Posts tagged: inflation

Official: Tory Led Government is bad for the economy

Conservative and Liberal Democrat spokespeople like to use the phrase “…because of the economic mess Labour left this country in, we have had to … share aircraft carriers with the French / sell off our forests / cut the NHS / betray students / kill a kitten / whatever”.

They use the argument that however undesirable the things they are doing, they are vital to help deliver their economic policy.

Government spokespeople give the impression that the economy was going to the dogs in May 2010 and only the prompt actions of the Tory led Government have been able to save it.

In fact, the direct opposite is true.

Labour had already done most of the things needed to stabilise the economy and return it to strong growth. The actions of the Tory led government over the last 8 months have destabilised the economy and returned it into recession. Unemployment is up, employment is down, inflation is rising, growth is faltering, business confidence is down.

The sad fact is that, as predicted by many economists 8 months ago, the policies of the Tory led Government are indeed choking off the economic recovery.

Here is what has happened to the main economic indicators (growth, inflation, unemployment) over the last 8 months:

GROWTH
Under Labour in May 2010 – on course for 3.5% a year and the strongest in the G7
Under the Con-Dems in January 2011 – back into recession with 0.5% GDP reduction and annual growth of 1.7%
(Source: Office for National Statistics, 25 January 2011)

INFLATION
Under Labour in May 2010 – 3.2% and falling
Under the Con-Dems in January 2011 – CPI at 3.7%, RPI at 4.8% and rising
(Source: Office for National Statistics, January 2011)

UNEMPLOYMENT
Under Labour in May 2010 – falling
Under the Con-Dems in January 2011 – up 49,000 to 2.5m
(Source: Office for National Statistics, 19 January 2011)

10 ConDem lies on the economy – and how to answer them

If you don’t have children, or a job, a business, a mortgage, savings, loans or investments and are not living on benefits or receiving any state services (like transport or police) then you can breathe a sigh of relief. The Con Dem’s economic policies won’t affect your lifestyle.

For the other 99.9% of us, I urge you not to read any further if you don’t want to worry about what they are in the process of doing to our economy.

Labour left office in May with strong economic growth, positive confidence in business, low inflation, unemployment dropping, low interest rates, a triple A credit rating and a deficit which was already falling and on target to be halved in four years.

Every single one of those indicators is now going the wrong way.

Many economic commentators agree that the primary reason for this abrupt reversal of fortunes is the combined impact of the June 2010 “emergency budget” and the Coalition’s cuts programme, creating fear and uncertainty in the markets and sapping business confidence.

Labour’s mantra until the next election must be: “Labour got Britain’s economy safely through the recession, then the Tories screwed it up”.

There is a real problem here because at the moment, the ConDems are winning the argument. In a recent poll 44% of those polled said the coalition was doing a good job in securing economic recovery against 37% who said it was doing a bad job. 42% said Chancellor George Osborne was doing a good job. Worse, a poll immediately after the “emergency” budget suggested that 49% of voters believe it is LABOUR who are to blame for the cuts.

I spent much of the 1980s and 1990s responding to voters who genuinely believed that in 1979 the trade unions had taken over the government, that the dead were lying unburied in the street, and Britain was on the point of anarchy. They found it difficult to ever trust Labour in Government again. The Conservatives had managed to spin the winter of discontent into an enduring myth of left-wing incompetence.

We must not let them do it again.

The immediate challenge for the new Labour leader will be to regain the initiative on economic issues and attack the unnecessary cuts and tax rises, while presenting a credible alternative economic case of how we would have cut the deficit.

The window for turning around public perception is closing fast. By the time of the Spending Review, the ConDems will have nailed their economic message – the economy is stuffed, the cuts are necessary, it’s all Labour’s fault – to the floor and it will be impossible to shift. It will take years to rebuild confidence in Labour’s ability to run the economy.

I would start with this basic summary:

Labour’s policy is to grow the economy and use increased economic activity, lower unemployment costs and higher tax returns to pay down the deficit. We want limited reductions in spending and a progressive, steady approach to reducing the debt. While we are doing it we would protect public services, particularly for the most vulnerable, while removing wasteful spending and bureaucracy.

The Con Dem policy is to slash and burn public spending, cut taxes for the rich and big corporations, and raise taxes and cut benefits for ordinary people. While most economists expect their plans to lead to a double-dip recession and high unemployment, the Con Dems are gambling that growth will materialise out of thin air.

For a detailed and expert critique of what the Coalition is doing, see Ed Balls’ excellent Bloomberg lecture in which he takes apart Osborne’s analysis and strategy.

1. LIE: Labour’s plan to reduce the deficit was not credible
“What we have not inherited from our predecessor is a credible plan to reduce their record deficit.”
(Source – Osborne Budget Speech, 22 June 2010)

TRUTH: Labour’s plan was to halve the deficit in four years. The independent Office of Budget Responsibility (OBR) set up by the Con Dem Government analysed Alistair Darling’s original 2010 Budget and their conclusion was that Labour’s proposals were already working and would indeed MORE THAN halve the deficit in four years:

“Our central forecast is that borrowing will fall from 11.1 per cent of GDP (£156.1 billion) in 2009-10 to 3.9 per cent of GDP (£71 billion) in 2014-15. The deficit on the current budget falls from 7.6 per cent of GDP to 2.7 per cent of GDP over the same period. These improvements are driven by the expected recovery of the economy over this period and by the policy measures announced by the previous Government to reduce the deficit.”
(Source: OBR Pre-Budget Forecast 14 June 2010)

2. LIE: When the ConDems opened the books, the deficit was worse than Labour had admitted, which is why we have to make deeper cuts.
“Because the structural deficit is worse than we were told, my budget today implies further reductions in departmental spending of £17bn by 2014-15.”
(Source – Osborne Budget Speech, 22 June 2010)

TRUTH: Far from things being worse, the deficit turned out to be £7bn LOWER than Labour had predicted – Darling’s measures were already having a positive impact.
(Source:  Office for National Statistics April 2010 report, published June 2010 (PDF) -  see Telegraph story for explanation and comment)

Note: The “structural deficit” is a subjective concept – it has no impact on departmental spending. Robert Chote, then Head of the Institute for Fiscal Studies and now Head of the Government’s own Office of Budget Responsibility said Osborne’s detailed figures on this concept were “spurious
See here for details of how misleading Osborne is being.

3. LIE: We had to act fast to reduce the deficit because of the crisis in the Eurozone
“The crisis in the eurozone shows that unless we deal with our debts there will be no growth.”
(Source – Osborne Budget Speech, 22 June 2010)

TRUTH: “The UK has the lowest debt-to-GDP ratio of any major EU economy. The average maturity of British government debt, at 14 years, is more than double that of any eurozone economy. And the cost of British government borrowing has been falling all this year. Indeed, sterling has become a safe haven for funds fleeing the uncertainties of the leaderless eurozone.”
(Source: Lord Eatwell, Professor of Financial Policy at Cambridge University, writing in The Guardian 9 August 2010)

4. LIE: Our economy was in a worse state than Greece – we faced a sovereign debt crisis if we did not make urgent and severe cuts.
“Our Budget deficit is set to overtake Greece. If we don’t deal with this, there will be no growth, there will be no recovery.”
(Source: David Cameron Speech, 28 May 2010)

“Greece stands there as a warning signal of what happens to countries who wait too long to act.”
(Source: George Osborne speech to Tory Spring Conference, 27 Feb 2010)

“[Gordon Brown] has left this country with the largest budget deficit in Europe – larger even than Greece”
(Source: George Osborne quoted in the Daily Telegraph, 6 May 2010)

TRUTH: Our economy is much stronger than Greece and our debts are much lower than the Greek debt – our debt is 68.1% of GDP while the Greek debt is 113.2% of GDP. Our economy is 6 times the size of Greece. Greece has a 50% higher unemployment rate. Our credit rating is much better, our debt costs less, our bonds mature later. The comparison is ridiculous.
(Sources: CIA World Factbook, World Bank)

Conservative Mayor of London Boris Johnson has also attacked this spurious argument:
“You may remember that during the election and in the run-up to the June budget, we were told that it was necessary to avoid a Greek-style sovereign debt crisis. We were told we would have to slash the deficit or else the markets would punish us with cripplingly high interest rates. Well, the deficit is still more or less what it was, and yet interest rates and bond yields are at historic lows.”
(Source: Boris Johnson article in the Daily Telegraph, 6 September 2010)

“Our debts are not as bad as Greece”
(Source: David Cameron speech, 7 June 2010)

See the Channel 4 Factcheck blog for a detailed breakdown of how this comparison makes no economic sense.

5. LIE: The Emergency Budget was progressive as more of the impact will be felt by the better off, with the poorest protected
“[The Budget]..is tough, but it is also fair”
“It is a progressive budget”
“…we have ensured that the burden is fairly shared”
“Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top.”
“The richest paying the most and the vulnerable protected. That is our approach.”
(Source: George Osborne, Budget Speech, 22 June 2010)

“this government will not cut this deficit in a way that hurts those we most need to help…”
(Source: David Cameron speech, 7 June 2010)

“the policies in this Budget, taken together, will not increase measured child poverty over the next two years.”
(Source: George Osborne, Budget Speech, 22 June 2010)

TRUTH: Independent analysis (from the Institute for Fiscal Studies) shows that the Osborne Budget is profoundly regressive and has a disproportionate impact on the poor compared to the rich. It is already clear that the ConDems want to protect the Tories’ rich friends at the expense of ordinary people. The budget cut progressive taxes like income tax (where the rich pay more as a % of their income) while increasing regressive taxes like VAT (where the poor pay more as a % of their income).

A report by respected independent think tank The Institute for Fiscal Studies (IFS), commissioned by the Child Poverty Action Group, said that unemployed couples with children will suffer most from tax rises and benefit cuts, losing about 8.5% of their income over four years. Families with one working parent will experience an income drop of more than 5%.

The IFS Report says that “many of the progressive tax rises that will be introduced over the next two years were announced by the previous Government, and that the Budget measures scheduled to come in between 2012 and 2014 are generally regressive.”

The IFS also say in their report that the “distributional analysis” produced by Osborne to justify his claims that the Budget was progressive did not include the impacts of several key changes such as cuts to housing benefit and tax credits and was therefore not accurate.

Incidentally, Osborne himself regularly cited the IFS when criticising Labour Budgets of the past:
“I am waiting for the Institute for Fiscal Studies’ analysis.” George Osborne, 26 March 2010
[The IFS is a] “much respected independent insitute.” George Osborne, 5 April 2005
“an independent report by the respected IFS” George Osborne, 31 January 2008

On 9 September 2010, two weeks after their report criticising Osborne, Robert Chote, the Director of the Institute for Fiscal Studies was appointed as the new Head of the Office of Budget Responsibility.

6. LIE: The Con Dem measures will promote a gradual recovery and growth, keeping us out of a double-dip recession

“[The Budget] will help companies invest, attract foreign investment, and boost growth.”
(Source: George Osborne, Budget Speech, 22 June 2010)

TRUTH: The ConDem budget of June 2010 will reduce growth and there is now a real risk of a double-dip recession.  Further measures including the impact of the spending cuts will have a devastating effect on the economy.

The Office of Budget Responsibility said that Osborne’s measures would reduce growth significantly – from the 3.5% predicted by following Alistair Darling’s Budget to a much lower 2.3%.
(Source: OBR Pre-Budget Forecast 14 June 2010)

After the Budget, the Governor of the Bank of England said Osborne’s measures would reduce growth and increase inflation:
“the overall outlook is weaker than that presented in the May Report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation,”
(Source: Mervyn King, quoted in the Daily Telegraph, 11 August 2010)

55% of the public think it is “very likely” or “fairly likely” Britain will go back into recession.
(Source: YouGov Poll, 16 August 2010)

Outgoing Chairman of the Office of Budget Responsibility, Sir Alan Budd, said that he was “not confident” Britain would avoid a double dip recession.
(Source: Interview on BBC Radio 4, as reported in Evening Standard, 16 August 2010)

FT Commentator Martin Wolf says the Coalition’s policies risk creating a double-dip recession which they have no idea how to deal with:
“How would the government respond if its plans generated a recession, as is possible and, in my view, probable? I have no idea. It would presumably rely on the Bank of England. There are reasons to doubt whether the latter would be very effective.”
(Source: Martin Wolf article in FT, 2 September 2010)

10 weeks after the Budget, Nick Clegg admitted that the recovery would be “choppy” and “uneven”.
“Of course this recovery which is starting is likely to be choppy and uneven.”
(Source: Nick Clegg Speech, 9 September 2010)

James Knightley of ING said: “With fiscal austerity being stepped up and consumer spending growth still falling there is significant reason for concern over the UK’s growth prospects.”
(Source: Reported in Evening Standard, 12 July 2010)

Finally Conservative Mayor of London Boris Johnson said that the ConDem’s economic policy was risking disaster:
“Of course it is a good thing to bear down on wasteful public spending, and the deficit must certainly be reduced. The question is how far and how fast this can be done without provoking a double dip recession – and the risk is that if there is a serious downturn at the end of the year”
(Source: Boris Johnson article in the Daily Telegraph, 6 September 2010)

7. LIE: The Con Dem cuts will improve confidence in the UK economy, and encourage investment in the UK as well as reduce the cost of Government borrowing

“This Budget is needed to give confidence to our economy.”
“[The Budget] will help companies invest, attract foreign investment, and boost growth.”
(Source: George Osborne, Budget Speech, 22 June 2010)

TRUTH: Business confidence is now dropping specifically because of the budget and the ConDems’ cuts proposals. Both businesses and economic analysts have a very pessimistic view of the next 12 months. Inward investors are being put off coming to the UK. And far from the cuts improving Britain’s economic reputation, they risk undermining it.
Martin Wolf of the FT says that the Coalition’s fear of a loss of confidence in the UK’s fiscal credibility if there are  no severe cuts does not make economic sense:
“…
the market is screaming its lack of concern about UK fiscal credibility. UK government 10-year bonds are yielding 2.9 per cent and the real interest rate on index-linked bonds is below 1 per cent. Yes, markets can be wrong. But these are the most liquid and transparent markets of all. Moreover, those now doubting the wisdom of markets are the strongest believers. Why do they have these doubts? Furthermore, there is no sign of crowding out of private spending by government borrowing. Finally, UK government debt is long-term with an average maturity of 14 years and denominated in the domestic currency. We are terrified of a confidence bogey who is asleep.”

Michael Izza, chief executive of accountancy body ICAEW, said:
“UK businesses that came through the recession are now facing the challenge of surviving the recovery. They still don’t know what the future holds and are uncertain about how the mood of fiscal austerity will impact the economic recovery.”
(Source: Guardian, 23 August 2010)

A survey by the Bank of England of its regional agents reported that business confidence had fallen, with companies ascribing their increased nervousness to the cutbacks.

8. LIE:  Labour’s spending was inefficient and wasteful, meaning most of the cuts are efficiency savings
“people across the country are being asked to tighten their belts because of Labour’s wasteful legacy”
Baroness Warsi, Chairman of the Conservative Party
(Source: Conservative Home)

TRUTH:
Labour had already committed to £35bn total savings three years ago, of which more than £20bn had been achieved by the election.
(Source: BBC News)

The so-called “efficiency savings” set out by the ConDem government include cancelling major policies and priority spending such as the Future Jobs Fund helping unemployed people get back into work, and cutting school rebuilding projects. Even bodies set up to help save money – such as the Audit Commission which makes sure local councils and NHS services provide value for money – are being axed.

9. LIE: Labour’s reckless spending during the recession made the problem worse
“Nothing illustrates better the total irresponsibility of the last government’s approach than the fact that they kept on ratcheting up unaffordable government spending even when the economy was shrinking….while the people employed by the taxpayer were insulated from the harsh realities of the recession…everyone else in the economy was paying the price.”
(Source: David Cameron speech, 7 June 2010)

TRUTH: Labour’s spending during the recession helped end the recession and prevented it turning into a more serious depression.

Figures from the Office for National Statistics showed that Government Spending had accounted for a rise of 0.4% in GDP last year, helping end the recession.
(Source: ONS reported in Evening Standard, 12 July 2010)

Incidentally borrowing and spending to help end the recession is exactly what Ken Clarke did after the previous recession, when he was Tory Chancellor of the Exchequer from 1992 onwards – clearing up the mess made by Norman Lamont and his adviser David Cameron.

10. LIE: Labour left the country’s economy in a mess and the Con Dem government is having to clean it up

TRUTH: Wrong, wrong wrong. Labour left the country in a strong recovery and the ConDems are messing it up.

BUSINESS CONFIDENCE:
Under Labour earlier this year:  At a 4 year high
Under the ConDems now: Falling due to the cutbacks

INTEREST RATES:
Under Labour earlier this year: 0.5%, a record low
Under the ConDems now: Predicted by the Bank of England to rise sharply

INFLATION:
Under Labour earlier this year: 3.2% and falling
Under the ConDems now: expected to rise sharply thanks to VAT rise and other pressures

UNEMPLOYMENT:
Under Labour earlier this year: stablilised and falling with new jobs being created
Under the ConDems now: expected to rise to 3m as cuts take hold

GROWTH:
Under Labour earlier this year: On couse for 3.5% this year – the best in the G7
Under the ConDems now: expected to fall to 1.5% at the end of the year

DEBT AND THE DEFICIT:
Under Labour earlier this year: Deficit £7bn lower than forecast, and on track to be cut by more than half by 2014
Under the ConDems now: WE DON’T KNOW YET

Compared to our European and world competitors, as Labour left office we had the fastest growth, comparable levels of inflation, lower interest rates, low unemployment and low national debt as a % of GDP.

Look at this graph to see that our national debt is actually lower than Germany, Japan and many other of our international competitors.

AND FINALLY: What some leading economists say about the Con Dem Government and their economic policies:

“To advocate capital cutting at a time of recession is the worst remedy that one could possibly have.  It is an insane policy and it will not only destroy the coalition, but it will do enormous damage to the country.”
Lord Robert Skidelsky, Emeritus Professor of Political Economy, University of Warwick, and former Tory peer
(Source: House of Lords Hansard, 26 July 2010)

“the scale of fiscal retrenchment, and the decision to cut the deficit at an accelerated pace, will inevitably increase dangers of a double-dip recession.”
David Kern, Chief Economist, British Chambers of Commerce
(Source: BBC News)

“In my judgement it would be very mistaken to proceed ahead as the chancellor is doing.”
Danny Blanchflower, Professor of Economics, Dartmouth College USA and former member of the Monetary Policy Committee
(Source: BBC News)

“the UK currently has very few of the conditions that have generally helped other economies to maintain strong rates of growth throughout their own squeezes. The upshot is that the scope for the fiscal squeeze to have big positive effects and/or for the rest of the economy to compensate appears limited.”
Roger Bootle, Capital Economics published in Deloitte research paper
(Source: BBC News)

“It is clear that the measures introduced in the June 2010 Budget are regressive overall.”
Institute for Fiscal Studies
(Source: IFS Report on the Budget)

“[The Chancellor's arguments] are questionable”
Institute for Fiscal Studies
(Source: IFS Report on the Budget)

The government’s estimate of the structural budget deficit is of “spurious precision”
Robert Chote, then Director of Institute for Fiscal Studies, now Head of the Office of Budget Responsibility
(Source: Speech at CIPFA Conference, 7 September 2010)

“Where public finances permit, planned fiscal consolidation could be delayed.” (ie: cuts should be postponed)
OECD
(Source: Guardian, 9 September 2010)

“If that (austerity) happens I think it is likely that the economic downturn will last far longer and human suffering will be all the greater… If the UK, Germany or other countries do it, then it is going to have systemic consequences for Europe and the whole world”
Joseph Stiglitz, Nobel Economics Prizewinner
(Source: Telegraph, 9 September 2010)