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 Scotland When it comes to the referendum, let’s remember “in unity is strength”

    When it comes to the referendum, let’s remember “in unity is strength”

    In the coming days UK Labour leader Ed Miliband will be here in Scotland – making the case for shared solidarity across these islands.He’ll arrive in the wake of a difficult summer for David Cameron and a growing sense that we can secure a Labour Government in next May’s general election.This view that Labour can win in 9 months time finds no place in the Nationalists’ narrative. They had hoped to be able to tell voters that Tory victory was […]

    Read more →
  • News Miliband: I want my Cabinet to have 50% women

    Miliband: I want my Cabinet to have 50% women

    Ed Miliband has reaffirmed his commitment to ensuring his Cabinet would have 50% women – although stopped short of making it a promise, saying he wants to “let my actions speak for themselves”. In an interview with woman’s magazine Red, Miliband said he’s proud that women’s representation in the Shadow Cabinet has improved since he became leader, and that he would like to see women make up half of the Parliamentary Labour Party (PLP): What has changed under his leadership […]

    Read more →
  • News Labour struggle to convince on the economy because of Gordon Brown, says Umunna

    Labour struggle to convince on the economy because of Gordon Brown, says Umunna

    Labour are still struggling to convince the public on economic credibility because of Gordon Brown, according to Shadow Business Secretary Chuka Umunna. While Labour left the country “in a far better state” when it left office, Brown’s final year as prime minister was marked by a failure to give the impression that he acknowledged the need to reduce the deficit and allowed George Osborne to frame the debate on the economy. In an interview with former Labour spin doctor Alastair […]

    Read more →
  • Comment Labour will hit back at the Bedroom Tax this Friday – will the Lib Dems?

    Labour will hit back at the Bedroom Tax this Friday – will the Lib Dems?

    Labour has been clear and consistent in its opposition to the Bedroom Tax. We said it was cruel and unfair, taking an average £700 a year from half a million low income households. The government has admitted that two thirds of those hit have disabilities, and another 60,000 are carers. All the evidence from housing and disability experts showed that most would have nowhere else to move to. We also said it was unworkable and could end up costing more […]

    Read more →
  • Featured Irreconcilable differences and unreasonable behaviour

    Irreconcilable differences and unreasonable behaviour

    I committed one of those Twitter no-nos last week when the news about Douglas Carswell quitting the Tories to join Ukip broke. Digging up a piece I’d written here on the day of the Cameron EU speech at Bloomberg in January 2013 , I reminded a grateful universe that, far from seeing that speech as a bold stroke of political genius – quite a widely held view at the time – I thought it had been a disaster that was bound […]

    Read more →