A real Plan B – before it’s too late

20th July, 2012 5:12 pm

So today, the Telegraph (of all papers) carries an article on IMF warnings to relax our austerity programme. They point out that

“The IMF said that the British economy may not be able to cope with the scale of austerity planned for 2013-14.

“The IMF suggested there was little evidence to indicate fiscal easing would provoke a strong adverse reaction from markets”

They then went on to slash growth forecasts for the UK by a bigger margin than any other developed nation,  to just 0.2% having predicted 0.8% just three months ago. They have cut growth forecasts for next year from 2% to 1.4%

Now, if you’ve glazed over and all you can read is “Blah blah-blah blah-blah….” here are the important bits.

Firstly, the economy is in a much worse mess than we feared. Everyone expected growth to be returning by now, instead, we are mired in recession and that recession is much deeper and lasting longer than anyone thought even a few months ago. It is almost certainly at least partially, a direct result of austerity policies

Secondly, the Labour and Lib Dem plans for the economy pre-election were right and the Tories have got this spectacularly wrong. Most voters did not vote for an austerity manifesto and I don’t think it is any longer unreasonable to call a vote of no confidence in this government if they fail to relax their plans for the economy immediately. They have no mandate, no ideas and no ability. This is getting serious now. We risk losing a generation of young people to unemployment, a flatlining economy for a decade or more and grinding poverty for those casually crushed by the austerity steam roller.

Finally, the lack of global imagination to solve these credit problems decimating our futures is breathtaking. What do the IMF suggest?

Tax cuts. Yep, give carefully selected groups of society a bit more money back to spend in the economy.
Also, maybe build some stuff.

It seems to have escaped every lofty economic genius that taking with one hand (austerity) yet giving back with the other (tax-cuts) can only ever be a zero sum game. In primary school terms, 2-2 = 0 Add 2 back again and you still end up with 2

“Building some stuff” is much more promising. But we’re talking post war scales of stimulus to have a hope of recovery.

So George, I propose (as do many others) that you announce a National Restoration project. You will borrow lots of cash at historically low interest rates to build houses and bridges and restore national treasures.

You will introduce the biggest apprenticeship scheme in living memory and offer real paid work to those who are unemployed. They will build their own homes, learn a trade or skills along the way, then they can live in the home they worked on themselves at a favourable rent. This way, we can train an army of engineers, builders, electricians, plumbers and architects and give them a secure future. If Government cannot build and then rent affordable housing at a profit, they really might as well give up.

We must build and invent and innovate our way out of this mess with a sense of national spirit and solidarity. We can build opera houses or park pavillions; we can create treasures for the future or rescue those we already have. It doesn’t matter too much what we build, but it matters very much that we start to build something. And soon. The scheme can rehabilitate offenders, train those without skills, or simply give young people a job and some hope. What’s more, we’d be building more than just bricks and mortar. We’d be re-building communities.

A few houses won’t help, one or two high gloss national announcements won’t do the trick, things have gone too far. We need a vast national scheme backed with real commitment and passion.

The IMF warnings are stark and leave little room for doubt.

Now is a time for great women and men. For courage, inspiration and leadership. It is a time for pulling together, not falling apart, we must reach for the stars, not race to the bottom.

I’m not sure that there is anyone left here, or abroad, who believes George Osborne is that man of courage or that this Government can provide the inspiration we need.

Now is no time for British reservation or timidity.

We need to act now. Or it it really will be too late.

This was originally posted here.

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  • Limp Richard

    “Now is a time for great women and men.”

    Conservative, Labour and Liberal Democrat politicians are automatically excluded then.

  • “Most voters did not vote for an austerity manifesto”.

    Really ?

    “Cuts worse than Thatcher” Alister Darling.

    “Savage cuts” Nick Clegg.

    Nobody I suspect has any problems with your suggestion about increased housebuilding. The main issue though really isn’t lack of capital. It is planning restrictions. That’s the reason house building has languished at 100,000 pa for the last few years. It’s a political problem. It’s the same with infrastructure projects. Most people like the idea of HS2 or Boris Island apart from the people who live near these places.

    • robertcp

      It is true that a majority of people voted against the faster pace of deficit reduction that was advocated by the Tories.  The Lib Dems then changed their mind after the General Election.

      • PeterBarnard

        I don’t think that it’s possible to say that, robertcp (“… faster pace of deficit reduction …). 

        Deficit reduction is about “the numbers,” and the only numbers that were on the public record prior to the election were those in Labour’s last Budget (deficit  = 11.8% [estimated]of GDP in 2009-10, reducing to 4% of GDP in 2014-15). Both the Conservatives and the Liberal Democrats were silent about the actual pace (“the numbers”) of deficit reduction.

        People saw the unprecedented – in peacetime – £167 billion forecast deficit/borrowing in 2009-10, the Conservatives and their media friends shouted, “Shock! Horror!” and very few took a step backwards to look at the big picture, ie public sector debt which was perfectly manageable, given the history of public sector debt.

        An economy depends on confidence. The shock! horror! shouted by the Conservatives (and their media friends) destroyed any confidence that may have been around. Indeed, the Conservatives buried any chance of confidence.

        That destruction of confidence also destroyed confidence in demand, without which no economy can function – no matter what mechanical tools are employed.

        Let me leave you, if I may, with some observations from a long time ago :

        (i) Adam Smith in 1776 : “Great Britain seems to support with ease a burden which, half a century ago, nobody believed her capable of supporting …. in Great Britain, from the time that we had first recourse to the ruinous expedient of perpetual funding … it was in the war which began in 1688, and was concluded by the Treaty of Ryswick in 1697, that the foundation of the present enormous debt of Great Britain was first laid.”

        In 1776, when Mr Smith wrote those words, the “Nominal Amount of the Unredeemed Capital of the Public Debt of the United Kingdom” was £131 million ; four years after the conclusion of the Napoleonic Wars, ie in 1819, it was £844 million (Abstract of British Historical Statistics – B R Mitchell – University Press, Cambridge 1962). In 1688, the public debt was just £3.1 million.

        (ii) Lord Macaulay in 1849 : “At every stage in the growth of that (national) debt the nation has set up the same cry of anguish and despair. At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt kept on growing, and still the bankruptcy and ruin were as remote as ever” (quoted by Harold Macmillan in his 1956 Budget speech).

        The Conservatives – and Mr Osborne particularly – have got themselves in a serious bind on the economy and they have only themselves to blame.

        • robertcp

          I am not sure that I understand your point.   I do not think that it is controversial to say that the Lib Dems changed their position on deficit reduction after the General Election.  I am sure that the Tories said that the Darling Plan was too slow.

          • PeterBarnard

            The point was, robertcp, that in their manifestos neither the Conservatives nor the Liberal Democrats had a quantified position on deficit reduction, ie neither party said that “we will reduce the deficit to £x billion per year by 2014/15.”

          • robertcp

            Peter, I will take your word for it.  However, I know that the Labour negotiators were very surprised when the Lib Dems said that they wanted more cuts, because this contradicted what they had said during the campaign.  The Tories did say during the campaign that the cuts should start in 2010 rather than in 2011 as Darling proposed.  These cuts were part of Osborne’s emergency Budget in 2010.  So my original point that a majority of voters did not vote for the faster pace of deficit reduction is still valid. 

        • jaime taurosangastre candelas

          It is always bemusing that the deficit (11.8% in the example you refer to) is always expressed against GDP, as opposed to the total Government budget to which it is the deficit. But perhaps this is spin, because the reality is worse.

          The Government spends roughly half of GDP.  So an 11.8% deficit in the budget is also roughly about 20% of the budget itself.

          Imagine that.  A Government borrowing 20 pence for every pound it spends.  Year in, year out, good times, bad times, relentlessly.

          For every pound the Government spends, it borrows 20 pence from our children.  And it will demand that money back through their taxes, with interest, at a time when they have their own children, or are trying to pay for our old age care.

          There really should be a law against deficit spending.

          • PeterBarnard

            If you read my comment, Jaime, you will see that the “11.8%” was not “indefinite” ; Alistair Darling anticipated the deficit reducing to 4% by 2014/15.

            For your information, as well, government does not spend “nearly half of GDP.” Actual government expenditure on goods and services in 2011-12 was about £370 billion (about 25% of GDP)  – the remainder was transfer payments.

          • jaime taurosangastre candelas

            Peter,

            transfer payments are generally welfare payments.  They are real money, because they can be spent by the recipients.  I appreciate that the accounting convention is to discount them because they are not directly related to output productivity, but in any normal and real world sense they are expenditure – an outflow from the Treasury via administering ministries to a recipient.  The money has to be raised.

            This is not a point against you, as you merely follow the convention.  It is an observation that the convention is a nonsense, an accounting trick, a spin.  Much like PFIs being “off balance sheet” but still costing money in year for many years, and National Insurance not being technically a tax (which we have discussed before).

            So, I stand by my point.  And I note that you do not comment on the wisdom of Government borrowing 20 pence for every pound that it raises in revenue.  

            As for the wailing in Labour circles about cuts, there is very often total silence on the fact that Darling’s and the tories’ plans were very similar.  Would there have been so much wailing if Labour had won in 2010 and then put into place Darling’s plans?  I suspect not.

          • PeterBarnard

            If you say so, Jaime (re transfer payments). I don’t want to bore people by saying any more.

            As far as the “wisdom of Governmant borrowing 20 pence for every pound that it raises in revenue” : at the time, it was necessary and “wisdom” (in your sense) doesn’t come into it. As an alternative to a total breakdown in society (if the borrowing had not occurred) it was very wise indeed.

            I tell you what – why don’t you start a petition on the No 10 website on to propose a law that governments may not borrow and if they do, the Chancellor and the Prime Minister will face charges with the possible outcome that they may well be tasting porridge provided by HM the Queen?

          • JoeDM

            Since when are transfer payments not part of Government Expenditure?

          • PeterBarnard

            Because government is not purchasing goods or services, Joe DM, when transfer payments are made.

          • robertcp

            A deficit of 11.8% or 20% is not a good idea but it kept the economy going between 2008 and 2010.   Obviously, it needed to be reduced when the economy recovered. 

        • Alexwilliamz

          It all feels like some kind of as yet unwritten parable. A man runs around the town stoking fear of a bogeyman (that does not exist) that the current mayor is complacently doing nothing about. Everyone becomes angry vote out the mayor for not doing anything to protect them from the bogeyman and the original agitator becomes mayor. Only because the stories of the bogeyman have spiralled out of control, there is nothing he can do that will allay this new fear of the bogeyman. He has only the normal physical tools available and nothing that could slay such a terrifying beast. Helpless he begins to try and tell everyone the bogeymen does not exist but  too late a whole generation of mayors is elected based upon their bogeyman defence policies, expending time and money on something that ultimately is a phantom, but as a result money is diverted from other civic projects, leading to infestations of rats, flooding and rising crime. Hmm maybe a happy ending is required…

      • JoeDM

         The Coalition policy is based on the policy that Darling put forward.

        • robertcp

          The Darling Plan was to halve the deficit by 2015.  The Coalition then said that it would eliminate the deficit entirely.  It has since moved to something that is quite similar to the darling Plan. 

    • Sueyt2y

      There’s no lack of capital. 

  • Good call, but uilding for the sake of buildinmg is no good, you might as well pay people to dig holes and fill them back in again. What is needed is investment in the kinds of projects that create proven social and economic returns.

    Two of the most beneficial forms of investment have proven to be construction of socail housing and investment in infrastructure.

    Perhaps buying up disused land and allowing people to rent plots on which to build their own homes and renationalising the railways and investing to bring them up to European standards might be useful (and popular) strategies.

    • robertcp

      I agree and I think Sue would as well.  I did not take her article as arguing for building for the sake of it, although there might be a short term case for doing exactly that.

    • Suey2y

      Actually the great irony is that “paying people to dig holes then fill them back in again” would work too. 

      It would be soul destroying, boring work, but it would be work, which is what matters & sparks growth from confident investors.

      • Yes employing people to essentially do nothing can boost aggregate demand in the short term, but what is the point in funding economic activity that generates fewer long term economic, social and environmental benefits than it actually costs, when there is plenty of evidence to show that sustained investment in the construction of social housing (for example) reliably creates significantly more economic (and social) benefits than the initial investment costs.

        Paying people to dig holes or funding activities with low fiscal multiplication values (such as tax cuts for the rich or absurd vanity projects) is just creating a debt for future generations to cover that is larger than the short term boost in aggregate demand. Nobody should be arguing in favour of wasteful spending at the expense of future generations, it just provides ammunition to the opposition.

        Don’t get me wrong, I’m wholly in favour of fiscal stimulus but there really should be more research into the most effective multipliers, so that proponents of state investment can adopt an evidence based approach to stimulating the economy by directing funding at projects that have been proven to be more likely to provide long-term economic, social and environmental benefits.

        If a more reasoned, scientific approach is taken, increases in spending on projects such as social housing, public transport infrastructure, research and development, education and high-tech industries can be presented as a stimulus now that will also improve economic prosperity for future generations, with an evidence base to support the assertions.

        I’m pretty sure the adoption of evidence based policy when it comes to state spending would be a big vote winner, especially given the rising public anger at the Tories brand of  mindless, self-defeating, ideologically driven cut-now, think-later austerian pseudo-economics.

        • Daniel Speight

          I think you will find that ‘digging holes and filling them in’ was a throw-away remark from Keynes to say that doing anything was better than doing nothing, but only to be thought of if there were no projects with value to be done. As this is not the case in ‘broken’ Britain it doesn’t really come into the equation.

      • treborc

        Investors in digging holes .

        • Alexwilliamz

          A tunnel to Ireland?

  • franwhi

    Great posting Sue. Yes it may be Keynsianism but your remedy is just what Britain needs – the Scottish Govt talk of “shovel-ready projects”. Just in my own city of Glasgow I can see that there is much that can be done in terms of housing and regeneration. It doesn’t matter what your party politics are – this is something all politicians should sign up to and planning restrictions can be overcome if there is the political and community will to focus on the right projects. Even digging holes is not to be discounted. For example, the last weeks of incessant rain and flooding, could galvanise work on flood defence projects – practical and worthwhile work with potential benefits for the future.       

     

  • Daniel Speight

    Could the Tories ever come up with an FDR like response to rebuild British industry? It seems unlikely. In fact at times it’s hard to see it coming from Labour’s front bench and it certainly is unlikely to come from Progress.

    Yet today we have the sad news that it could well be China that supplies five new nuclear power stations to Britain. Leaving aside whether nuclear power is the right way to go, what an indictment of the state of British industry this.

    As a young man I worked for two companies that were building, among other things, Britain’s nuclear power stations. Back then we were one of leaders in the civilian use of nuclear power, now we have to get the expertise from China.

    There are guilty men, and women, for the present state of Britain, and almost all of them are politicians.

    • Dave Postles

       Reminds me of the d         <!–
      @page { margin: 0.79in }
      P { margin-bottom: 0.08iébacle of the assistance for Sheffield Forgemasters – and even when action was taken, it was a reduced amount – another Clegg fiasco.  

      • Dave Postles

         That should have been about Clegg and Sheffield Forgemasters.

    • JoeDM

       Yes.  Politicians who have consistently underestimated the British people and have  seen it as their responsibility to ‘manage our decline’.  

      The only one to stand front and centre for the UK and to provide us with some national self-respect was Maggie.  And even she was eventually removed by the pro-EU wets like Heseltine and Clarke.

      • DaveCitizen

         Nothing like a good old fashioned re-write of economic history to get us waving the flag! Neo-liberalism, Thatcher, Reagan – ring any bells?

        • Mr Sloane

          I remember them! Under two Regan Presidencies America went from being the greatest lender nation to the greatest debtor nation! In a mere eight years! Quite and achievement.

      • Daniel Speight

        Not true as it was Thatcher’s governments that did the most damage to British industry. I’m afraid you picking the wrong heroine there. Maybe best to stick with heroin or whatever else you use.

    • Amber Star

      The Chinese aren’t going to build the nuclear power plants. They’d finance it.

      The Chinese couldn’t engineer their way out of a paper bag at this moment in time! The benefit to China would be they’d learn from the UK projects (probably French/UK/US engineering with French, German & East European workers doing the build).

      It would let China invest some of the £Bns they are sitting on from their trade surplus with the UK. They are in a hurry to invest before Osborne QE’s the value of their sterling holdings down to somewhere around zero. QE is basically the only close to sensible lever which Osborne has utilised during his time in office. Hence Labour not screaming the house down in opposition to QE – it is basically almost a left-wing approach: Those who hoard money & do not invest will have to live with its value being inflated away.

      I’ve a sneaking suspicion that it will go ahead because of the potential for wider European involvement in the projects. But here’s the thing: If the UK taxpayer will be expected to underwrite/guarantee the building costs, future income stream & clean up costs, we must stop this from going ahead because we will be making a huge rod for our own backs! Personally, I’d use QE to inflate the accumulated trade imbalance away.

      • Nemesis

        According to the Guardian it WILL be Chinese atomic technology and expertise PLUS finance that will build the proposed reactors. I would imagine this would mean Chinese scientists and engineers designing the technology and overseeing the project with some of the construction work sub-contracted out to European firms. A UK firm has been pencilled in to run and manage them.

        http://www.guardian.co.uk/environment/2012/jul/20/china-uk-nuclear-power-plants

      • Daniel Speight

         No Amber it’s Chinese nuclear technology. This is probably in advanced of ours due to us not having any.

  • Mario Peebles

    Keynesian ideas have been seen to have been successful and pulled countries – indeed the world! – out of depressions and slumps in the past. This is indisputably and historically obvious. My question is has the kind of austerian programmes that are currently being implemented in the UK and other European countries ever been similarly successful in reigniting growth in flagging economies and saving them from ruin? If so where, when, and exactly what happened? I’m asking this because so many people seem to be claiming that massive cuts, especially in tax and welfare, work better than stimulus and investment based on borrowing but never furnish examples to back their statements up. If anybody could point me towards a few pertinent examples I love to read about them on the web because I can’t find anything genuine worth giving credence to after extensive googling.

    Cheers.

    • Mario Peebles

      This is a bit worrying. I expected to have heaps of Tory boys and Tory girls setting me straight and pointing to all sorts of instances where austerity has pull various countries out of economic decline, saved them, and got their countries growing again. But no. Is austerity an experiment then? Are we just “giving it a go” and “hoping for the best”? Is George Osborne’s economic policy just a roll of the dice?

      • Mario Peebles

        Still no takers? I really thought all the right-wingers would be quoting chapter and verse about how austerity saved this country and that country from ruin, pulled them back from the brink, and lit the blue touch papers on their economies. But no. Which is kind of creepy.

  • ThePurpleBooker

    This is the wrong approach. We have a Plan B but we need to define our Plan C. That is what we need to be talking about. We need to start thinking about ways to get the deficit down. Yes, we will need growth through the Plan B but our pre-election pledge was to halve the deficit in a period of four years. We are showing signs that our economic competence is increasing but now we need to show Plan C and that is by getting fiscal responsibility. Dan Hodges proposed a Five Point Plan for Fiscal Responsibility. I agree we need one. Here are a few proposals:1. Legislate to halve the budget deficit over a period of four years.
    2. Give the Office for Budget Responsibility full indepedence as well as powers to set and report on fiscal rules.
    3. Give the Office for Budget Responsibility powers of the Congressional Budget Office to also calculate cost on proposed legislation as well.
    4. Give personalised tax receipts which could be online but will include tax credit changes, VAT, fuel duty and tax allowances as well as just National Insurance and income tax which will be set by the OBR.
    5. A new law to stop any Government from saving surpluses as well as limits on deficits, to make it illegal to save surpluses and overspend.

    • “NeoLiberal Golden Hammer approach” – More independence = more power to the private sector which means more problems.

      point 5 is ridiculous – a surplus is good as it will be able to be fed back into the economy by reducing debt or provide additional funding. if this is enacted, you will have governments wasting the surplus on bollocks, like the council march/april road digging practice.

      Providing a comprehensive reinvesment of the  UK’s infrastructure and industry and providing national investment bank with the ownership of RBS would be a start.

      Feel free to use numerous false analogy, straw man argument, and general fallacy to prove your point.

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