2 important things that Ed Balls said today, but the media have largely missed

June 3, 2013 2:16 pm

I’ve just got back from Ed Ball’s speech on the economy this morning at Thompson Reuters and haven’t yet had the time to fully digest all of the arguments. So what follows is more of an “initial take” on the macroeconomic aspects of the speech than a “considered view”.

First things first, it was a major speech covering quite a wide range of areas. No doubt the media focus will be on the announcement around cutting the winter fuel payment for richest 5% of pensioners , but I think this somewhat misses the wider significance of the speech.

Nearly three years ago Ed Balls delivered his ‘Bloomberg speech’, rightly warning that the impact of the Government’s austerity programme would be disastrous. Two and half years later, the Shadow Chancellor has once again chosen a major City newswire to make an intervention in the economic debate. If ‘Bloomberg’ was about the economics of recession, then ‘Reuters’ is about the economics of an extremely weak recovery.

In my initial view there were two important takeaways from the speech. First, a subtle shift in Labour’s current economic position and second an argument about the kind of fiscal framework a Labour Government would work within.

Ed Balls argued that:

“Over the past two years, when the economy was totally stagnant, and when our economy has needed a quick and fast-acting shot in the arm, we have advocated a temporary VAT cut – alongside infrastructure spending, action on youth unemployment and targeted tax measures for business as part of our five point plan for growth.”

“Today, with growth prospects still very uncertain and interest rates too low to be of use, a temporary VAT cut now is still the right prescription before extra capital spending can come on stream – although any immediate tax cut which helps middle and lower income families is better than nothing.”

“But over the coming year if, as we all hope, some kind of recovery does take hold, then the balance of advantage will shift from temporary tax cuts to long-term capital investment.”

In other words, over 2011 and 2012 as the economy faced an acute demand problem, then Balls’ believes, that a temporary VAT cut (alongside other measures) was the most direct way to stimulate growth but, as we move into a weak and hesitant recovery, he now seems to be placing more emphasis on capital spending.

I suspect this is a sensible position to take. Recent research from the TUC has demonstrated how the Government’s slashing of its capital spending has led much of the recent downturn. Thousands of construction workers are unemployed, real wages in the sector have collapsed and if construction output had just remained flat over the last 5 quarters, growth would have been three times faster. A focus on boosting capital spending is the course recommended by the IMF.

Equally important, Labour’s argument that the best way to get to deal with the UK’s debt is through a short term increase in borrowing has always been a tough political sell, even if it makes perfect economic sense. By focussing on capital spending, Labour certainly strengthens its case. Research last month from NIESR demonstrated that in ‘crisis times,’ such as at present, then a 2% increase in government infrastructure spending (paid for through borrowing) not only boosts growth in the short and long run but also would lead to a lower debt/GDP ratio in the medium term. In other words, capital investment at the moment would be largely self financing.

A focus on capital spending can be seen as part of a shift in focus from short term stimulus towards longer term policies. Ed Balls’ speech built on this by talking of the need for a modern industrial policy alongside measures to increase long-termism in business and a focus on infrastructure, especially new affordable housing.

A temporary VAT gives the economy a much needed shot in the arm, but more capital spending not only boosts growth in the short run by putting people back to work it also gives the country important assets in the future – be it new homes, better transport or a more efficient energy infrastructure.

The other key point from the speech was Ed Balls’ refusal to sign up to the Government’s spending plans and his focus instead, on what he termed new ‘fiscal rules’.

“Instead, Labour will set out, in our general election manifesto, tough fiscal rules that the next Labour government will have to stick to – to get our country’s current budget back to balance and national debt on a downward path.

Tough rules, which will be independently monitored by the Office for Budget Responsibility.

A clear and balanced plan to support growth, alongside a clear timetable to get the deficit and the debt down – finishing the job where this Government has failed.”

The Government’s current fiscal framework has utterly failed. As I wrote last week:

“In effect the current fiscal framework is to eliminate the structural deficit in a rolling five year period that never actually bites.

In many ways this is the worst of all worlds, the short period of the target forces the government into making cuts too quickly which damage growth but the fact that the policy is so-flexible means the tomorrow never actually comes and so the period of cuts are continually extended. This is a recipe for continual austerity.

But the problems with the current framework don’t stop here. I would go further and argue that the structural deficit itself is the wrong target. The structural deficit is not something that can be measured, it is only something that can be estimated and those estimates are highly uncertain.”

The real debate is not whether parties sign up to a failed set of plans but what their alternative framework would look like. The Shadow Chancellor today hinted a plan that allows more flexibility to respond to economic conditions whilst focussing on reducing debt in the medium term. In macroeconomic terms, that sounds sensible.

There are many more details needed – details that will concern a great many. But in terms of major macroeconomic strategy, then today’s speech seems a step in the right direction.

  • philjvtaylor

    It was Alistair Darling in the 2009 Pre-Budget Report who cut investment in half. It was an easy way for him to be “prudent” without cutting current spending. It really is hard to know how Osborne could have reversed this in his June 2010 budget when the whole purpose of the Coalition was to tackle the deficit. At that time Osborne said:

    “We have faced many tough choices about the areas in which we should make additional savings, but I have decided that capital spending should not be one of them. There will be no further reductions in capital spending totals in this Budget.”

    Any Labour politician talking about lack of investment really is taking the Mickey.

  • postageincluded

    All well and good (and I can see everyone on all sides disagreeing) but if he’s going to get to no 11 to do it then the governments new “lobbying” proposals, aka the “Let’s end Union funding for Labour” Bill, needs to be stopped.

    In case anyone thinks there is no connection between these stories, remember that the government knows more than we do about just how sick the economy still is. They are pulling this trick not just because the opportunity has presented itself, but also because they know that the current “recovery” is merely synthetic – they’ll have nothing to show for their 5 years in 2015. They know they can’t win without cheating.

  • evad666

    No cut in winter fuel payments for immigrant Labour Voters.

  • Pingback: Three major things I’ve learnt from recent Labour speeches | Liberal Conspiracy()

  • Pingback: Liberal Conspiracy: Three major things I’ve learnt from recent Labour speeches | moonblogsfromsyb()

Latest

  • Comment We want to build relationships with Labour – but they need to take some bold steps

    We want to build relationships with Labour – but they need to take some bold steps

    First my credentials. I have supported Labour at every election since I was old enough to vote. I am a party member of some 30 years standing. Why then, as the General Secretary of the trade union for staff in further and higher education am I in such utter despair at the timidity of the policy offer made by Labour to the members I represent and their students? Let’s be clear, I believe the coalition’s policies have been a disaster […]

    Read more →
  • News I was “never ever complicit” in illegal rendition or torture, says Jack Straw

    I was “never ever complicit” in illegal rendition or torture, says Jack Straw

    Jack Straw has condemned the use of torture and denied being complicit in the torture of suspected terrorists, following the publication of a report in America concerning the CIA’s use of “enhanced interrogation techniques” (EITs). Straw was Labour’s Foreign Secretary from 2001 to 2006, during the foremost years of the “War on Terror” and the UK’s military involvement in Iraq and Afghanistan. Questions have been raised concerning what members of the British government knew about the use of EITs, but […]

    Read more →
  • Comment How not to change the constitution

    How not to change the constitution

    In this Parliament AV was rejected, Lords reform stumbled and even the Tories attempt to ‘equalise’ constituencies fell. ‘The Implications of Devolution for England’ already looks unhealthily like these other failed constitutional reforms. Nonetheless, the issue holds real dangers for Labour. Hague’s partisan and divisive Commons statement showed the Tories’ more concerned to maximise difference than to bring people together for the good of England. Yet even this couldn’t disguise Conservative divisions. In three months his Cabinet Committee failed to […]

    Read more →
  • News “Our choice is the country’s choice” – Lisa Nandy’s LabourList Christmas Lecture

    “Our choice is the country’s choice” – Lisa Nandy’s LabourList Christmas Lecture

    On Monday evening Lisa Nandy MP gave the LabourList Christmas Lecture to launch her pamphlet “Our Labour Our Communities” – you can download the pamphlet here. Here’s the text of that lecture: We’ve got five months to go until the most important General Election in a generation. And over the last year, as I’ve spent time with Labour candidates meeting and listening to people in communities as diverse as Brighton, Norwich and Calder Valley it seems to me the overwhelming […]

    Read more →
  • News Polling New Ashcroft polls shows the point where the Labour gains stop coming

    New Ashcroft polls shows the point where the Labour gains stop coming

    The latest batch of marginals polling carried out by Lord Ashcroft has been published today, and it does not bring many glad tidings for Labour. The polling covers four Labour seats: Dudley North, Great Grimsby, Plymouth Moor View and Rother Valley; eight Conservative seats: Carmarthen West & South Pembrokeshire, Ealing Central & Acton, Elmet & Rothwell, Harrow East, Pendle, South Swindon, Stevenage, and Warwick & Leamington; and one Green Party seat: Brighton Pavilion. All of the Conservative held seats, bar Warwick & […]

    Read more →