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Hung parliament could sort out public finances

7:21 pm - March 10th 2010

by Giles Wilkes    

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Given there is no sign at all that the Conservative’s disastrous 2010 campaign is likely to improve, this question of the economy’s performance with a minority government will continue.

A note from CitiGroup puts the case for the prosecution:

There is no consensus across the parties on fiscal policy, while Lib Dem voters disagree with the Conservatives on fiscal policy and prefer Labour’s policies on most other key political issues. Lib Dem voters would rather go into coalition with Labour than the Conservatives. We suspect that a hung parliament would only be able to implement and sustain major fiscal consolidation if boxed in by a market crisis. Gilts and sterling remain vulnerable.

The author acknowledges Nick Clegg’s recent vow ‘not to take any risk with UK plc’, and suspects that they LibDems will not cooperate unless given the Holy Grail of electoral reform in return. Which the Conservatives will never grant.

Clegg is getting annoyed:

“David Cameron and George Osborne are stoking up fears in the markets, actively trying to destabilise the pound and reduce the government’s ability to borrow. It’s like a protection racket: vote for us or our friends in the City will lay waste to your economy, your savings and your job.”

Too right. Chris Cook in the FT has a more nuanced summary of how things might pan out:

The threat of the LibDems pulling the plug on a government is overstated. The third party would, very quickly, be seen as co-culprits for the administration’s programme. So the LibDems would be stuck with them. If they then caused the fall of the government, they would be blamed for the chaos that follows … So the path of short-term naked self interest – the most powerful force in politics – would almost always be for the LibDems to back the administration.

The Lib Dems have the most to gain and the most to lose from the hung parliament situation. Their incentives are unambigiously in the direction of fiscal responsibility. No-ones goes around thinking “I can’t vote Lib Dem – they are too serious about the deficit”. A period where the LibDems hold the sensible middle of the debate: between diehard romantic deniers on the Labour benches, and blinkered trapped-in-the-1980s CutNowCutHarders on the other side, could gain them real credibility with a public worried about the difficult, um, balancing act that needs to be performed.

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About the author
Giles is an occasional contributor. He blogs at Freethinking Economist
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Reader comments

As I understand it, Vince Cable, the LibDems spokesman on Treasury issues, has been very specific in saying he would not support an early budget delivered by George Osborne, the present shadow Chancellor.

It’s perhaps worth my posting again this link to reported comments by Sir Alan Budd on the risks of a double-dip recession from early, steep cuts in public spending. Sir Alan was chief economic adviser in the Treasury 1991/7:

William Hague’s recent departure from his regular foreign affairs brief to make comments about a return to the economics of the 1970s led me to speculate in another thread about whether Cameron is lining him up to replace George Osborne on realising belatedly that Osborne is an electoral liability.

A couple of Green Party MPs might also play a key positive role in such a scenario – exactly as they have in Holyrood, these last few years, to excellent effect.

3. Mike Killingworth

Giles, like most people you seem to have no idea what the level of cuts will actually mean.

By far and away the best article I have seen on this – and yes, the subject probably does require the attention span dead tree format does so much better than the Internet – is by John Lanchester in to-day’s London Review of Books.

If you are not a subscriber, go and read it in your local public library. While you still have one.

No-ones goes around thinking “I can’t vote Lib Dem – they are too serious about the deficit”.

Well no. Not while they pledge to ringfence education and the NHS (according to David Laws last night) and their most high visibility policy is a thumping great tax cut.

Rupert, before I start giggling, could you please specify how on earth the Greens believe we should sort out public finances?

2 – “A couple of Green Party MPs might also play a key positive role in such a scenario”


Giles is saying that the Lib Dems could gain credit by supporting greater cuts in public spending than Labour (to be fair, it sounds like his leader is listening to him).

As I understand it, the Greens support fewer cuts in public spending. Is the plan to follow the Irish example, where the Greens get a couple of MPs and then vote for the opposite of what they stood for election promising to do?

As an alternative to John Lancaster, try the analysis in the IFS’s Green Budget for 2010, as published in February:

9. Mike Killingworth

[3] Sorry, I forgot about their – excellent – website.

[8] I don’t know whether you got Lanchester’s name wrong by accident or on purpose. I’ll assume the former. From a quick – very quick – scan of the IFS paper, two things stand out for me

– the structural nature of the decline in GDP (likely to be increased if the sort of regulation Lanchester envisages actually comes to pass). A “base” unemployment rate of nearly 10% is fairly horrific but given the age structure of our workforce all too credible.

– the extreme difficulty of making cuts of the order (said to be) necessary without being socially regressive. Indeed, when all this has settled down – say in five years’ time – all the signs point to our society being as unequal as it was in the 1920s and 1930s. And education will not be a way out, either. This of course has implications for social cohesion and in the last resort for democracy itself.

‘To economists, there is a glaringly obvious solution to this conundrum: inflation. In the present circumstances, any government, faced with a mountain of debt, would want to use inflation to erode the real value of the debt. Even a relatively modest (by historic standards) level of inflation, say 4 per cent, will in ten years take away a third of the value of the debt.’

John Lanchester says 4 per cent is modest by ‘ historic standards ‘. Actually it Is near the average. UK Inflation averaged 4.1% 1900-1999.

‘ The acceptable limit on inflation, therefore, is pretty low. As it happens, the IMF has recently started saying that the UK inflation target is too low. It has 4 per cent in mind. That offers more room for manoeuvre, and although the bond market might grumble, it wouldn’t mind too much, because this would also involve new bonds being issued at more interesting interest rates than the current ones. The yield for a Treasury bond paying until 2049, for instance, is 4.25 per cent. That, in return for tying up your cash for 40 years, is unsexy. A period of higher inflation would juice up the return on newly issued debt. So the bond market (which really, truly is the force which determines what happens in this area – I can’t stress that enough) would probably let the government get away with 4 per cent inflation. ‘

This is a bit muddled thinking. I don’t think he appreciates the difference between nominal yields and real yields. The bond market does know the difference. Inflation erodes the value of already issued debt. The real yield on newly issued debt responds to an increase in inflation expectations. Therefore, higher inflation impacts the stock of already issued debt, not newly issued debt as he implies as the real yield could be the same at a higher nominal yield. At higher inflation money flows out of fixed income assets towards equities. It would only ‘ juice up the return on newly issued debt ‘ if the real yield was higher.


We need IMO to look at economic prospects in an international and not just a domestic perspective.

The Eurozone economy is evidently fragile and that is our main export market when we are hoping and expecting a boost to demand from more export sales and from home produced substitutes for imports that have become more costly in Britain through the depreciation of the Pound against the Euro.

That’s important if public spending is being cut back and consumers are constraining spending to pay off debts and build savings balances. Also, by the final quarter of last year, business investment was down 25% on a year before, largely because the banks are curbing loans to business for fear of the costs to them of rising bad debts.

Another reason for some pessimism is that mooted regulatory reforms of banking and financial markets to reduce the likelihood of another financial crisis will almost certainly reduce the profitability of banks and other financial institutions. One implication is that government tax revenues from the financial sector will be less buoyant compared with times before the onset of the financial crisis. Today’s FT carries a front page warning from the US Treasury Secretary that the US will resist some EU proposals for regulatory reforms so it will likely take time to sort out the reforms.

There are good reasons for worrying about what early and steep cuts would do to the British economy in its present state. But I also think it true that there’s clear evidence of wasteful public spending. Consider the implications of this recent news report:

“The National Health Service can make the £15bn to £20bn of savings needed during the next three years without damaging the quantity or quality of care – indeed while even improving the latter – according to David Nicholson, the NHS chief executive.”

If £15bn to £20bn can be cut from the annual NHS budget of c. £105 billions without that making much difference to the quality of patient care, what does that mean for other public spending?

Due apologies to Lanchester.

12. Mike Killingworth

If £15bn to £20bn can be cut from the annual NHS budget of c. £105 billions without that making much difference to the quality of patient care, what does that mean for other public spending?

Well, Nicholson makes a heroic assumption and also a health-specific reason – that more (relatively cheap) prevention would mean less (relatively expensive) cure. That in itself will mean more “busybodying” of the sort that riles up the libertarians on here. It may of course be that people who continue to lead unhealthy lifestyles after a number of warnings should be charged extra, but that is another debate for another time. I am unclear as to the extent that this approach can be transferred to other parts of the public sector.

The heroic assumption is that staff will accept pay cuts and more unsocial hours working in return for fewer redunadancies. Since most health-care staff have portable qualifications, I don’t see why significant numbers of the won’t simply emigrate.

13. Mike Killingworth

Apologies for the c*cked-up formatting and “the” in the last line should of course be “them”.

11. Bob b. Good points. Government needs to follow lean manufacturing . What we have left of our industrial base has spent the last 30 years removing unnecessary costs and focusing on only the essential. Too many in governemnt appear to have no idea on how to identify and focus on the essential and deliver value for money – many IT schemes for example. The problem is that most Labour politicians appear to have no experience of drafting a specification which actually solves a problem, followed by designing and constructing the project on time, to budget having ensured the cheapest long term cost is achieved.

There may be new schools constructed but unless you have the teachers who can cope with disruptive pupils, then educational excellence is unlikley to be achieved. Many schools in Asia achieve excellence in far worse conditions than those in the UK , even with classes of 50 pupils; the difference is the absence of disruption and the determination by the parents that their children should be well educated. If one lookeds at the conditions of such schools as Winchester College and Manchester Grammar School in the 1930s, many people today would be shocked, yet they produced academic excellence . If one looks at schools such as Mossbourne School they succeed because because of the quality of the teaching.

Labour like quoting how much they spend, what is important are the results.

“Well, Nicholson makes a heroic assumption and also a health-specific reason”

I asked a local healthcare professional about Nicholson’s comments – an extremely bright, articulate ethnic Indian lady, who came to Britain from America to marry, as I have a good rapport with her and we can have open, relaxed discussions.

Her response was to point to local examples where significant cost savings can be made from new and recently opened local care centres or polyclinics.

I can’t judge the feasibility of that without a good deal more hard information. But on what I’ve heard from other informal sources, there is the potential for significant savings by treating in polyclinics patients who turn up at A&E departments when there is no trauma or life-threatening condition to treat.

The fact is that some patients will go to A&E when they could readily be treated by their GP or in polyclinics. All they really need is a bit of first-aid, nursing care or advice. They don’t need the highly specialised and costly skills and equipment needed to treat traumas and critical conditions.

Charlie 2 @14: “Labour like quoting how much they spend, what is important are the results.”

Agreed. I’ve been in and around governments at various levels and politics for well over 30 years, sufficiently long to observe that the regular practice of Labour politicians is to demonstrate their personal “good intentions” by showing how much taxpayers’ money they are voting to spend to prove it. Spending public money is seldom difficult. Spending it wisely and effectively is.

Try this press report from May 2003:

“The [US] Department of Defense, already infamous for spending $640 for a toilet seat, once again finds itself under intense scrutiny, only this time because it couldn’t account for more than a trillion dollars in financial transactions, not to mention dozens of tanks, missiles and planes.”

Managing government IT contracts has proved challenging for successive governments, an issue that has been openly reported and debated in mainstream professional magazines, like Computer Weekly, for many years. The problems are not new or unusual and not peculiar to the public sector – or to Britain. Part of the problem is in finding effective and – importantly – technically competent managers. Such people are difficult find and recruit.

In the early 1980s, there was a report in The Economist about jobs for PhDs in philosophy from American universities where the annual output easily exceeded the numbers of academic appointments becoming vacant. It turned out that many were going into the then rapidly expanding computer industry where an aptitude for logical thinking is especially valued.

I don’t think that there’s any simple, standard recipe for good schools. As best I can tell, the consensus among relevant professionals is that the best strategy is to find and appoint “good” head teachers, which turns out to be easier said than done.

I’ve posted this before:

“Honderich is also a consequentialist, which partly explains his hatred towards Tony Blair. ‘He is always asking to be judged by the morality of his intentions,’ he spits. ‘He doesn’t understand that no one cares about his fucking morality. We judge him by the consequences of his actions. In any case, his morality is so muddy and ill-considered. I’m increasingly coming to the opinion that Blair’s main problem is that he’s not very bright.'”

Before he retired, Honderich was Grote professor of philosophy at UCL.

Rather than schoolboy sniping, how about looking at what the two Green MSPs have actually stood up for and got enacted in Scotland, since the SNP took office?

Green MPs in Westminster would indeed stand firm against the ludicrous agenda of cuts cuts cuts that the 3 main Parties are joining in. Govt debt is at 55% of GDP. It may in the next 4 years get to around 70%. It was more than 100% of GDP from 1945-1963…

Managing government IT contracts has proved challenging for successive governments, an issue that has been openly reported and debated in mainstream professional magazines, like Computer Weekly, for many years. The problems are not new or unusual and not peculiar to the public sector – or to Britain. Part of the problem is in finding effective and – importantly – technically competent managers.

I believe that they would achieve more ‘wins’ if they bothered to read Dunning-Kruger and NAO and PAC reports on projects in a genuine attempt to “learn lessons” from failure. It seems a substantial factor is deliberate dishonesty, obfuscation and denial of any problems by those in authority. Possibly because political expediency is prioritised over the interests of the population, and no-one is held to account.

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  1. Richard Hebditch

    RT @libcon: Hung parliament could sort out public finances http://bit.ly/dsEbYd

  2. Liberal Conspiracy

    Hung parliament could sort out public finances http://bit.ly/dsEbYd

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