Why should Labour think about signing up to Osborne’s plans when they don’t work?

4:00 pm - April 23rd 2013

by Duncan Weldon    

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Last week political news focused on a report in the Independent, claiming that Labour will pledge to go into the next election with higher spending plans than the Conservatives.

It gave a preview of forthcoming research from the Fabians:

Arguing the cuts may be unnecessary, the study says that, if the economy is growing by about 2 per cent annually, public spending could rise by 1 per cent a year and Labour could achieve Mr Osborne’s target of seeing debt falling by 2016-17 two years later or sooner than 2018-19 if taxes were increased.

Leaving aside the likely political brouhaha over what this analysis means for the politics of 2015, it is an important contribution to the economics of 2015.

The political debate on whether or not parties should sign up to the Coalition spending plans beyond 2015 is currently crowding out a much more important fact – the UK no longer has a fiscal framework that is fit for purpose.

In effect many are now arguing that policymakers should buy themselves ‘fiscal credibility’ by signing up to a fiscal framework which is failing to reduce the deficit. This seems to me an odd state of affairs.

The Government originally said it would have reduced borrowing to £37bn by 2014/15; the latest estimate is for annual borrowing of £108bn in that year. Cumulatively the Government is set to borrow around £250bn more than it intended.

The current framework is not working, even on its own terms.

Partially this is because many seem to assume that reducing the deficit is simply a result of taking ‘tough choices’ and making spending cuts. But when the economy is weak then the multiplier on government spending is higher and making cuts now simply reduces growth, pushes up unemployment and makes ‘dealing with our debts’ harder, not easier.

Austerity keeps being extended and yet some people continue to argue that setting unrealistic targets and then missing them is the best way to ensure that you are seen as credible.

But the problems with the current framework don’t stop here. I would go further and argue that the structural deficit itself is the wrong target. The structural deficit is not something that can be measured, it is only something that can be estimated and those estimates are highly uncertain.

Those arguing that policymakers should sign up to the current fiscal plans are in effect arguing that policymakers should sign up to a fiscal framework that has failed to reduce the deficit anywhere as much as promised, that binds in tight austerity, that is targeting the wrong measure and that is subject to heavy revision.

The real question that should be asked of policymakers is not, ‘do you sign up to the Government’s current spending plans?’ But instead, ‘what is your proposed framework?’

A longer version of this post is here.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments

What Labour should do, I think, is make commitments that relate to borrowing rather than spending – demonstrating a firm intention to reduce the level of borrowing over the next parliament, but leaving room to adjust timescales and the balance between growth, spending cuts and tax rises from year to year depending on the economic circumstances.

The Tories are going to try to do what they did in 2010 and set their own proposed deficit reduction timetable as the benchmark against which Labour must be judged. (‘They say they’ll halve the deficit in four years? We’ll eliminate it entirely! They say they’ll cut it by 1.25% of GDP a year? We’ll cut it by 2.5% a year!’) But this time Labour will be able simply to reject whatever accelerated timetable the Tories propose as lacking all credibility. They can reasonably insist that the benchmark is not what the Tories *say* they’ll achieve in terms of deficit reduction between 2015 and 2020, but what they *actually* achieved between 2010 and 2015.

Which means the benchmark is going to be really quite low – maybe £50bn over five years. As such, given some modest assumptions about growth and some modest proposals on tax and spending, Labour will be in a position to pledge to beat the Tories on deficit reduction without pledging to match them on spending cuts.

Labour has already said the Indpendent “report” was rubbish.

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