Removing rail subsidies could end up benefiting passengers

Posted: 22 Jan 2013 12:00 AM PST

Taxpayer subsidies to the rail sector have increased dramatically in recent years, with concomitant fare increases attracting widespread condemnation. Richard Wellings argues that structural reform to the railways is necessary to reduce the burden on the public purse. 

Taxpayer subsidies to the rail sector have reached astronomical levels. At £6 billion per year (including Crossrail), they have roughly trebled in real terms over the last twenty years. But the high rate of subsidy has not led to a reduction in fares, which have risen above the official rate of inflation in recent years. There are two main reasons for the large increase in taxpayer support. The first, and probably most important, is wasteful investment in loss-making new infrastructure. This is the direct result of policies that have aimed to increase public transport ridership and reduce car use.

For much of the post-war period, rail was viewed as a declining industry. Despite previous government efforts to suppress private road transport, the step change in efficiency resulting from the door-to-door transit of passengers and freight led to rapid growth in car and lorry traffic. A policy of ‘managed decline’ was therefore applied to the railways. British Rail received subsidies to keep the system going and there was some modernisation of key inter-city routes, but there was little enthusiasm to attempt to reverse the long-term trend.

This changed with the ascendancy of environmentalism within government. With their perspective grounded in radical egalitarianism, environmentalists not only objected to the pollution produced by private road transport; they also resented its social aspects – for example, the way that cars had become symbols of wealth and individual expression. The environmentalist agenda gradually captured university departments, various government bureaucracies, elements of the media and eventually national policy. In the mid-late 1990s, the road construction programme was cut back dramatically and a new strategy introduced. Private road transport would be deliberately discouraged with travellers encouraged to use buses, trams and trains instead.

For the railways this represented a sea change. The new policy meant that rail now had prospects for growth. It did not, however, change the fundamental economics. Since rail involves at least a three-stage journey, compared to the door-to-door convenience of private road transport, it remained unattractive for the vast majority of journeys.

Following privatisation, however, the policy of encouraging more rail travel appeared to be successful. Usage rose by around 50 per cent between 1997 and 2012, to levels not seen in peacetime since the 1920s. This reflected not just the impact of various deliberate policies, but also other trends such as a booming centralLondon economy for much of the period and demographic changes that led to a huge expansion of the ‘inner city’, pushing middle-class families out into the commuter belt to avoid poor schools, anti-social behaviour and fear of crime.

A combination of increased ridership and price controls produced severe peak-time overcrowding on several routes into London. Train operating companies have been constrained in their ability to smooth the peaks using the price mechanism, since season ticket fares on most London commuter journeys are regulated by the government. With a severely limited ability to deploy the price mechanism and other means to make more efficient use of existing rail capacity, the industry has increasingly focused on supplying new infrastructure to accommodate growth. This has proved hugely expensive, however. The final cost of the ongoing Thameslink 2000 upgrade, for example, is likely to be £6 billion. And the Crossrail scheme will cost £16 billion.

Since in commercial terms such projects are loss-making and would never be undertaken in their current form by the private sector, taxpayers have been forced to fund them. Accordingly, wasteful investment in new rail infrastructure is probably the largest single factor in the growth in taxpayer support in the post-privatisation era. Such investment has not been restricted to overcrowded routes in the South-East. The government also funds improvements for blatantly political reasons, in regions where there is little passenger demand. For example, it was recently announced that branch lines in South Wales would be electrified – at taxpayers’ expense, of course. The environmentalist agenda means that rail schemes get priority even though the government’s own cost-benefit analyses show that economic returns from road improvements are far higher.

The second major reason for the increased burden on taxpayers is the artificial structure imposed by the government on the post-privatisation rail industry. Historically, railways that developed in the private sector exhibited a high degree of vertical integration. This meant in practice that the same company owned the tracks and operated the trains, thereby avoiding the transaction costs associated with complex contractual arrangements between highly interdependent separate organisations.

Partly as a result of EU policy, Britain’s privatisation model has been very different, with one firm owning and maintaining the tracks, other firms operating the trains, and another set of firms leasing out the rolling stock. On top of all this complexity, the industry has been tightly regulated by various government agencies. The resulting fragmentation, combined with layers of bureaucracy, needlessly increased costs on the network. In addition, the high levels of regulation severely hindered entrepreneurship. As a result, the productivity-boosting innovations that have cut costs in other industries did not materialise on the railways. Indeed regulation is now so restrictive that private rail firms have effectively become subcontractors for the Department for Transport.

Structural reform would therefore be one of the best ways to reduce the burden on taxpayers. The government should stop prescribing the level of vertical integration and instead free the rail industry to become more efficient. This policy should be combined with a more rational approach to rail investment. A first step is to abolish price controls to remove artificial distortions to fare levels and consumer demand. The provision of new capacity should then be left to the private sector, without taxpayer support. It would make commercial sense to build new infrastructure in high demand locations where it could be funded by fare revenues or land development. Uneconomic projects driven by political motives and special-interest lobbying would no longer get built.

The economic case for phasing out subsidies is very strong. The taxes imposed on individuals and businesses to support the railways destroy jobs and hinder wealth creation in the wider economy. In addition, large parts of the rail industry could thrive without the bureaucratic micro-management that comes with government support. It may seem counter-intuitive, but removing rail subsidies could also end up benefiting passengers, by unleashing entrepreneurship and innovation on the railways that would drive down costs.

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.

Dr Richard Wellings is Head of Transport at the Institute of Economic Affairs.

You may also be interested in the following posts:

  1. Investing in a new High Speed line will provide a once in a generation chance to improve rail services
  2. The economic benefits of high speed rail in Europe can now be demonstrated beyond doubt. Now the UK should consider investing in HSR as well
  3. How to cut the cost of railways and keep fares down

Len, Conflict and One Nation

Posted on Wednesday, January 16th, 2013 at 3:41 pm.

Len McCluskey, General Secretary, Unite.
Last night, there were two major discussions of Labour’s future policy and strategy. The first, held in Westminster, featured Labour policy chief Jon Cruddas, Ed Miliband’s “Blue Labour” guru Maurice Glasman and had David Miliband sitting in the audience. The debate ranged widely over the question of how to build ‘One Nation’.

The second event was an LSE lecture by Len McCluskey, General Secretary of Unite, Britain’s largest trade union, on the political strategy for trade unionism. Despite Unite’s size and influence, there were few big names from the Labour party in attendance and the speech has achieved little media coverage, not even making any of the endless lists of top British political stories.

Indeed, the only references to the speech I found on Google news we articles for Iran’s Press TV and the Belfast Telegraph. Perhaps this demonstrates Len McCluskey’s point about the exclusion of the representatives of the working class from British political life. The Trade Unions are still being treated like the “Mad Aunt in the Attic”.

Yet if I had to choose which discussion was likely to have a lasting practical impact on the direction of the Labour party over the next two years I’d make the Union leader’s speech the favourite. Why?

First is the obvious structural influence of Len McCluskey personally1 and the leading Trade Unions generally on Labour policy and strategy. Half of votes at conference and a sizeable proportion of the National Policy Forum and the NEC are dedicated to Trade Union representatives, and while those representatives are very far from a monolithic bloc, when a common agenda is shared, they represent a powerful voice inside the party.

However, this organisational presence doesn’t guarantee political dominance, whatever the Conservative party would have us believe. The NPF, NEC and Conference have been around for a long time but the Union complaint about New Labour was not even that all their demands were ignored, but that they often did not even feel part of the conversation.

((I’d argue this is a misreading of how New Labour and the Unions operated: So a diversion:

New Labour ministers tended to approach policy-making with Trade Unions as something that could be positively managed within specific bounds. These boundaries were roughly: No Return to pre-80s union legislation, no significant re-nationalisation, pressure on public service reform, and preservation of a basic pro-business and free movement of goods policies, but along with that, more union rights, though limited, a fairly radical range of workplace legislation on specific issues. This meant that while New Labour was rarely regarded with affection by Trade Union leaders, they could at the same time score significant policy victories.

As late as 2005 TUC Conference speeches, while sharply critical of Labour’s lack of ambition, were also larded with specific Trade Union policy achievements. After eighteen years of unrelenting defeat, this was perhaps more significant than it seems in retrospect and formed a large part of the reason why New Labour and the Trade Unions developed a modus vivendi. The fact that Labour’s policy jargon included regular references to ‘The Warwick Agreement” and “Warwick Two” were symbolic of this transactional, constantly re-negotiated relationship. Union leaders needed to swat New Labour, but they also felt that they needed New Labour to make swatting the government worthwhile.

That tolerance began to die towards the end of Tony Blair’s administration, and declined sharply under Gordon Brown, perhaps because for many years Trade Union leaders had regarded Brown as “The acceptable face of New Labour” and had higher expectations of a Brown-Led Labour government than of Blair, When these expectations went largely unfulfilled, discontent was muted by a combination of a lack of a credible left alternative, the economic crisis, which relegated political concerns to a lower priority, and finally the fear of a Conservative government))

This is why McCluskey’s speech deserves proper attention. New Labour existed and survived for thirteen years, and did so at least in part because Unionism offered no coherent alternative analysis or political strategy. There were a few on the extreme left who sought a return to Bennite struggle, but it felt faintly ludicrous, I suspect even to those involved.

Now this has changed. New Labour is dead, and in the subsequent debate about what replaces it Len McCluskey wishes to put the political power of Trade Unionism into the service of a specific political idea, and makes a clear, cogent and direct case for doing so.

I dissent from this analysis, and disagree about the conclusions, but it is time, well past time, to take this analysis seriously and consider where it might take Labour. This is not least because on an intellectual and stylistic level, McCluskey’s speech is clearer, more provocative and richer in content than the vast majority of speeches, especially the airy asserting of pious good intentions that are so fashionable now, and deserves attention and great thanks for that alone.

Th argument begins with a quote from Miliband, (Ralph, not Ed):

““All concepts of politics, of whatever kind, are about conflict──how to contain it, or abolish it.”

This provides the core of McCluskey’s argument. First that conflict is inherent to the relationship between the workers and the powerful, second that the unions must be the marshals, quartermasters and strategists for one side of this conflict, and that third, it is vital to the working class that this work bot be hobbled and prevented.

From this flows the view that the defeats of the Trade Union movement experienced since the 1970s were primarily“a consequence of the deliberate drive to destroy the trade union movement and working-class politics which the elite has embarked on over the last generation or so”

In other words, the Neo-Liberals waged war upon the workers, won the field, and so unionism declined, and with it, the status of workers.

In order to reverse this process, the essential first step is to extend the organisational power of the union to win the worker’s battles.

“if we are on a march towards “one nation” and ultimately “one world”, it is a road that leads through struggle and conflict.

We cannot create common interests across a society that is now more unequal than for generations simply by wishing for it.”

This is, I think, an acute insight. The great strength and danger for the “One Nation” project is that it ends up merely being a mechanism used to avoid conflict, first in the Labour party (by seeking to be so inclusive that both Len and I feel obliged to make favourable references to the slogan, to avoid seeming disloyalty) and then nationally, as it demands responsibilities from all, offering rights in return. This could make it either a hegemonic political projects, or a vast balloon of inflated rhetoric.

As McCluskey notes, “One Nation’s” political history, whether Disraelian, interwar, postwar, or New Labour could be used to ameliorate or manage the process of conflict.2 Depending on your perspective, this is either a sell-out of the interests of the Working Class, or a cover under which the working class can be distracted from claiming their full rights. Either way, to be given a more definite content, One Nation requires some conflict.

Where does this analysis of the past take us for the future of unionism?

“We have to say that we speak for the working class, that the working class speaks for a better world for all, and we have to organise and fight on that basis – not as a special interest or as a lobbying group, but as the motivators of the only real alternative to the crisis of capitalism and the multiple failures of the present ruling elite.”

First, it leads to the conclusion that conflict is essential for future social progress.

Whether through “Occupy” style direct action, strikes, mass demonstration, the presence of conflict is a sign that the right battles are being fought. Logically, for the Trade Union movement, this should require much greater organisation and strike action freedom.

Second, note that this analysis is primarily political, not industrial.

It sees the events of the last thirty years as the profound result of a Neo-Liberal assault on the institutions of the working class. The response must therefore be primarily a political response.

There is little analysis in the speech of other possible factors for the decline of British Trade Unionism over the last three decades, whether it is the shifting of heavy industry overseas, the role of new technologies in de-industrialisation, or unionism’s failure to offer much to the emergent routine white-collar classes of the private sector.3

This feels like a story of unionism that misses out the workplace.

If what is happening is a “Neo-Liberal” assault on the working classes, what explains the strange absence of conflict in the private sector? Today, Private sector strike rates are very, very, low, This is true even when comparing within the ‘neo-liberal’ era. 4.

The strange absence of Industrial Conflict in the Private Sector
In 2012, it looks as if we will have one of the smallest numbers of days lost to strikes in the Private Sector since ONS started counting.

In the remaining unionised private sector workplaces, the story of British Unionism has been more about constructive engagement with employers than conflict.

Now, the obvious response to this is that the hollowing out of the Union movement has led to an unexpressed conflict, one that is being repressed by a lack of industrial representation.

Yet, there seems little sign yet of an upsurge in demands for union organisation which might signal such a path. Union Density in the Private sector is falling, and the rate of growth of private sector union membership is lagging the overall growth in private sector employees.

On a critical reading of the Union left, if conflict is not happening in workplaces – if private sector workers are not voting for conflict in union ballots, in demands for membership, or spontaneous organisation, it becomes vital to locate it elsewhere, whether the public sector, non-industrial protest or politics.

Is this perhaps part of why protest and conflict in the political sphere matters to the new Union left?

I feel this drives McCluskey’s picture of non-labour movement radicalism.

Stuggles like Occupy or Tax protests against capitalism offer a sign of the radicalism that is not demonstrated in the union members own actions, at least in the Private sector. It’s like my reaction whenever I read of calls to “Unite the Resistance” – what resistance is there to unite that isn’t already united?

This underlies the way in which Len McCluskey talks about expanding Union membership. It becomes about gathering together those left abandoned and workless by neo-liberalism, not an offer of something to those who may be surviving within it.

Socialist Worker Headline: Congratulations. You’ve already succeeded!
So the speech’s list of those who need Unionism includes “unemployed, the disabled, carers, the elderly, the voluntary and charity sector”. Those who work in the private sector but are not unionised are a tougher target, thanks to “exploitative and anti-union companies”. ((To be fair though, this is a speech about protest, not industrial organising, and I’m sure that Unite regularly talks about the importance of growing membership through organisation))

This strikes me as a lop-sided picture of Britain today.

First, I suspect that the reserve army of Labour Unite wishes to enlist will prove rather different to the one he sketches. Second, I think the growing private sector non-unionised work force is less about exploitative companies and more about the changing nature of employment5.

Just as the Tories are wrong to characterise Britain today as a land with hundreds of thousands of scroungers, it’s not the case that the unemployed are a stable, disenfranchised mass. Instead, especially for women, there is a steady cycling in and out of a complex web of work, part-time work and family obligations.

Trade Unionism’s current membership model is reliant on a stable labour force in a single location or community, with equally stable, and thus manageable, interests and demands. Unite’s response to the decline of this model, The community membership scheme, itself seems an attempt to graft this model on a very different Labour market.

For example, What happens to the Community member when she finds work for 20 hours a week? What support will her union offer for her? Well, according to the Membership guide “they will either be transferred onto full Unite Membership or be advised to join the appropriate union if the work is not in an area covered by Unite”6 I’m not sure how attractive this will prove.

Here’s my view – Len McCluskey’s critique of Neo-Liberalism as the driving force of Union and Working class decline leaves out a great deal of what is actually happening in workplaces, and how “Neo-Liberals” like Bill Clinton, Tony Blair and, yes, Gordon Brown, sought to ameliorate, anticipate and make the most of those changes.

Further, it leads to constantly locating flaws elsewhere, which requires surprisingly little analysis of Unionism’s own weaknesses.7

But my dissent from Len McCluskey’s analysis is far less important than the fact the left analysis exists.

Followed through to his logical conclusion, then the argument that the delivery of “One Nation” means conflict ahead. For example, it means that McCluskey should be pushing the Labour party for a radical expansion of Trade union organisational rights.

Further, rather than a “One Nation” position balancing of “Rights and responsibilities” across all of society, McCluskey’s position entails an expansion of the rights of the working and non-working classes at the clear and direct expense of the privileged few.

((At its smallest level, this requires the presence of more “working Class” voices in Labour politics. Yet again, “working class” is likely to be a political, not a demographic, or employment statement. I grew up in a housing association home with a single mother who moved between benefits and part-time work. I also went to Oxford and write words for a living. Am I more or less working class than Len himself, or say, Owen Jones? What about Hazel Blears, or Phil Wilson? ))

Politically, McCluskey would argue that this would motivate and energise those who grew dissatisfied with Labour. I’ve set out why I think this analysis is wrong electorally elsewhere, so won’t repeat it.

What matters next is how willing Len McCluskey and those around him are to generate the conflict of which he speaks, and when he chooses to pursue it.

If they wish, Unite could seek to put the Labour leadership to the test before the General Election, with a clear set of policy demands that would almost certainly be strongly resisted. If they succeeded with a large part of this agenda, this would give Labour a clear, and more controverisial political identity.

On the other hand, Unite might choose to wait, judging that the election of a Labour government is a needed first step to making real change and that conflict now would merely mean an inability to pursue more important conflicts later.

The Labour leadership will seek to persuade Unite, the GMB and others to broadly accept the latter position, hoping to return to a more generous version of the Warwick I and II transactional agreements.

However, reading Len’s speech I wonder if he would regard such an approach as a “return to Blairism”, and thus entirely unsatisfactory and vague.

If he did, the theoreticians and philosophers at that other intellectual seminar, the one in a Westminster committee room graced by so many ‘big thinkers’, might find they are in for something of a surprise.

I had trouble deciding how to address Len McCluskey. we’ve never met, but have exchanged tweets and he’s said he looks forward to reading my response to his speech. So calling him Mr McCluskey seems snitty, but Len seems over-familiar. So I’ve sort of switched between Len McCluskey when referring to him personally, and Mcluskey’s when referring to the speech. Anyway Len, if you’re reading, this is an attempt to explain how I’ve used your name! [↩]
Though Disraeli did not talk of “One Nation” – the first use of the phrase was, I think, Baldwin‘s [↩]
The only reference I saw to these cast this too as a part of a deliberate assault on the Working classes, a “neo-liberal experiment that sent ‘old’ industries elsewhere in the world”. [↩]
Nor can this be explained as purely a result of legislative weakness limiting Trade Union action. Public Sector strikes have increased [↩]
To put it another way, I don’t quite see why capitalists are today more rapacious and anti-Union than they used to be back when very fat men watered the workers beer [↩]
For a part-time worker, this will be around £70 a year, or c£140 if working over 21 hours a week. [↩]
To be needlessly provocative, since conflict is good, It is like a general having suffered a series of reverses and seeing a large part of his troops have deserted, blaming only the evil intent of the enemy, and never wondering if he chose to fight on the right ground, or even whether fighting was the right decision to begin with [↩]

Welfare state: Ed Miliband can strike a blow for social equity

Ed Miliband’s mission should be to uphold the social contract without being accused of profligacy

Last Wednesday, the chancellor, George Osborne, delivered a report card on a stuck society. The tally made grim reading: austerity extending into 2018, targets missed and, according to the Institute for Fiscal Studies, further cuts of £27bn to come, with growth possibly returning only in 2014. All bad news for UK plc. For millions on benefits, there was worse news about one of the remedies the chancellor has chosen, a strategy that also represents a trap set for Labour that could frame the battle for the 2015 election. It is a measure that has prompted protest across a swath of civic society, including leading charities and faith leaders.

The device is simplicity itself. The chancellor has announced his intention to pass legislation in January to lock tax credits and social security benefits into an “increase” or uprating of only 1% for the next three years, saving £3.8bn. Recent surveys indicate that, while the welfare state is broadly valued, perceived abuses by “scroungers” and those who receive extensive support while making little or no contribution to the welfare pot are not. A consensus exists that the welfare state, moulded by the Beveridge report, 70 years old last month, is no longer fit for purpose, not least because it was conceived when full employment was assumed and when the majority died before many years of pension had been taken. The dominant Tory narrative is that the benefits side of the welfare state has become an incubator of broken Britain and fecklessness, much of it Labour’s responsibility. It’s a political tale that holds credence for many voters.

Labour’s dilemma therefore is how to vote on the welfare uprating in January. Osborne’s calculation is that, if Labour votes against the measure, it could restore its reputation for reckless spending and wastefulness. But a vote in favour of effective cuts to some of the poorest people in the country, including millions within working families, would cost its reputation dear among its supporters.

However, there is a further possibility, one that Labour is now said to be exploring – that it tables a number of substantial amendments to the proposals that would allow it to articulate its hostility to the plan within the framework of a positive alternative. If the trap is successfully sprung, it could cause significant damage to the coalition and cement Ed Miliband’s reputation for political courage and for speaking on behalf of a wide range of disadvantaged Britons. What is required to pull that off is a strategic fluency that Labour has yet to display and boldness, courage and imagination.

Make no mistake. The 1% uprating means that for the first time since 1931, the income of the poorest will fall as a deliberate act of government policy. Inflation for the period that the 1% cap lasts is expected to run at 2%. However, those on limited income spend more on food, fuel and water than the rest of the population and each is rising faster than inflation. Absolute poverty, the choice, say, between food and heating is already being reported in Glasgow, London and Birmingham. The financial ramifications go further. They also hit the squeezed middle. Working families will weather 60% of the cuts to come. According to the TUC, a family of four will see a cumulative real-term cut of £2,800 by 2015/2016. There is also the wound to the civic body. The Osborne trap shatters the social contract that mitigates risk and provides an adequate income to all. So how should Labour proceed?

First and urgently, it needs to challenge the toxic myths. The state can and should be a positive element, a catalyst for growth. Second, Labour must detail what a reconfigured social contract looks like and how to ensure a fairer redistribution of opportunities, incomes and resources. Third, it has to reclaim some of the more positive aspects of its time in power – working tax credit helped to lift more than a million children out of poverty – and lay out what it means by a One Nation welfare state.

Once the propaganda is stripped away, who truly gets what from the welfare state? Cameron has said that more than £5.2bn is lost in benefit fraud, but £4.2bn of that is due to government error. According to Professor Marjorie Mayo’s research, intergenerational worklessness accounts for under 2% of the working population, too many but hardly an epidemic. A study by the New Policy Institute says that as a share of national income, total spending on benefits and tax credits has never been higher at 13% of GDP. It’s a sign of rising state dependency but not quite in the way that Iain Duncan Smith, the work and pensions minister, describes.

In 1948, the single rate of social assistance was worth 18% of earnings. Now it is worth 11%. Of the £53bn rise in spending after inflation, only £2bn was accounted for by unemployment benefit; £10bn pounds goes on housing benefit because too few affordable houses are built. Another £17bn is spent on family benefits and tax credits subsidising low wages, a situation that would have left Beveridge incredulous. And pensioner benefits take a further £24bn, the largest slice. Sixty per cent of children in poverty live in working households and four in 10 jobs are self-employed, temporary or short term. The original welfare state has morphed into one that props up a risky labour market, employers, corporations and landlords while a nation of strivers in too many instances works for less than it takes to feed a family.

There are those who fiddle the system, but that shouldn’t deter Labour from mapping the true terrain of today’s shambolic welfare state. The still tougher challenge is laying out what takes its place. Should a mansion tax pay for universal childcare? Should pensioners forfeit perks or Labour impose a higher corporation tax? In Sweden, in the early 90s, the deficit increased tenfold. Cutting the benefits bill was achieved through growth and employment. The richest paid most and more was invested in education rather than income transfers such as maternity and paternity pay and unemployment insurance. Now, Sweden has generous unemployment benefit but only for a period and employers have to help the jobless to reskill. Is that the kind of society Labour has in mind?

Labour’s Liam Byrne said “working, saving, caring” were the principles of a One Nation welfare state. So how does that rhetoric transform into affordable policies? The bill allows Labour to reveal some of its grand design, one that, it’s hoped, refuses to balance the books on the backs of the poor but instead sets radical new priorities so that a fair investment in families and children secures a decent future for us all.

Observer Editorial 6th January 2013

George Osborne’s austerity is costing UK an extra £76bn, says IMF New analysis of figures throws doubt on chancellor’s forecast

Heather Stewart
The Observer, Saturday 13 October 2012 21.08 BST

George Osborne’s drastic deficit-cutting programme will have sucked £76bn more out of the economy than he expected by 2015, according to estimates from the International Monetary Fund of the price of austerity.

Christine Lagarde, the IMF’s managing director, last week caused consternation among governments that have embarked on controversial spending cuts by arguing that the impact on economic growth may be greater than previously thought.

The independent Office for Budget Responsibility implicitly used a “fiscal multiplier” of 0.5 to estimate the impact of the coalition’s tax rises and spending cuts on the economy. That meant each pound of cuts was expected to reduce economic output by 50p. However, after examining the records of many countries that have embraced austerity since the financial crisis, the IMF reckons the true multiplier is 0.9-1.7.

Calculations made for the Observer by the TUC reveal that if the real multiplier is 1.3 – the middle of the IMF’s range – the OBR has underestimated the impact of the cuts by a cumulative £76bn, more than 8% of GDP, over five years. Instead of shaving less than 1% off economic growth during this financial year, austerity has depressed it by more than 2%, helping to explain why the economy has plunged into a double-dip recession.

Labour seized on the IMF’s intervention as a vindication of shadow chancellor Ed Balls’s argument that the cuts programme is self-defeating. “The IMF’s analysis should be a wake-up call for David Cameron and George Osborne,” said the shadow chief secretary to the treasury, Rachel Reeves. “It’s time the prime minister and the chancellor listened to the evidence, accepted their plan isn’t working and changed course.”

TUC general secretary Brendan Barber said: “The chancellor has repeatedly used the IMF as cover for his austerity strategy, despite warnings that deep spending cuts in the midst of a global turndown would make a bad situation worse. Now that the IMF has admitted spending cuts could hit the economy at least twice as hard as it previously thought, the government has all the evidence it needs to change course.”

Neal Lawson, director of left-wing pressure group Compass, said, “the cuts were never going to work, but these calculations show the effect is bigger than anyone judged. The economy isn’t suffering from government borrowing but a severe lack of demand that only the government can fix.”

Osborne told reporters in Tokyo that the IMF does not allow for the boost provided to growth by the Bank of England’s £375bn of quantitative easing. “The point I would make about their study of the fiscal multipliers is that they explicitly say they were not taking into account offsetting monetary policy action. In the UK, I would argue we have a tough and credible fiscal policy to allow for loose and accommodative monetary policy and I think that is the right combination.”

But many economists believe the dent in growth caused by austerity policies may be larger than first thought, because the financial crisis has left banks starving firms and households of credit; and with many countries cutting back simultaneously, it is harder to fill the gap created by cuts with demand for exports.

Former monetary policy committee member Danny Blanchflower said: “In a way, the surprise is that it’s taken everybody so long to work it out: Keynes knew it in the 1930s. This is the ‘long, dragging conditions of semi-slump’, and the multipliers are likely to be larger when you’ve got banks that aren’t lending and you’re coming out of the longest recession in 100 years.”

Adair Turner, chairman of the Financial Services Authority, said that the Treasury should have pumped even more into Britain’s banks during the credit crisis to leave them in a stronger state. “The recovery from recession has been far slower than most commentators and all official forecasts anticipated in 2009,” he said. “That reflects our failure to understand just how powerful are the deflationary effects created by deleveraging in the aftermath of financial crises.”

The OBR, set by Osborne to give an independent assessment of the economy, will publish a report on Tuesday explaining why it has consistently overestimated economic growth, and is expected to touch on the issue of whether the cuts are taking a greater-than-predicted toll. At its last forecast, in March, it predicted 0.8% growth this year; the IMF now expects the final figure to be -0.4%.

• This article was amended on Sunday 14 October to add the word “implicitly” to clarify how the Office for Budget Responsibility used a “fiscal multiplier” to estimate the impact of the coalition’s tax rises and spending cuts.

Cameron’s coalition: a government with ominous intent

David Cameron is halfway through his term as prime minister and despite the ‘omnishambles’ of his austerity cuts his steely ideological core will not allow him to change course now

Polly Toynbee and David Walker
The Guardian, Wednesday 19 September 2012 17.00 BST

Geographically, socially, financially, educationally and electorally, Cameron has favoured his own people. Photograph: Murdo MacLeod for the Guardian
How should we separate dogma from disarray, in this half-time report on David Cameron’s occupation of No 10? Dogma is the strength of Cameron’s determination to dismantle the state, while disarray is his confusion and incompetence in carrying it out. People assume political leaders know what they are doing, when in fact they are often deeply confused. Cameron, like all modern politicians, gets swept up by one day’s headlines. He is also in thrall to Tory beliefs that are often confused and contradictory. He has been a navigator without maps, usually oblivious and indifferent to the unintended consequences of his policies. In health, criminal justice and welfare the Cameron era has to be characterised by the 2012 catchphrase “omnishambles”. Yet if his programme has been less grand design than instinct, the urge to cut back the state was strong and has given the Tories identity and impetus. This has been and remains a government with ominous intent.

By half-time, though, spectators round the Westminster stadium expected the worst to be over. The announced tactic was to frontload spending cuts, get past the necessary pain of tax increases and give Team Tory a run-in to the next election, with time for a few electoral Mobots. Growth would be well established and George Osborne would scatter feelgood tax give-aways ahead of the polls.

That’s not going to happen. The timetable has slipped badly, so that the structural deficit in the public finances cannot be eliminated until 2016–17, and that’s optimistic. Tax handouts now can only be purchased by yet more searing cuts to public services and welfare spending.

Blaming Europe for failure came naturally, but was triply unconvincing. First of all, as a matter of fact, UK exports to the EU had been growing, at least until early 2012. Secondly, the deepening Eurozone crisis was in large measure a result of the same austerity policies Osborne and Cameron insisted were the remedy for the UK. And thirdly, if the Eurozone crisis was as bad for Britain as Osborne claimed, wasn’t that the best reason to temper austerity and revive demand?

But thinking again is for pragmatists. Cameron’s stiff-necked insistence on sticking with his cuts shows that despite the haplessness and chaos, his inner ideological core is steely. State shrinkage was and remains his government’s guiding light. Cameron’s cuts will permanently damage and diminish government and collective endeavour, and in that sense he may still leave the field a winner.

He still has fully to deliver. The Institute for Fiscal Studies reckoned that, at April 2012, four-fifths of planned reductions in spending remained to be realised. Departments and public bodies had lopped the easiest to reach branches, cancelling investment, freezing pay. The body count must now rise. In 2011, 270,000 public sector staff were sacked, cutting the payroll by 7%. By March 2012, according to Unison estimates, 625 public employees were losing their jobs every day, and decimation must go on indefinitely. Osborne’s targets depend on chopping cash support for the disabled, further cuts in tax credits – which will make low paid work even less attractive – and paying less housing benefit, which forces population movements that make no economic or social sense.

Can Cameron stay the course? There is evidence to hand, for his second-act script was written into the little-read business plans Whitehall departments were required to publish in June 2012, even if within weeks, ambitions were being abandoned. Take the Treasury’s aim of greater variation in public sector pay, so those who work for councils, the Department of Work and Pensions or the NHS in poorer parts of the country would see their salaries cut, as a means of allowing private sector employers to cut their pay too. Tory MPs grew alarmed at the disruption and loss of local income; the business people supposed to benefit disputed the Treasury’s understanding of labour markets. Cameron backtracked: in the civil service reform white paper regional pay variation was nowhere to be found. It hangs in the air uncertainly, with a fraught attempt in the South West NHS.

No wonder Osborne rounded on business for failing to speak out in favour of tax cuts. The unwillingness of the private sector to be as Thatcherite as the government would like is proving a problem, as well as an ideological paradox. Companies have even been reluctant to strip employees of rights, which may make it hard to implement the Cameron-backed plan to allow managers to fire at will. The introduction of universal credit depends on bringing vast IT systems on line. Iain Duncan Smith struggled to keep his job at DWP, so may stay there long enough finally to learn a lesson that has been staring him in the face for months: in trying to help poor households into work there’s a permanent trade-off between simplicity and fairness. His work programme will look even more perilous if contractors demand to be paid despite failing to find clients jobs that aren’t there.

A union protest against the cuts … the IFS estimates four-fifths of the coalition’s spending reductions remain to be realised. Photograph: Ben Stansall/AFP/Getty Images
And so on, round the departments. Despite the Tories’ pre-election pledge of a bigger army, 25,000 are to be cut from the services together with 29,000 civilian staff as the Ministry of Defence budget is to shrink by 7.5% by 2015. But that is not matched by any slimming in UK pretension. If the state must be urgently reduced, why go on spending twice as large a proportion of GDP on defence as Germany, a higher proportion than the Chinese (officially) spend, clinging to the top table, the UK’s permanent seat on the UN security council seat and a role as rear gunner in any passing war?

The government, according to the MoD business plan, will “succeed in Afghanistan” (whatever that means); “continue to fulfil its standing commitments” (tautology); promote defence exports (while cutting its own purchases); “succeed in other operations it is required to undertake” (obeying prime ministerial whim). The MoD started buying elements of the renewed Trident system, for which the lowest total estimate is £20bn, an unexplained, luxury survivor in these years of austerity.

From the Department for Communities and Local Government business plan springs the extraordinary interventionist proposal to identify 120,000 troubled families – a suspiciously specific figure – and sort them out. Evidence for the existence of a permanent core of disadvantaged households is shaky; ministers talk about families in trouble, families causing trouble and troubled families, though the categories and numbers are all different. Whitehall wants councils to seek them out and earn £4,000 if they get mothers and fathers into jobs and sons and daughters into school, stop them offending, or causing neighbours trouble – all this while benefits are cut and in-work rewards falling for those who are in work.

The government hopes to bask in an Olympic afterglow, but Jeremy Hunt’s successor Maria Miller faces the unappetising task of selling a policy for culture and sports that critically depends on government while cutting playing fields and arts support. Despite Hunt’s departure, the DCMS business plans still ominously promise to make room for Murdoch and his surrogates by deregulating broadcasting and communications and to keep up pressure on the BBC to “ensure it is more accountable”.

In education, Michael Gove makes no secret of his aim to bring more private money into schools through sponsorship. The business plan for the Department for Education confirms Gove’s stated intention to fracture the “1944 settlement” beyond repair. A vision of educational anarchy beckons as he compels more primaries to become academies, free schools expand and revamped versions of the old city technology colleges are established, moving further and further away from the possibilities of comprehensive secondary schooling, as the OECD reports the UK as one of the most class-segregated systems in the developed world.

In justice, the departure of Ken Clarke makes no difference to a plan to bring more private contractors into prisons, probation and community sentences. Private companies will not, of course, have an incentive to stop the growth in prison numbers that, on the face of things, would bring them extra income.

The Department for Environment business plan is to try to cope with the negative consequences of privatisation under a previous Tory government, but not to admit the lack of a national water grid, excessive leakage and inadequate sewerage in London. The government also needs to reform energy: a dearth of bidders to build new nuclear power and nimby Tory MPs blocking wind farms combine to show the limits of a privatised market.

Read the Cameron business plans and nothing is joined up. Transport Department plans for charging heavy goods vehicles to use the roads would make sense if they were married to a programme of shifting freight to rail and radically cutting the number of journeys made by delivery companies. Yet the point of the privatisations of rail and buses under previous Tory governments was to break them up. The plan’s stated aim of “making public transport more attractive” is unlikely to be implemented when fares are rising faster than inflation.

In health the Tories face daunting political risks, entirely of Cameron’s creation, not one of them mitigated by the ejection of Andrew Lansley. Voters may not absorb the administrative detail of a “reform” the chief executive of the NHS said was visible from Mars, but one thing they know: Cameron promised during the 2010 election not to cut or privatise the NHS. Those will be principal – and perilous – themes into the next election.

At the 2010 Tory party conference, Francis Maude said the government was relaxed about creating a postcode lottery for healthcare and other services, and that is precisely what results from the “reforms” now in place: as the state is rolled back, there can be no national standards. The public always strongly resents any suggestion they can get a drug or treatment in one place, but not another. New evidence emerges of the centrality of mental health, and how switching resources to psychological services could save large sums from physical healthcare budgets. But that would mean a central initiative, with the capacity to steer and reallocate. In opposition Cameron derided Labour’s targets but has sought to reimpose the same 18-week maximum wait for surgery – demonstrating how often he finds centralism essential when faced with the consequences of the anarchy that characterises his competition policy.

When you have provoked thousands of police constables to give up off-duty time to march through Whitehall in vocal opposition to your plans for their pay and pensions, as the government did in May 2012, you might take care not to rile them further. They are, after all, the people you are going to depend on to police the other demos, to put down riots and reassure the public on crime. But no, the Cameron recipe for policing is in turmoil. He is simultaneously cutting police numbers, overhauling recruitment and promotion, appointing a detested hatchetman as chief inspector of constabulary, reorganising the national detective agencies and, to crown it all, creating elected commissioners who will have a built-in incentive to slug it out with chief constables, interfere with police operations – and harry the government for more crime-fighting resources and, as ever, “bobbies on the beat”.

Police officers oppose changes to their pay and pensions … Cameron’s recipe for policing is in turmoil. Photograph: Dan Kitwood/Getty Images
But again, don’t let the disarray obscure the dogma. The three-word badge for Cameron’s first half is “any qualified provider”. A key document is the Open Public Services white paper published in July 2011: however cack-handed its delivery, this paper proves Cameron’s radicalism. Even the paper’s publication showed bravado. It was to have been published in February that year but a scandal at Winterbourne View, a long-term private residential hospital, provoked alarm at private profiteering. Undeterred, Oliver Letwin and Francis Maude, Cameron’s ideological commissars, went ahead and published the masterplan a few months later.

It’s there to read for anyone who doubts Cameron’s purpose, and anyone who thinks the Liberal Democrats have watered down Tory ideology. The default position for all public services is private provision, and not even the military or policing is exempt. The abject failure of G4S at the Olympics has not blunted the intention. Most departments, agencies and local authorities are obliged to drum up at least three rivals, preferably commercial, to bid to provide services. As Cameron wrote in the Daily Telegraph, this creates “a new presumption against the dead hand of the state”. Woe betide any civil servant obstructing it: “If I have to pull those people into my office and get them off the backs of business, then believe me I’ll do it.”

It’s working. “The UK’s austerity programme is entering a fruitful phrase for outsourcing,” said an analyst in June 2012, noting £4bn worth of government work out to tender in the first six months of the year alone. The Tories intend irreversible change, believing that once they excavate the foundations, this edifice can’t be rebuilt.

Of course there are countervailing tendencies. Philosophically, Conservatism was and remains all over the place. Shrink-the-state zeal conflicts with a Tory desire to keep Britain great, leading to over-the-odds defence spending. Love of the little platoons of localism vies with the constant urge to command, witness Gove and communities secretary Eric Pickles. Market freedom is at odds with social order exemplified in Cameron’s half-baked National Citizens Service for the young. Ministers rubbish professionalism, abuse the civil service, slander GPs and teachers, then bemoan loss of respect and authority. Even a shrunken state needs disinterested, enthusiastic public servants.

In the second half, governing will get harder. Lib Dems facing electoral annihilation will have to consider early exit from the coalition. Peevish and disappointed at the loss of both electoral and House of Lords reform, they must surely now veto the Tories’ bid to shrink the House of Commons by cutting constituencies in their favour.

Another question presses. Osborne dared not repeat his line about all being in this together when he cut tax for the rich in his 2012 budget. As benefit cuts bite and real incomes fall, the unjust distribution of pain gets plainer for all to see. For all his speeches on social justice and social mobility, the thrust of Cameron policy is to make the country more unequal at an accelerating pace. By 2015, the IFS estimates, at least 500,000 more children will fall below the official poverty threshold: this compares badly with Labour who took a million out of poverty. Duncan Smith’s thinktank is working overtime on trying to show poverty is only a socialist construct, and that official measures based on income are worthless. They won’t succeed, as the accumulating data show the young, women and the poorest households have taken a disproportionate share of the cuts.

Geographically, socially, financially, educationally and electorally, Cameron has favoured his own people. For example, the National Commissioning Board for health is no longer obliged to share out money according to the indices of deprivation; resources are being “equalised”, which means redirecting funds from poorer areas in the north of England to richer southern districts.

In the end, electors will judge on the economy. Eurocataclysm may precipitate a wider collapse and Osborne will try hard to blame it for the added economic damage caused by his austerity. Economists warn of a decade or even two of depression, stagnation and socially unsustainable unemployment. Cameron could still change course, responding to unfolding events with imagination and humility. But that would mean abandoning the project that his Tory generation picked up from Thatcher, their vendetta against government and their unshakeable trust in markets, despite all the evidence of failure and all the perverse consequences. Such a volte-face is unlikely, so Cameron’s second half looks set to offer more of the same dogma and disarray.

• Dogma and Disarray: Cameron at half-time by Polly Toynbee and David Walker

Britain’s press are fighting a class war, defending the elite they belong to

It’s not just Rupert Murdoch and his crooks. All the corporate barons who corrupted our political system must be unmasked, Monday 12 December 2011 20.30 GMT

Illustration by Daniel Pudles

Illustration by Daniel Pudles

Have we ever been so badly served by the press? We face multiple crises – economic, environmental, democratic – but most newspapers represent them neither clearly nor fairly. The industry that should reveal and expose instead tries to contain and baffle, to foil questions and shut down dissent.

The men who own the corporate press are fighting a class war, seeking, even now, to defend the 1% to which they belong against its challengers. But because they control much of the conversation, we seldom see it in these terms. Our press re-frames major issues so effectively, it often recruits its readers to mobilise against their own interests.

Crime and antisocial behaviour are represented as the predations of the poor on each other, or on the middle and upper classes. “Blonde millionaire’s wife raped in luxury home by asylum-seeking benefits cheat” is the transcendental form of a thousand tabloid headlines, alongside “Pippa Middleton’s bottom gets £1m makeover from top designer”. Though benefit fraud deprives the exchequer of £1.1bn a year while tax avoidance and evasion deprive it of between £40bn and £120bn, the tabloids relentlessly pursue the petty crooks, while leaving the capos alone.

On Monday the rightwing papers applauded government plans to cut benefits for people in social housing who have more rooms than they need. The “growing scandal of under-occupation”, the Mail observed, contributes to the housing crisis, depriving larger families of the homes they need. The Express told us that “it is only right that decisions such as this must be taken”. But what about the private sector, where there’s a much higher rate of under-occupation, especially among the wealthy? When this column suggested that these under-used homes should be taxed, the corporate press went berserk. Only the poorest should carry the cost of resolving our housing crisis.

Not a day passes in which rightwing papers fail to call for stiffer regulation of protesters, problem families, petty criminals or antisocial teenagers. And every day they call for laxer regulation of business: cutting the “red tape” that prevents companies and banks from using the planet as their dustbin, killing workers or tanking the economy.

The newspapers’ own criminal behaviour, more of which is being exposed before the Leveson inquiry as I write, looks to me like the almost inevitable result of a culture that appears to believe that the law, like taxes and regulation, is for little people. While portraying the underclass as a threat to “our” way of life, the corporate papers ask us to celebrate the lives of the economic elite. Saturday’s Telegraph devoted most of a page to a puff piece flogging the charming jumpers being sold by a Santa Sebag-Montefiore (nee Palmer-Tomkinson) from her “white stucco Kensington House”. She works – if that’s the right word for it – with someone she met at Klosters, where she and her family “ski with the Prince of Wales and Princes William and Harry”. So far they have managed to sell 40 of these jumpers, which somehow justifies an enormous photo and 1,400 breathless words.

I mention this sycophantic drivel not because it is exceptional but because it is typical. A friend who used to work as a freelance photographer for the Telegraph stopped when he discovered that most of those he was sent to photograph were the well-heeled friends and relatives of people on the paper. Journalism is embedded in the world it should be challenging and confronting.

These papers recognise the existence of an oppressive elite, but they frame it purely in political terms. The political elite becomes oppressive when it tries to curb the powers and freedoms of the economic elite. Take this revealing conjunction in the Daily Mail’s leading article on Saturday: “David Cameron yesterday finally said no to the European elite – vetoing plans for a treaty that included an EU-wide tax on financial transactions.” In other words, Cameron said yes to the British elite. But it cannot be explained in those terms without exposing where power really lies, which is the antithesis of what the rightwing papers seek to achieve.

As the theologian Walter Wink shows, challenging a dominant system requires a three-part process: naming the powers, unmasking the powers, engaging the powers. Their white noise of distraction and obfuscation is the means by which the newspapers prevent this process from beginning. They mislead us about the sources of our oppression, misrepresent our democratic choices, demonise those who try to challenge the 1%.

Compare the Daily Mail’s treatment of the Occupy London protesters, confronting the banks, to its coverage of the camp set up by people of the charming village of Meriden, confronting some gypsies. “Desecration, defecation and class A drugs” was the headline on the Mail’s feature article about Occupy London. Published on the day on which the City of London began its attempts to evict the protesters, it deployed every conceivable means of vilifying them and justifying their expulsion.

The Mail’s Meriden story, on the other hand, was headlined: “Adding insult to injury: now villagers who have protested against an illegal travellers’ camp for 586 days are told: YOU are facing eviction.” The story emphasised the villagers’ calm fortitude and the justice of their cause. Presumably they don’t defecate either.


Press barons have been waging this class war for almost a century, and it has hobbled progressive politics throughout that time. But the closed circle of embedded journalism is now so tight that it has almost created an alternative reality.

Ten days ago, for example, the Spectator ran a cover story that could not have been crazier had it been headlined: “Yes, Father Christmas does exist, but he’s been kidnapped by lizards”. A serial promoter of mumbo-jumbo called Nils-Axel Morner, who claims he has paranormal dowsing abilities and that an iron-age cemetery in Sweden is in fact the Hong Kong of the ancient Greeks, was given 1,800 words to show that sea levels are not rising. Citing “evidence” that was anecdotal, irrelevant or simply wrong, explaining that it was all a massive conspiracy, Morner ignored or dismissed a vast wealth of solid data from satellites and tide gauges.

The Spectator kindly gave me space to write a response last week, but it strikes me that a story like this could not have been published five years ago. It first required a long process of normalisation, in which evident falsehoods are repeated until they are widely believed to be true. The climate talks in Durban were slotted by the papers into the same narrative, in which climate scientists and the BBC conspire to shut down the economy and send us back to the stone age. (And they have the blazing cheek to call us scaremongers.)

It’s not just Murdoch and his network of sleazy crooks: our political system has been corrupted by the entire corporate media. Defending ourselves from the economic elite means naming and unmasking the power of the press.

• A fully referenced version of this article can be found on George Monbiot’s website