Tag: austerity

Britain’s austerity is indefensible

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Britain’s austerity is indefensible

Martin WolfBy Martin Wolf

Cameron’s arguments against fiscal policy flexibility are wrong
Ingram Pinn illustration©Ingram Pinn

David Cameron’s “there is no alternative” speech last week on the UK economy has aroused much criticism. This is justified. The British prime minister’s arguments for sticking to the government’s programme of fiscal austerity were overwhelmingly wrong-headed.

It is easy to understand why he had to defend the government’s failing flagship policy. The incoming coalition embarked on a programme of austerity with the emergency Budget of June 2010. The economy, then showing signs of recovery, has since stagnated. Even the fiscal outcomes are poor. Indeed, according to the latestGreen Budget, from the authoritative Institute for Fiscal Studies this fiscal year’s borrowing requirement may be bigger than last year’s. Only a productivity collapse saved the day – by keeping unemployment surprisingly low, ameliorating the social impact of the output disaster.

How does one defend this record? Simon Wren-Lewisof the University of Oxford and Jonathan Portes of the National Institute of Economic and Social Research, among others, have demolished the prime minister’s views. Here are the key points.

Mr Cameron argues that those who think the government can borrow more “think there’s some magic money tree. Well, let me tell you a plain truth: there isn’t.” This is quite wrong. First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases. Second, like other solvent institutions, governments can borrow. Third, markets deem the government solvent, since they are willing to lend to it at the lowest rates in UK history. And, finally, markets are doing this because of the structural financial surpluses in the private and foreign sectors.

Again, Mr Cameron notes that “last month’s downgrade was the starkest possible reminder of the debt problem we face”. No, it is not, for three reasons. First, Moody’s stressed that the big problem for the UK was the sluggish economic growth in the medium term, which austerity has made worse. Second, the rating of a sovereign that cannot default on debt in its own currency means little. Third, the reason for believing long-term interest rates will rise is expectations of high inflation and so higher short-term rates. But such a shift is going to follow a recovery, which would make austerity effective and timely.

Mr Cameron also argued: “As the independent Office for Budget Responsibility has made clear … growth has been depressed by the financial crisis … and the problems in the eurozone … and a 60 per cent rise in oil prices between August 2010 and April 2011. They are absolutely clear that the deficit reduction plan is not responsible.” This brought a rejoinder from Robert Chote, OBR director, who noted that: “Every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term.”

Serious researchers, including at international organisations, argue that the multiplier effect of fiscal austerity may be far bigger than the OBR has hitherto assumed, at least in today’s depressed circumstances. Moreover, even if the OBR believes the outcome turned out worse than forecast because of adverse shocks, rather than its underestimation of multipliers, this is an argument for active policy, not against it.

The prime minister also stated: “[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.” What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started. Bradford DeLong of Berkeley and Larry Summers, the former US Treasury secretary, have shown that, in a depressed economy, what Mr Cameron deems incredible is likely to be true. A recent International Monetary Fundpaper argues that “fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output”. Mr Portes adds that, even if this is not true for the UK on its own, it is likely to be true for Europe since almost everybody is retrenching simultaneously.

Mr Cameron argues that “this deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.” In a way, this is the most worrying error – not because the fiscal policy of the Labour party, then in power, was perfect. Far from it. Fiscal policy should have been tighter. But that is not the main reason the UK has a huge structural deficit.

It is the economy, stupid. In 2007, according to the IMF, UK net debt – at 38 per cent of GDP – was the second-lowest in the Group of Seven leading economies. These levels were also exceptionally low by UK historical standards. In the March 2008 Budget, the Treasury estimated the structural cyclically adjusted deficit on the current budget at minus 0.7 per cent in 2007-08 and minus 0.5 per cent in 2008-09. The collapse in output has caused the explosion in deficits and debt. Almost everybody underestimated the vulnerability, the Conservative leadership among them: pre-crisis, it committed itself to continuing the plans that Mr Cameron now calls “reckless and unaffordable”.

Some think reckless spending explains the jump in government spending from 40.7 per cent of GDP in 2007-08 to 47.4 per cent two years later. Yet, between 1996-97 (the year before Labour came into office) and 2007-08 (the year before the crisis), the share of spending in GDP rose by only 1.2 per cent. No: the collapse in GDP, relative to expectations, caused the jump in spending and decline in receipts, relative to GDP. The Green Budget compares the forecasts for 2012-13 made in the 2008 Budget and the 2012 Autumn Statement: nominal GDP is down 13.6 per cent, receipts are down 17.6 per cent, spending is down 5.6 per cent and borrowing is up 372 per cent. It is because the OBR (and others) believe most of this lost GDP is permanent that the position seems so grim. (See charts.)

Mr Cameron’s argument against fiscal policy flexibility is wrong. But, beyond this, we have to consider why the economy has proved so fragile and rebalancing so difficult. That is for next week.

martin.wolf@ft.com

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Would a mansion tax really be anti-aspiration? | Shelter blog

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18 Feb 2013

As often happens on Sunday mornings, I hazily grab my phone, look at Twitter, and spot an interesting new idea that a politician or think tank has floated to deal with an aspect of our housing crisis.

This weekend it was the Mail on Sunday leaking wealth tax ideas from a Liberal Democrat internal consultation paper to be discussed at their forthcoming Spring Conference. The main proposal was for assets – particularly property assets – worth more than £2m to be taxed.

Unfortunately, the proposal threw in suggestions that jewellery might get considered in a wealth tax. Twitter was alive with sneering remarks about bureaucratic snoopers rifling through asset-rich cash-poor widows’ jewellery boxes.

But I was quite surprised at the visceral reaction that some commentators had to the idea of taxing £2 million property portfolios. One MP described it as ‘the politics of envy’, another warned that it would be ‘a tax on aspiration’.

What struck me was how some of the naysayers thought that a £2m property portfolio was within reach of the average person on the street.

That’s definitely not borne out by some of the stats I’m aware of:

Even among older people, the average home value is only £238,000 [PDF]. The average person over 55 would have to own nine homes before they hit that threshold!

Most non homeowners on average wages can’t even afford the mortgage on an average priced home. To suggest it’s anti-aspiration to tax £2m property portfolios is to misunderstand how that most basic aspiration is slipping away from people working hard and doing all the right things. A Lloyd’s TSB’s study suggests that just 0.2% of homes in the UK are worth more than £2m.

Even when you look at landlords, the vast majority (78%) own just one property they let out, so few would reach the £2m threshold. Indeed, the average buy-to-let loan in the last quarter was just over £125,000.

Clearly, there would be lots of practical issues to consider should a policy like this get off the ground.

But the important thing is the message that this kind of policy would send out. It would confirm what a growing number of people are already realising: that ever-growing house prices supporting personal wealth that is tied up in property are not sustainable.

This generation of young people are counting the cost of a decade’s worth of rapidly rising house prices, which are simply too high for a mortgage to be affordable.

Rather like Boris Johnston’s proposal to ringfence stamp duty receipts for building homes in London, perhaps receipts from a mansion tax could be funnelled back into building more homes. Just an idea.

via Would a mansion tax really be anti-aspiration? | Shelter blog.

We want economic growth, so how about more homes? | Shelter blog

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19 Feb 2013

You might have missed Nick Clegg’s announcement on the next wave of city deals: apparently all twenty cities that applied for a city deal will now enter talks with the Government ‘on a staggered basis’, to ‘negotiate deals that give them the levers and powers they need to drive economic growth.’

OK, so this may not constitute a revolution in civic leadership, but Clegg’s convolutions do reveal an interesting tension within central government: they’re desperate to drive economic growth, but bound by a spending cuts and localism agenda that ties their hands.

This problem is just as acute when it comes to Clegg’s other big idea for regional growth: new garden cities.

Everyone wants growth. Almost everyone wants new infrastructure. And increasingly, almost everyone wants more homes built.

The good news is that we don’t have to choose between these three goodies, because providing infrastructure enables more homes to be built, and both produce jobs and growth.

The bad news is that we’re not getting any of them, despite an ever-growing stream of initiatives designed to unblock, set free, kick start, or pilot new models of development.

After almost three years of localism, deregulation and reform, the numbers are still resolutely awful, as this graph shows.

Housing-Supply-Mega-Graph-Feb-2013

Housing Supply Mega Graph Feb 2013

This suggests to me two things. Firstly, cutting public investment by more than 60% overnight may not have helped. (A cheap point, but fair).

But more worryingly, it suggests that the conventional policy levers aren’t working any more. A relentless downward ratchet seems to apply to house building: in bad times, the market shuts down and supply plummets. But in the boom years, house prices rocket and supply barely ticks up, even with a government push.

The result is a falling trend line, house prices no one can afford and a catastrophic shortage of homes.

Clearly, a few more tweaks, a little bit more cash, or another initiative is not going to transform this picture. We need something big. As big as a city – or several in fact, as we need to be building roughly a new Sheffield’s worth of homes every year.

To build a city you have to actually try – you can’t just hope it’ll build itself with a bit of encouragement and red-tape busting. You have to decide where it’s going to go, get hold of the land, plan it, put in the infrastructure and build the homes. Which is what everyone claims to want to happen.

What’s missing is the mechanism. With the exception of the Olympic Delivery Authority – and it was exceptional – we lack the institutions that could actually build new settlements. Hence Clegg’s promotion of garden cities.

Compulsory reading for Clegg’s team should be ‘Transferable Lessons from the New Towns’. It is full of useful tips on how to build a new city, efficiently and cost effectively, using existing (if neglected) policy levers.

Turns out it’s quite easy really, if you have the political will: powerful development corporations acquired the land at pre-planning prices, and gave themselves planning permission for whole new cities, which they then built. Then they sold the homes, using the profits to pay off their debts (early). And with nary a multi-stakeholder partnership board or PFI leaseback contract in sight.

A generation later, more than two million people now live in the new towns. The last of them, Milton Keynes, is not only still building homes, it’s also one of the country’s few economic hot spots.

Handily, the new town powers are still sitting on the statute book. The catch is that someone has to decide which bit of the country should be blessed with a whole new settlement. And that means, invariably, upsetting some people, and does rather run counter to the whole localism thing.

Last year Nick Clegg promised us a garden cities prospectus that would set out how the Government proposed to square this circle and make ‘locally planned, large scale developments’ happen. It’s fair to say that this concept has been treated with a degree of scepticism by fans of new towns.

But as the economy threatens to enter triple-dip territory, the pressure to get some big developments going might just be the spur needed to dust off those powers and get building for real.

via We want economic growth, so how about more homes? | Shelter blog.

Austerity operates not only as a set of economic policies but also as a cultural object within policy and popular debate

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While there has been some recognition of the gendered impact of austerity, less attention has been paid to its specific implications for mothers. Drawing on a journal special issue, Tracey Jensen explains how through understanding austerity in cultural as well as economic terms, we might come to see its implications for our shared culture and sensibilities, as well as its specifically gendered dimensions. 

In the aftermath of the 2008-2009 recession and as the resultant austerity regime of reduced public spending began to be implemented, budget reviews demonstrated that it would be women who would bear the brunt. Fast forward to 2013 – with the second dip of recession a recent memory and a third dip imminent – the gendered effects of recession are impacting most acutely on one group in particular: mothers. The lattice of austerity policy – including reductions in public service provision, reduced levels in real terms of social security payments, frozen housing benefit and reductions in tax credit payments (amongst others) work together to have a compound effect on the support, income and security of mothers and especially those on low incomes, single mothers and those caring for disabled children. Changes in employment since the recession, such as the rise in short-term, part-time, insecure and precarious work, all impact disproportionately on those with caring responsibilities who are more likely to be snared within the ‘low-pay, no pay’ cycle of underemployment and poverty. The Equal Opportunities Commission estimated that some thirty thousand women a year lose their jobs as a result of becoming pregnant, and emerging evidence suggests that this maternal discrimination is currently increasing as employers seek to cut back, stall promotion and reduce workforces. Austerity is powerfully gendered, certainly, but it is particularly fixed upon women who have children.

Examining the public debate around austerity and gender, and extending it to consider more closely the implications and impacts of austerity upon families, the online journal Studies in the Maternal has published a Special Issue on the topic of ‘Austerity Parenting’. Drawing together work from sociology, critical social policy, community development, media and cultural studies, gender studies and economics, ‘Austerity Parenting’examines how the developing public narrative of austerity is connected to moral discourses of parenting. In particular we have asked how parents and parenting have been called upon by the architects of austerity, as both ‘to blame’ for the crisis (through ‘bad parenting’) and as being the solution (through ‘good parenting’) to an increasing variety of social and economic ills. ‘Parenting’ – articulated as moral and personal conduct and choices – is positioned as being the most important factor in determining a child’s life chances, more important than income, security, access to decent housing, healthcare, education, and so on. This moral narrative around good parenting distorts the wider debates we should be having about widening social and economic polarisation and stagnant social mobility.

An (initially tentative) rhetoric which has accompanied the implementation of austerity policies is that austerity is the necessary lean time which must follow on from the excessive spending of the previous Government. This rhetoric has grown bolder and is now echoed across policy and popular debate. We have spent too much money supporting those at the bottom, according to this narrative, and this spending has led to the breakdown of moral fibre and personal responsibility. This rhetoric rewrites the crisis of capitalism as being caused, not by the high-risk speculative financial sector, but rather by the ‘burdens’ of the welfare state and the ‘dependency culture’ it is said to create. Incredibly, social security levels (in 1979 worth 23% of the average income, now worth a paltry 11% and falling) are positioned as ‘too generous’ and as such enabling people to ‘choose’ a life on benefits. Those placed and blamed at the centre of this so-called dependency culture are ‘troubled families’, held to be chaotic, undisciplined, lacking in work ethic and responsibility; and importantly, to be transmitting these problems to their children who are doomed to repeat the cycle. These ideas are familiar enough to social scientists who remember Charles Murray’s claims about the underclass, which (despite a lack of evidence) exerted an enormous influence on policy in the early 1990s and as Imogen Tyler has documented dramatically re-emerged in media representations and political responses to the riots in August 2011. In the United States the underclass thesis led to the construction and circulation of figures such as ‘welfare queens’ and since the beginning of the current recession, we have seen a surge in similar stigmatized names for those in poverty, including ‘welfare scrounger’ and ‘feckless poor’.

But this particular moment is also bearing witness to the emergence of new terms and subjectivities designed to censure, accuse and condemn: the ‘skiver’ (vs striver) the ‘shirker’ (vs worker), the ‘feral parent’ and the ‘troubled family’. Such terms are wounding – they are designed to police, punish and hold in place, to individualise blame for stagnant social mobility and the conditions of poverty and worklessness. These ‘names for Britain’s poor’ are also arguably designed to produce or procure a consensus for welfare roll-back and deepening inequalities. Certainly, the enlivening and reanimating of such wounding terms alerts us to a profound poverty of imagination in policy debates. Emerging critical research demonstrates the inaccuracy of these emerging and moralising vocabularies and even more troubling the wilful ignorance of policy elites who insist on individualising poverty with no empirical evidence. This Special Issue contributes to this growing body of critical policy research, and seeks to explore the ways that austerity might be understood to operate not only as a set of economic policies but also as a cultural object within policy and popular debate, a subject-making discourse that is conferred, occupied and resisted, and as a web of socio-historical fantasies about the nation’s past and its possible futures. As such, this collection of work examines how austerity, in its connections with parenting, is circulating a particularly damaging vision of what causes poverty and social inequality and what our response could be. In proposing that social injustices are simply the result of bad choices made by lazy, irresponsible or workshy parents that ‘the rest of us’ can (and should) no longer afford, austerity parenting is reconfiguring our very sense of what public, mutual and collective sensibilities we should or ought to have towards one another.

Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting. http://blogs.lse.ac.uk/politicsandpolicy/

About the Author

Tracey Jensen is a Lecturer at Newcastle University. Her research explores the classed and gendered intersections of contemporary parenting culture, and how these are reproduced across social, cultural, media and policy sites.