indication of debt-to-income ratios or the interest-payments ratio – the flow of interest payments relative to pre-interest disposable income.

I disagree. Lots of companies don’t have high debts. For individuals, as with companies, the issue is really net worth. Who’s in negative equity? The majority aren’t.

The real issue is government debt, all of it. Pensions included. They don’t have assets they can sell. The government is in huge negative equity

The UK economy is consumer lead. At the height of the boom the public were borrowing and spending large sums based on their ever rising house prices. That extra spend has gone, probably for decades. Worse still banks will be pressuring borrowers to pay back these loans now they are not covered by house values and will not be keen to lend new money. This borrowing is apparently around 180% of GDP. This must reduce consumer spending for many years.

The pound is falling and expected to fall further which must increase energy costs and food prices since both are largely imported. This means increases in petrol, gas and electricity costs to the consumer. Few workers are getting rises in the private sector to offset these additional costs and for paying back loans. Many mortgages are based on very low interest rates. 400,000 people are in arrears at these rates A one percentage point rise in interest would cause debt service costs relative to income to double, to 13 percent.Therefore consumer demand must be muted for many years on these accounts.

The financial sector was a large contributor to GDP but this contribution must fall noticeably because of the reduction in business post boom and then permanently even more once the negative effects of new EU regulation are in place.
The huge amounts of money that will have to be paid to service public debt must severely reduce the amount of available investment in the UK such as in new industry for many years holding back any improvement in GDP.

A large amount of personal taxation is extracted from the not so well off. If personal taxation is increased say by 10% there will be a corresponding reduction in demand from the consumer making a double dip recession more likely.
Where is the upside than can overcome these effects inside a mere year or two or are politicians living on hope?

[63] I don’t understand your first sentence, Derek: in the sense that isn’t that true of all economies once they get past a certain stage of development? The alternative is, I suppose, an export-led economy, but you don’t get many of those in democracies.

That quibble apart, I think your analysis is very perceptive – I would only add that not only are few private sector workers getting pay rises, but no one in the public sector is either (nor are occupational pensioners).

The benefits of any future growth will – as has been the case in the USA since the 1970s – accrue solely to those who are already wealthy.

It is all very well for people to say that we should go for a “knowledge based” economy but the whole point of an economic strategy is to identify a course of action that you can do better than anyone else. (That of course is why we came to depend overmuch on financial services.) Such a strategy fails this criterion.

And it is all very well for people to say, oh well, our standard of living will have to fall until we are competitive again – and by inference that people will stop outsourcing call centres to the subcontinent or hiring Russian navvies. This also forgets one key point – demographics. Young people can work harder for longer, and most jobs don’t require more than a couple of years’ experience tops. (To check this, ask yourself what line of work is only practised by the over-forties. Psychoanalysis, mabe?) And the average age of the UK population is 55. Quite simply, the British labour force doesn’t have the physical stamina to be competitive, even if it was willing to work for £1.20-£2.50 an hour (which is all it’s worth on the global market).

The political consequence of this is likely to be that, whilst five of the last six General Elections have re-elected the incumbent, over the next 10 years or so, there will be a great deal of political instability. It’s beginning already, with people seriously supposing that UKIP and the Greens can win seats at the next election – without appealing to ethnic block votes, either.

Good article and addresses a central point to this election. We all know the Tories want to cut, we just don’t know exactly where. Labour on the other hand pussyfoots around pretending all is ok. This is where I think the Tories are missing out. Lay out specific cuts, and if Labour want to pretend they aren’t necessary and then win the election we’ll soon see who was right