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

3rd June, 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()


  • Featured News Osborne announces major u-turns on tax credits and police cuts

    Osborne announces major u-turns on tax credits and police cuts

    George Osborne today caved into pressure from Labour and announced u-turns on both tax credits cuts and cuts to police budgets. Both issues have been major attack lines for Labour in recent months. Labour peers voted for motion on tax credits in the House of Lords last month, defeating the Government, and forcing Osborne into a rethink. Shadow Chancellor John McDonnell has said on a number of occasions that if the Tories committed to a full reversal of the policy, then Labour would […]

    Read more →
  • Featured News Tories accused of playing political games over Syria as Labour splits denied

    Tories accused of playing political games over Syria as Labour splits denied

    Labour insiders are fuming at the accusations that there is a split between Jeremy Corbyn and Hilary Benn over Syria. Reports this morning suggested that the leader’s office had failed to inform Shadow Foreign Secretary Benn that he was invited to a Downing St security briefing on Syria. Both Corbyn and Benn’s team deny a breakdown in communication, and sources claim that it has come from the Tories’ playing political games with the issue. They say that the email inviting Corbyn […]

    Read more →
  • Comment PMQs Verdict: Punchy performance from Corbyn on comfortable ground

    PMQs Verdict: Punchy performance from Corbyn on comfortable ground

    PMQs are difficult for an Opposition leader at the best of times; before an economic set-piece statement, they must be nigh on impossible. You’re going up against the Prime Minister blind, knowing the person across the despatch box knows every detail of what is about to be announced, and that anything you do will be overshadowed by what follows. Jeremy Corbyn approached today’s debate with six fairly specific questions: four on climate change and renewables, and two on domestic violence […]

    Read more →
  • News John Healey slams Osborne’s housebuilding bluster

    John Healey slams Osborne’s housebuilding bluster

    George Osborne is receiving praise in the press this morning for his expected pledge to invest in housebuilding during the Autumn Statement today. However, the 400,000 subsidised homes he is expected to pledge be built by 2020 comes after Housing minister Brandon Lewis said a million would be built back in September. Ahead of Osborne’s address to the Commons this afternoon, Labour have slammed the Tories’ “bluster”, and pointed out that David Cameron has presided over the worst peacetime record of […]

    Read more →
  • Comment Featured The griping and plots need to stop so we can get on with being an opposition

    The griping and plots need to stop so we can get on with being an opposition

    The Conservatives are having a great time. Today, in their Spending Review they’ll outline their budget plans, which will include monumentally savage cuts. Deeper cuts than in any other major economy. Meanwhile, the Labour party is embroiled in internal battles, the kind of which shows little sign of abating. But it needs to, and soon. Less than two weeks after Jeremy Corbyn’s landslide victory, talks of when and how to oust Labour’s newly elected leader made it into the papers. […]

    Read more →
Share with your friends