Osborne must find reverse gear to drive the UK economy towards recovery

The Faustian pact the coalition made with the Bank of England and the markets has not worked. It’s time to end austerity and use fiscal policy to revive Britain

Faustian pacts are not a good idea. On assuming office in 2010 the coalition entered into a pact with the Bank of England and the financial markets which ranks as one of the most ill-conceived ventures in economic policy by any British government since the second world war.

It was to be deficit reduction – indeed the elimination of the so-called “structural” deficit – by 2015, in return for supportive monetary (including exchange rate) policy from the Bank of England and the enthusiastic backing of the financial markets. The sine qua non as the criterion for success of this policy and pact was to be a marked improvement in the pace of economic recovery.

The chancellor, George Osborne, made a bad start by raising VAT – a £12bn blow to consumer spending, with additional multiplier effects. The economy the incoming government inherited was recovering, albeit slowly. But the combination of the perverse increase in taxation (knocking almost 1% off gross domestic product per annum), and the impact of the austerity programme was sufficient to stop the recovery in its tracks.

This added to the deflationary impact of higher import prices arising from the massive – but necessary – devaluation of the pound in which the Treasury and the Bank of England had acquiesced. Then there have been all the other depressing influences on real incomes of which the governor, Sir Mervyn King, recently complained.

I should emphasise that paradoxically, an increase in energy prices can be inflationary in that it affects the general price level and deflationary in that, via the impact on real incomes, it has a depressing effect on spending power and therefore economic activity. Thus the monetary policy committee can be criticised by purists for not hitting the official inflation target of 2%, yet praised for not taking its brief too literally, and aggravating the depression.

For depression it is: in common with the redoubtable Jonathan Portes of the National Institute of Economic and Social Affairs I have regarded the term depression appropriate to a situation where output continues to remain well below its previous peak, let alone the 15% or so by which it is below what the historical trend would indicate.

In a paper which I recommend to all (“How to Restore Growth and Cut the Deficit, The Policy Consequences of Revived Keynesianism, Lombard Street Research“) the economist Christopher Smallwood reminds us of Keynes’s definition of depression: “a chronic condition of subnormal activity without any marked tendency either towards recovery or towards complete collapse”.

Although things are pretty bad, we have certainly avoided complete collapse – so far! The role of Gordon Brown and others in “saving the world” in 2008-09 was vital in preventing disaster then. Central bankers since had either read or heard about Liaquat Ahamed’s book Lords of Finance about how their predecessors got it so wrong in the 1920s and 1930s. Through quantitative easing – open market operations to offset a private sector credit crunch by easing monetary conditions – the central banks have stopped the rot.

Quantitative easing was urged way back by Keynes in order to lower interest rates. But it was when monetary policy was ineffective – like “pushing on a string” – that Keynes advocated what have come to be known as “Keynesian” policies – the use of fiscal policy (government spending) – to revive activity.

Unfortunately, under the Faustian pact we have witnessed a double whammy: fiscal policy being used to reduce government spending when the economy is already depressed. And a monetary policy that has been pushing on a string.

As Smallwood points out, the Treasury and Bank drew the wrong conclusion from the apparent success of the combination of fiscal contraction and monetary expansion in the 1980s and 1990s. “In both cases, the contractionary impact of tax rises and spending cuts was counterbalanced by substantial falls in interest rates, and of the sterling exchange rate at a time when our export markets were growing,” he writes. Exports and investment took up the slack left by budgetary cuts.

This time there was not much further for interest rates to fall. Indeed, banks were widening their margins and many borrowers did not feel the intended effects. For some, interest rates actually rose. Moreover, despite the more competitive pound, the sluggishness of our main markets prevented an export boom.

George Osborne cannot bear to admit he has been wrong, blames the Bank, and produces a Canadian ex machina in the shape of Mark Carney. And so far from pleasing the financial markets with this austerity programme, he finds they are more concerned about lack of growth, or continuing depression. Indeed the markets showed signs of incipient panic when they learned last week that King himself wanted more quantitative easing at the last meeting of the MPC.

Now, following recent work on the operation of “fiscal multipliers” in the US, Smallwood argues that a switch to a policy of fiscal expansion is the only way out. The multiplier was a discovery of the economist Richard Kahn’s, which Keynes adopted. Normally economists think of additional public spending or tax cuts having “multiplier” effects, as the person or institution in receipt of extra funds spends them in a way that boosts the incomes and spending of others. Similarly, higher investment produces what economists call “accelerator effects”.

But at present we have very damaging negative multiplier effects, in which budget cuts lead to obvious hardship, to further reductions in people’s ready cash and consequent social problems.

Smallwood argues convincingly that fiscal policy needs, selectively, to be put into reverse. “A properly designed fiscal stimulus could restore growth, at the same time generating powerful tax flow-backs from (a) national income (multiplier effects); (b) higher private investment (accelerator effects); and (c) improved long-term growth potential as a result of increased investment.”

There is a huge range of potential infrastructure projects out there. They can pay for themselves. The only way out of this mess is a complete reversal of fiscal policy. It would be seriously ironic if the financial markets ended up punishing this country for the unintended consequences of a Faustian pact that was meant to please them. The ratings agencies have already started.

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

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.

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

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.

York strives to pay living wage as cuts bite and poverty spreads

The city has a tradition of philanthropy dating back to the Rowntrees – and the council is determined that its workers will not bear the brunt of austerity

At the turn of the 20th century, the chocolatier and philanthropist Joseph Rowntree bought 150 acres of land north of York and created New Earswick, a low-rent garden village for his employees and others decanted from the rank slums of the city. A Quaker, he believed in investing in the wellbeing of his workers.

Today, New Earswick remains lavishly green and pleasant and is also home to a network of retirement bungalows and a care home in which Dawn Watson, 51, has worked as a general care assistant for 14 years. In January, her wage packet saw a dramatic and permanent increase of £200 a month, earned for the same job, and the same hours. The reason is that her employer, the Joseph Rowntree Foundation (JRF), now pays its staff the voluntary living wage of £7.45 an hour (£8.55 in London). “It helps with the cost of everyday life,” Watson says. “But it also makes me feel valued, better in myself – if better is the right word.”

This Tuesday marks the city of York’s 100th day as Britain’s first living wage city. The challenges it faces are immense. “Who is against a decent wage?” says Ian Gillies, leader of the Tory group on the Labour-held city council. “But it’s an issue of affordability. If we have to borrow to pay it, it becomes a political whim with dubious consequences.”

York, with a population 205,000, has significant areas of deprivation among large islands of affluence and a real housing crisis, with supply meeting only 8% of need. More than 250 jobs from a council staff of 7,500 will go over the next two years. By the end of 2015, the city will have cut 25% of its total budget – a sum amounting to millions. At the same time, £338,000 has been set aside to ensure that from April, 573 council employees will have salaries increased to the living wage. How can that make sense? Or is the living wage a compass by which progressive local authorities might steer a fairer way through austerity?

In 2011, the independent York Fairness Commission, sponsored by John Sentamu, the archbishop of York, was established. Commissioners came from JRF and Aviva, an important local employer, and included Kate Pickett and Richard Wilkinson of York University, who co-wrote a book called The Spirit Level. Its thesis is that a range of social ills, including illiteracy, violence, mental and physical illness, unemployment and low civic engagement – all costly to the public purse – are affected not by how wealthy society, is but by how unequal it is. Big gaps between rich and poor are bad for everyone, even the well-off. “Inequality is so much more widespread than many people realise,” Pickett says. “Once they do know, the first instinct is to say: ‘That’s not right’.”

According to the charity One Society, the pay gap between top and bottom earners is, on average, 15 to one in local authorities and a huge 262 to 1 in FTSE 100 companies. So far, one in eight local authorities have reduced the pay of chief executives and one in five are committed to paying employees the living wage.

In addition to the living wage, the Fairness Commission also recommended an investment in preventive action against inequality and a living wage clause in council contracts and procurements. All were adopted by the council. “Social justice is in the city’s DNA,” says Kersten England, the chief executive of the council. “We want to put money into the pockets of the poorest earned from a fair day’s pay. Money means status and has a psychological impact. York is a growth city but we want to take everyone on the journey, not just the privileged.”

“The living wage is necessary but not sufficient in itself,” Julia Unwin, JRF’s chief executive, points out. “It has to be part of a much bigger picture.” The Citizens Advice bureau in Blossom Street, York, deals with more than 60 increasingly desperate inquiries a day. Here, Unwin’s point is made manifest. “Two years ago, we always had a solution. It might not have been brilliant, but we had one,” says Clare Guinan of the CAB. “Now, we don’t.” For the working poor, income no longer matches expenditure while job insecurity is rampant. “You are no longer employed or unemployed for a period,” Guinan says. “It depends on the day.”

George Vickers, a manager at the bureau, says York has seen a 45% increase in involuntary part-time work in the past year. It is not uncommon for a person to work full time but be given a 20-hour-a-week contract. The reduction or withdrawal of benefits by Jobcentre Plus is widespread: in one case a man was given a job, beginning a fortnight later, and was sanctioned for not seeking work in the intervening 14 days. “That’s demeaning. The squeeze is on at such a fundamental level,” says Guinan.

The squeeze is also spreading. Julia Histon is the chief executive of York Housing Association, which pays the living wage and rents to those on the lowest incomes. She says: “People massively underclaim on benefits. We help them with budget planning and ways to avoid homelessness. But what’s now happening is that young professionals are also being squeezed out of the private rental market and they aren’t eligible for the housing we offer.”

Statistics reveal the scale of the crisis. The average income in the city is £20,420; the average house price £201,000. Nearly half of households have an income of less than £24,000 year but an annual income of £42,000 is required to rent a three-bedroom home. The waiting list to rent social housing is 2,690 names long and growing. “We are building 40 units a year but if you think of the scale of the problem, that’s tiny,” Histon says.

The council plans 5,000 affordable houses in four years. “Otherwise, the kids of our families can’t afford to live in their own city,” England says. “That’s also the challenge of income inequality.”

Martyn Weller is co-owner of a York business that organises adventure activities such as kayaking and caving. York has 800 small businesses employing, on average, a staff of seven. Weller’s has a turnover of £175,000 a year. Nationally, two-thirds of small businesses pay the living wage but it isn’t feasible for all. Weller pays his staff £6.50 an hour and himself £675 a month. The Ministry of Defence last year contracted his company at £255 a session, four sessions a week. Now, it’s two sessions, at £135 each. “That’s happening everywhere.”

According to KPMG, one in five of the national workforce are paid less than the living wage. In York, 103 of JRF staff have received a 20% pay increase while those at the top end have had no increase. JRF has commissioned a number of studies to assess the impact, but one bonus is already apparent. Previously, there was a 20-30% turnover of care staff, and it costs £600 to recruit and train each individual. “Turnover is much lower,” JRF’s Shaun Rafferty says. “The living wage can be a good deal for employers too.”

Six mornings a week, at Carecent, behind the giant Central Methodist church in York, volunteers provide free breakfasts, food, help and clothes to a large band of the homeless, many suffering mental ill health, all showing the wounds of permanent exile from society. Up to 60 come each morning. Donations from the public are plentiful. “York is that kind of place,” says Nicky Gladstone, project manager. Here, cuts and the living wage have little relevance. If you take nothing from nothing, you have nothing.”

“York looks pretty but it is very typical of a lot of England,” Unwin says. “Low income, low pay. What we have is strong leadership and a shared vision of what a sense of fairness might achieve. If it can be done here, it can be done anywhere.”

 The Observer, Sunday 10 February 2013

The less well-paid you are when you enter the labour market, the more your degree will now cost

Posted: 22 Jan 2013 06:00 AM PST

Ron Johnston argues that much of the debate on tuition fees is misleading. Not only is the size of the debt incurred by students persistently understated but the repayment system is itself regressive. The greater your rewards from studying for a degree the less you pay for the opportunity. This has profound consequences for postgraduate education and recruitment to the professions. 

On 6 January 2013 The Independent on Sunday reported that a number of UK university vice-chancellors and other senior academics had expressed great concern about the absence of financial support for, and thus problems of recruitment to, taught masters’ courses – many of which provide necessary training for a range of (mainly) public-sector professions rather than introductions to fundamental research. On the same day, The Observer carried a major article by Will Hutton (Principal of Hertford College, Oxford) on that issue, rightly associating those difficulties with the amount of debt students will have accumulated at the end of their undergraduate degrees. Unfortunately, like so many  others, he did not fully address the nature and extent of such debts, nor the misleading representations of the repayment system from both the politicians who implemented it and many subsequent commentators.

The details needed to make a full assessment are readily available from the ‘student loans repayment calculator’ on a government website. Although it makes some pragmatic assumptions, such as at what rate individuals’ post-graduation incomes increases and future rates of inflation, the information provided is sufficient to generate a clear conclusion: the extent of the debts students graduating from 2015  onwards will be carrying is not only often understated but in addition the repayment system is regressive according to income and not progressive, as frequently claimed.

Take, for example, a student who reads for a three-year degree at a fee of £9,000 per annum, but does not take up the available maintenance loans. Because interest is charged during the three years of study at the rate of inflation (RPI – assumed to be 3.6%) plus 3%, the debt on graduation is not £27,000 but £30,723. Repayments only commence when the graduate earns more than £21,000 per annum, and are at the flat rate of 9% of the difference between gross income and £21,000 – so that someone earning £25,000 repays 9% on £4,000.

The smaller the amount that you earn, the less you pay in any one year, but as you continue to be charged interest on the outstanding amount (at the rate of inflation if you earn £21,000; at the rate of inflation plus up to 3% depending on your income if you earn £21-41,000; and by the rate of inflation plus 3% if you earn more than £41,000) the size of your debt continues to increase – for nine years if your starting income was £21,000. As a consequence our student whose course fees were £27,000 will take 23 years and 4 months to pay off the loan, at a total cost of £67,743.

The larger your starting salary above a threshold, however, the less you pay back in total – and in a shorter time. According to the ‘student loans repayment calculator’, somebody who ‘borrowed’ £27,000 for the fees and whose starting salary is £25,000 repays a total of £57,526 over 17 years and 8 months; with a starting salary of £30,000, the repayment period is 13 years, 9 months and the total repaid is £50,943; and for a starting salary of £40,000, only £44,354 is repaid – over a period of just 9 years and 9 months. The conclusion is clear: the less well-paid you are when you enter the labour market, the more your degree costs, both relatively and absolutely – and not the other way round.

David Willetts and others have claimed that the repayment system is, in effect, better than a graduate tax: on page 18 of BIS’s June 2011 White Paper Students at the Heart of the System, for example, we are told that the proposed system of graduate contributions ‘preserves a careful balance between the interests of higher and lower earners, by requiring higher earners to make a fair contribution to the costs of the system as a whole’ and that because ‘all graduates will pay less per month than under the old system, … higher education [will be made] more affordable for everyone’! Furthermore, the better-paid (and those from wealthier backgrounds) can pay off their debt immediately on graduation, at no cost – a further regressive element to the system; or they can pay the full fees upfront.

All this is built on assumptions regarding not only the rate of inflation (the higher it is, the larger your debt) but also increases in the graduate’s income over time, plus any change in the repayment threshold. A graduate with a starting salary of £21,000 is assumed to be earning £41,000 thirteen years later, with increases of up to 15% in the early years, falling to about 5%. (The source for the government website’s calculations is an Office for National Statistics analysis of Labour Force Survey data) If income grows more slowly, the debt accumulates even more, the repayment period is longer, and the total repaid also increases – which again disadvantages the lower-paid. Another website  allows further experimentation with varying rates of salary increase and inflation; the conclusions developed here do not change, only the inflexion point in the graphs discussed below.

These calculations all assume that the student doesn’t take out a maintenance loan – a maximum of £7,675 per annum for those living away from home and studying in London. If you also take out that loan for three years (and do not qualify for any support because of low parental income), the government’s calculations show that for graduates with a starting salary of £21,000 the initial debt is £56,924 (not the £50,025 ‘borrowed’). It grows until the 26th year of continuous earning (when it stands at £101,976); repayments stop after 30 years (after which any remaining debt is wiped), by when the full sum remitted has been £114,418. Someone whose starting salary is £30,000 has a peak debt of £67,457 after 10 years; the full amount is paid off after 23 years and 9 months, with the total costs of the package being £135,914. And the graduate with a starting salary of £40,000 makes repayments totalling just £104,105 (23% less than that for the person whose starting salary is £10,000 lower), completing the process in only 16 years and one month.

Those whose starting salaries are low are protected, therefore. The government assumes a minimum income once the graduate enters the labour force of £15,795: somebody earning that amount who takes out loans for both fees (£9,000) and maintenance (£7,675) repays £56,041 over 30 years, by which point the amount owed has increased from the initial sum of £56,924 to £136,304 – when it is wiped out. The system is progressive in its impact for those with the lowest starting salaries, therefore, but above £21,000 it becomes regressive because of the single ‘tax rate’ (and despite the link between income and a varying interest rate on the accumulating debt): so, the greater your rewards from studying for a degree the less you pay for the opportunity (or, as the Institute of Fiscal Studies concluded in its 2010 evaluation of the government’s proposals: the scheme ‘does benefit poor students, [but] it does not benefit poor graduates’).

The graph above shows just how large the differences are, especially for students who take out loans not only for fees but also for the maintenance grant: it contrasts a student who has a fees-only loan for three years and another who in addition takes out the maximum maintenance loan for studying in London. Starting incomes from £16,000 to £44,000 are shown; all of the data are taken from the ‘student loans repayment calculator’. If a student takes out a fees-only loan, then the total amount repaid falls once the starting income exceeds £18,000. For the student studying in London who also takes out a maintenance loan, the amount repaid increases with the starting salary until that reaches £26,000, and then begins to fall; somebody with a starting salary of £44,000 pays back less for the same amount ‘borrowed’ (£50,025) than somebody with a starting salary just above £20,000.

No wonder that Vice-Chancellors are worried about the future market for postgraduate masters’ degrees. Even if loans were available for those courses, how many students would avail themselves of such opportunities, given the debts they are carrying from their undergraduate education – especially if they want to work in the relatively poorly-paid professions like social work? Society as a whole should share their concern – where are the next generations of entrants to many of our (under-rewarded) professions to come from given this unfair burden?

(With many thanks to Rich Harris, Kelvyn Jones, Dan Lunt, David Manley and Ed Thomas for illuminating discussions of these issues.)

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.

About the Author

Ron Johnston is Professor of Geography in the School of Geographical Sciences at the University of Bristol. His academic work has focused on political geography (especially electoral studies), urban geography, and the history of human geography. 

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Downgrade our AAA rating? Moody’s has become part of the problem

It was ideological politicians and fearmongering ratings agencies that launched this damaging austerity experiment

Duncan Weldon, guardian.co.uk, Friday 16 November 2012 11.36 GMT

‘The best thing George Osborne could do is reject the siren voices calling him on to the rocks of more austerity.’ The credit ratings agency Moody’s has announced that it will review the UK’s top AAA credit rating early in the new year. This is the same Moody’s that, back in 2010, was keen to praise the government’s austerity drive as a major factor in preserving the UK’s good credit. So what has changed in the past two years?

Moody’s now appears concerned that, in its words, “the government’s efforts to achieve fiscal consolidation and reduce debt are being hampered by weaker than expected economic prospects”. This is quite obviously correct, if the economy is not growing strongly then tax revenues are weaker and social security spending higher than they otherwise would have been. A country can’t deal with high deficits unless its economy is moving in the right direction. In the past two years, however, the UK has achieved growth of just 0.6% against initial Office for Budget Responsibility projections of 4.6% growth over the same period.

So while it would be wrong to fault Moody’s for correctly pointing out that weak growth means the chancellor, George Osborne, is much less likely to hit his debt targets, it is worth asking exactly why it ever thought such a sharp fiscal contraction was a good idea in the first place?

Moody’s, in common with the government, appears to have seriously underestimated the impact of spending cuts and tax rises on the wider economy. Its warning is an excellent chance for the chancellor to reassess his plans.

Back in October 2010, as the chancellor was putting the finishing touches to his comprehensive spending review, the IMF published some important, but widely ignored, research. IMF staff looked at the likely impact of spending cuts and found that, in normal times, every 1% of GDP of spending cuts reduced the overall size of the economy by 0.5%, a painful but manageable reduction. However, the fund warned that this (relatively) benign outcome depended on interest rates falling and a country’s currency depreciating to boost exports. These two factors would cushion the blow from spending cuts.

In the absence of such factors (and it was always hard to see how UK interest rates could go any lower or sterling could have fallen much further) the IMF found that each 1% of GDP’s worth of spending cuts would reduce GDP by 1% – a one to one ratio. This is more painful and less manageable. Furthermore the fund argued that if countries’ trading partners were also embarking on austerity at the same time, then the impact would be magnified. In this case each 1% of GDP of spending cuts would potentially reduce GDP by 2%. In such cases austerity risks being self defeating, with cuts to government spending simply leading to lower growth, less tax revenue and a bigger benefits bill.

The respected National Institute for Social and Economic Research has now found that this is exactly what is happening across Europe as a whole. Co-ordinated austerity has pushed down GDP and is leading to debt/GDP ratios that are higher than they otherwise would have been. Much of this was foreseeable back in 2010.

The problem for Moody’s is that it was, and is, part of the problem. It was a combination of ideological politicians and fearmongering ratings agencies that launched the great austerity experiment. Two years on the results are clear – lower growth, higher employment and still-high deficits. The extreme cases are Greece, Portugal and Spain where austerity package after austerity package have been met with the same results. Each time the solution appears to be to try the same thing again.

Moody’s has now warned that the government’s “most significant policy challenge is balancing the need for fiscal consolidation against the need for economic stimulus”. The best thing the chancellor could do is reject the siren voices calling him on to the rocks of more austerity and launch the stimulus we need to get the economy moving. This is a U-turn we could all support.

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.