Downgrading the UK’s credit rating: it’s about politics, not economics

The announcement that credit ratings agency Moody’s has downgraded the UK’s credit rating from AAA to AA1 has caused something of a political storm.  George Osborne has repeatedly described the UK’s AAA credit rating as totemic, a touchstone by which his performance as Chancellor should be measured.  It is difficult to avoid seeing it as the Gold Standard of our time; its loss is a major embarrassment for the Coalition, and some voices are arguing that for Osborne as Chancellor, it should be terminal. Even his traditional media supporters are after his blood.

Its economic significance is less clear.  Evidence that Coalition economic policy is failing on its own terms has not exactly been hard to find – an economy that remains in recession (the so-called triple dip really being a function of the fact that the once-in-a-lifetime Olympics gave a mild boost) and rising borrowing from a Government that rationalises taking vast quantities of demand out of the economy in the name of debt reduction.  At one level the downgrade is simply a statement of the bleeding obvious.

Moreover, one definition of a credit ratings agency might be an organisation that gave Lehmann Brothers an AAA rating on the eve of its collapse: I’ve blogged elsewhere about the catastrophic failures of ratings agencies.  In terms of the real economy, this downgrade seems  likely to make little difference – it was not exactly a surprise and markets are likely to have priced it in already.

Politically it is important because it exposes the real austerity agenda – which is ideological rather than economic.  It is about the transfer of wealth away from wage-earners to holders of assets – a process that has been under way for many years but, in the UK, is accelerating dramatically as real wages fall; about shrinking the state and reducing the “burden” of welfare.  Osborne has already claimed that this downgrade shows that the Government needs to continue on the same course; one conclusion from the downgrade – no doubt shared by many in the City and the Conservative Party and in economic think-tanks – is that the UK needs to cut harder and faster. The impact of this downgrade really lies not in the economics but in the political reaction; Osborne’s is to brush off his humiliation and to continue the project.

And where does this leave Ed Balls?  Labour remains deeply conflicted – on the one hand bemoaning the economic effects of austerity, but on the other wedded firmly to an austerity agenda, with Balls vowing to keep the Coalition cuts and – potentially – to add more of his own.  As I’ve argued before, Labour’s One Nation trope is strenuously avoiding engaging with economic issues at all.  Rationally, the Moody’s downgrade makes Labour’s precarious seat on the economic policy fence appear even less tenable.  The commentariat might want to reflect that the political fallout from this downgrade damages Balls as much as it does Osborne.

In other words, this is about politics.  It’s one more piece of evidence  - and in the context not a particularly significant one – that austerity is failing on its own terms; but the political agenda remains unchanged.

Tory benefits campaign: ideology as a bridge of lies

The Conservative Party has launched a campaign which seeks to distinguish between hard-working families and scroungers, through a poster depicting an unshaven person lounging  on a sofa in contrast to a modest 2.4 children family who emphasise the virtues of diligent work.  It is all of a piece with George Osborne’s rhetoric about those who have their curtains closed during the day.  It’s not a new tactic – it harks back to 2010 election posters – but its timing is perhaps significant, representing a time when Government has taken a quite deliberate decision that the incomes on those on benefits will fall faster than those who do not.  It is also surely significant that it marks the arrival of Lynton Crosby into national Tory politics – this kind of rhetoric is mainstream on the Australian right.

It is of course a wholly false dichotomy.  In the real world of evidence and truth it is obvious that the majority of those receiving benefits are in work, but are not paid a living wage.  And there are no jobs – even for those who are capable of work. Coalition rhetoric about generations of worklessness has been shown to be utterly without foundation.

But it provides a narrative – one that is embraced by the media and politicians of all parties.  There is powerful ideology at work here.

To my mind, it evokes powerfully the writing of Vaclav Havel, describing the politics of late communism. Havel writes about how in the crisis of late communism, the authorities used ideology as a way of distorting the populace’s connection with reality – as a form of psychological and political manipulation.  In his essay The Power of the Powerless he refers to ideology as “a bridge of lies”:

Ideology is a specious way of relating to the world. It offers human beings the illusion of an identity, of dignity, and of morality while making it easier for them to part with them. As the repository of something suprapersonal and objective, it enables people to deceive their conscience and conceal their true position and their inglorious modus vivendi, both from the world and from themselves. It is a very pragmatic but, at the same time, an apparently dignified way of legitimizing what is above, below, and on either side. It is directed toward people and toward God. It is a veil behind which human beings can hide their own fallen existence, their trivialization, and their adaptation to the status quo.

The lies here are about power, who wields it and for whose benefit – for example the rhetoric of how wealth derives from hard work rather than privilege, good fortune and accident of birth (the imperative, as Ivan Illich put it, of rationalising the head start as achievment); and the illusion of democratic power in a political system in which the mainstream parties share the same underlying economic assumptions; or when powerful and entitled groups like established churches and the alumni of private schools adopt the language of victimhood.  And above all, neoliberalism needs to maintain that illusion that wealth and power are functions of work and effort – to disguise the extent to which most work is alienated, and wholly irrelevant to a culture of declining living standards for the majority. Reading Havel in an age of neoliberal hegemony is to understand the irony of the great and the good of that hegemony turning out in force at Havel’s funeral.

Above all, we now live in the age of the ideological dog-whistle – something that powerfully demonstrates the common neoliberal assumptions at work across all parties.  The Tories’ latest campaign differs from Labour’s language of “hard-working families” in degree only, not substance; and I’d guess the Tories know that very well and are playing to that.  It’s interesting that in responding to the campaign, Labour Deputy Chairman uses exactly the same language as the Tories: he talks of “taxes on strivers” in the Budget.  The same words, the same assumptions, the same dichotomy: Labour choosing – consciously or not – to adopt the language and assumptions of power rather than speaking truth to it, and doing the Tories’ work for them.  I have no doubt that Mr Dugher – like so many decent people in the Labour Party – is appalled and disgusted by what the Coalition is doing to the most vulnerable in our society. But, whether wittingly or not, his language suggests an inability to step outside the neoliberal bubble and connect with the realities.

To kick over an idol, you must first get up off your knees.  Tawney’s 80-year-old message to Ramsay Macdonald’s Labour Party has never been more resonant; if we believe that neoliberalism is a dangerous, destructive and deluded ideology we have to stop using its language, and instead find a resonant narrative rooted in truth and experience, one that talks about the realities that mainstream Westminster politics consciously avoids.  The crisis of British democracy is exemplified by the fact that there is nobody in the mainstream willing to do that.

Vaclav Havel’s position is ultimately optimistic – ideology as a bridge of lies is inherently unstable, and only lasts for as long as people are willing to live within the lie:

Individuals can be alienated from themselves only because there is something in them to alienate. The terrain of this violation is their authentic existence. Living the truth is thus woven directly into the texture of living a lie. It is the repressed alternative, the authentic aim to which living a lie is an inauthentic response. Only against this background does living a lie make any sense: it exists because of that background. In its excusatory, chimerical rootedness in the human order, it is a response to nothing other than the human predisposition to truth. Under the orderly surface of the life of lies, therefore, there slumbers the hidden sphere of life in its real aims, of its hidden openness to truth.

The key, then, is for people who are not prepared to accept neoliberalism to challenge the language, to abandon it, and to learn to speak truth to power.  And it’s only when the politicians who are supposed to speak for the vulnerable and dispossessed learn to abandon neoliberal narratives that they will be able to do their job within the system.

The pseudo-science behind the political war on the disabled

It has been a bad week for those on benefits, with George Osborne announcing in his Autumn Statement that benefits will be uprated by less than inflation – in other words, cut in real terms.  Labour is promising to fight these cuts but the pronouncements of both Labour DWP spokesman Liam Byrne and Labour leader Ed Miliband do not exactly fill one with optimism.

People with disabilities have been in the forefront of the attack, and that attack has been reinforced by a narrative that unites all the mainstream players in Westminster politics.  If the cruelty and destructiveness of Coalition policy on benefits is to be exposed and combatted, it is essential that the story is understood.

There’s a detailed and referenced account of that narrative on the Disabled People Against Cuts website.  In summary, the piece indicates how the current approach, using a bio-psychosocial model of disability, is flawed and unsupported by evidence, but, encouraged by private sector organisations that see the potential for profit in carrying out bio-psychosocial assessments of those claiming benefits, has become a de facto orthodoxy.

The authors point out that the approach to disability has shifted from a social approach – one that emphasises to environment and context and sees society’s response to disability as the issue to be addressed – to a so-called bio-psychosocial approach that focuses on the individual and their reaction to the environment.  As the piece points out, it is an approach that can have value in dealing with individuals. But it’s all too obvious how such an approach can be picked up and abused by neoliberals.

Put briefly, the root of the ideological justification comes from the American sociologist Talcott Parsons’ concept of the sick role, which argues that sickness is in essence a form of social deviance, which needs to be policed by medical and other professions.  This is associated with the idea that work is essential to well-being (which is true in the sense that those denied the opportunity for meaningful work suffer mental and physical symptoms); it becomes very easy for neoliberals to conflate these into a doctrine in which you can argue that denying disabled people the ability to live without work is therapeutic (you can also use it to justify the idea of workfare in which benefits are contingent on unpaid work), and of course fits well with populist narratives of workshyness and scrounging.  The scarcity of meaningful jobs in long-term economic depression is not considered by this model).

Into this environment march private companies like ATOS and Unum, with experience of developing assessment regimes with a simple aim – that of reducing the number of people on benefits.  And add to this the recruitment of amateurs like banker Lord Freud, recruited to advise Gordon Brown on benefit reforms and now a Minister in David Cameron’s government; the potential for these companies to present a ready-made pseudo-scientific model to politicians and advisers in need of a quick result; and you have the current mess.  A policy that is obviously failing, but which has the appearance of scientific credibility and which flatters the ideological preconceptions and prejudices of those in power.  It is a subsititution of privately-generated pseudo-evidence – flatpack policy-making, as it were – for real evidence that is all too familiar to observers of how this coalition government conducts itself.

And as the authors of the DPAC piece make clear – this is pseudo-science, in which the work of the academics whose work underpinned the bio-psychosocial model has been misrepresented and distorted for profit by organizations who provide a convenient and potentially popular post-hoc rationalisation for what is the central policy goal – to reduce the amount paid in benefits to the disabled.  Political and media rhetoric, playing to the fears and prejudices of the ignorant, has done an astonishing job of destroying compassion and empathy in modern Britain, but one suspects that even for Tories and Liberal Democrats, stating openly that you want to cut the living standards of the disabled is a step too far.  It is one of the defining characteristics of the neoliberal project that it needs to subvert democracy, because open neoliberalism does not win elections; pseudo-science, like pseudo-economics, is what allows neoliberals to bridge that gap. And it allows the devaluaing of conflicting “expert” opinion.

The point about all of this is that none of it is surprising.  The devaluation of evidence is at the heart of coalition policy; evidence-based policy making is subordinate to ideology and profit.  But the point here is that this is not just a coalition policy; this kind of thinking was becoming mainstream under Labour government and underpinned Labour policy.  It quite obviously informs every pronouncement of Labour’s DWP spokesman Liam Byrne.  And it is one reason why I, for one, am deeply sceptical of Labour’s apparent change of heart on benefits – because I see no evidence that Labour’s underlying rationality has changed.

Fuel prices: why Labour has got it wrong on indexation

Finding oneself potentially in agreement with George Osborne is disconcerting.  But, watching the debate over the indexation of fuel duty, it’s difficult to avoid the conclusion that Labour, in calling for a further delay in the proposed 3p per litre indexation of duty, are calling this one badly wrong.

Labour’s concern is that people will be hit by increases in fuel duty at a time when household costs are already rising.  It would be wrong to deny that they have a point. The recent announcement of a 10% increase in domestic energy costs has hit people hard.  More generally, living standards for all but the wealthiest in society are falling; a significant increase in household expenditure on motoring – especially for those who have to use their cars – has the potential to be painful for many middle and lower income families.

Economic issues

However, I’d argue the overall economic effect of a freeze is likely to be regressive, for a number of reasons.

First, it is overwhelmingly the case that expenditure on motoring, and on fuel in particular, is closely linked to income.  Essentially, the more people earn, the more they spend on fuel.  Fuel duty is, by its nature, a progressive tax.  (It’s also very cheap to collect and, apart from around the Northern Ireland land border, very difficult to evade – reasons why the Treasury under Governments of all colours is keen on it). And – in a media world that is overwhelmingly geared towards the views of what might be described as the aspirational middle – it’s often forgotten that a third of the population have no access to a car at all.  And these are very often the poorest and most vulnerable people of all. The 2011 ONS report on the effect of fuel duties on household income shows that while those in the lowest income groups pay more in terms of proportion in income in fuel duty – where they have a car – they pay less in cash terms than those in the higher income groups who are far more likely to have a car. (I’d argue that rather than holding down tax rates for the better-off, the impact on lower-income motorists should be offset through general tax rates and benefits).

According to the RAC Foundation, in 2008 approximately 14% of average household expenditure goes on transport – 88% of that on motoring costs.  The average household expenditure on fuel is about 4%.  Clearly that will vary widely – that figure will be higher in rural areas, and traditional family units have higher expenditure.  But over the long term, the real cost of motoring has fallen enormously – by 17% between 1997 and 2008, at a time when public transport costs rose steadily.  As I’ve argued here before, the so-called War on the Motorist is a pernicious fiction; and it’s important to remember that the external costs of motoring – in terms of pollution, safety and community severance – fall overwhelmingly on the poorest in society.

Moreover, the pump price of petrol has fallen by 10p per litre since the spring; and crude oil prices fell by nearly 5% in one day last week.  If there is ever a good time to index fuel taxes, this is it; in a competitive forecourt market it is quite likely that much of the duty increase will be absorbed, meaning that the hit is taken by oil companies rather than motorists.  None of this is to trivialise the impact of even small increases in prices on people who are on the financial edge; but there are much bigger issues in play here, like domestic energy prices and benefit cuts.

And recent thinking from the IMF and others is that the multiplier – the multiple by which public expenditure is more stimulating than tax cuts – is higher than Government has assumed.  In other words, the economic cost of cutting taxes is higher than has been recently assumed.  If the failure to index fuel duty is offset by additional cuts in expenditure, the effect will be to suck more demand out of the economy.

The political consequences

Labour’s decision may be dodgy economics, but looks like quite good politics; it looks like a party standing up for that politically iconic section of society, the squeezed middle.  But is it? The problem for Ed Balls is that, in overall terms, the effect on household spending is likely to be relatively small and unpredictable (especially if oil prices continue to fall): but that, in the longer term, the failure to index taxation effectively undermines the tax base.  Failure to index fuel tax (and remember, this is about maintaining the tax level in real terms, not increasing it) means that as an incoming Chancellor, Balls would have less revenue to play with.

It also binds Labour further into the rhetoric of low taxation and – by implication – more cuts.  Ed Balls is no stranger to that rhetoric; and I’d guess that George Osborne – a Chancellor who appears to see his role as political activism rather than keeper of the public finances – is quietly satisfied at the way that Balls is reducing his room for political manoeuvre as we pass the mid-point of the political cycle.  One of the interesting aspects of the ONS report I cited earlier is that the proportion of the fuel price accounted for by duty is in decline – and that it itself an indicator that the fuel tax base is declining and that indexation is needed.

In conclusion, it looks as if Labour could be boxing itself further into a tax-cutting and expediture-cutting agenda when all the economic evidence is pointing the other way, in pursuit of a measure that is likely to benefit the 4×4 owner on the school run far more than the poorest and most vulnerable society. It reinforces the impression that Labour has bound itself into the same economic assumptions as the coalition.  And it makes it far easier for Tories and Liberal Democrats to attack Labour’s economic position as inconsistent.

Austerity: is Ed Balls being outflanked on the left by the IMF?

Austerity has become the default mode of European – more especially British economic policy; in his speech to the Conservative Party conference last week David Cameron reiterated that there is no “Plan B” and mocked the Labour Party for its alleged tax and spend profligacy – even though the statements of shadow Chancellor Ed Balls appear to lock Labour into an endorsement of austerity that is in many respects more rigorous than that of the Coalition, raising the prospect of deep cuts after 2015 on top of those that the Tories have already made.

Against this background, it has been fascinating to read the assessment of Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR), on his blog Not the Treasury View.  In my view his analysis is desperately important.

Portes’ assessment matters because it goes right to the heart of the theoretical justification for austerity economics.  Portes examines the multiplier – the key theoretical construct that underpins Keynsian economic analysis and explains the effect that changes in Government expenditure have on the economy as a whole.  The fundamental principle is that government and individuals behave in different ways.  Individuals consume and save (and, increasingly in the boom years before the 2008 crash) borrow.  Governments spending goes on procurement, projects, transfer payments (benefits and subsidies), and of course paying public workers.  They also borrow, and repay debt; but at different levels to individuals. Put crudely, a key assumption of Keynsian economics has been that Governments – especially in bad times – spend a higher proportion of their income directly than individuals, especially in an environment where they are borrowing, than individuals, who have a propensity to save or offshore – the wealthier they are, the more likely they are to take demand out of the economy in this way. Thus increasing Government expenditure is, other things being equal, more likely to stimulate economic activity than cutting taxes  – it’s the basic reason why many of us on the left see the Coalition’s economic policy as so utterly disastrous.

The multiplier, then, is the mathematical expression of this relationship.  It’s obviously something that is pretty approximate, based on a mixture of theory and observed effects in a massively complex economic world.  But as a rough rule of thumb it has plenty going for it.

Portes shows that there are three views of the way in which the multiplier operates under austerity.

• First there is the view articulated by the supporters of austerity – that empirical evidence suggests that, far from stimulating activity as Keynsian policy-makers have assumed, increasing government expenditure decreases it.  As Portes argues, this counter-intuitive view was based on a single influential paper by Alesina and Ardagna which emphasised confidence and exchange rate effects; it has the effect of telling politicians whose inclination was to reduce public expenditure what they wanted to hear. Portes concludes that this view was not very credible economically, but hugely influential politically.

• The second view – pretty mainstream among economists, including the IMF  – was that austerity would be damaging but not disastrous. Based on historical evidence it postulated a multiplier of around 0.5 – i.e. a reduction of 1% in public expenditure would lead to a fall in output of around 0.5%

• The third view was exemplified by the writings of Nobel Laureate Paul Krugman and numerous others, and argued that institutional factors meant that the multiplier was likely to be much higher; these economists crucially argued that rather than relying on historical data to understand an economic situation that had few precedents, it was necessary to revisit the macroeconomic theory. Krugman famously and scathingly caricatured the advocates of the first view as “waiting for the confidence fairy”.  They argued that this approach led to the conclusion that the multiplier would be far higher, certainly greater than 1 and possibly as high as 1.7.

Portes quotes from the latest IMF Bulletin which shows that the Fund is moving much closer to the third view – and points out the policy implications: first that the assumptions used by the OBR to feed into UK economic policy were way too optimistic (and its puzzlement over why things have not gone as it predicted misplaced); and that the impact of fiscal expansionism, the obverse of austerity, will be all the greater.  In other words – the bang for each buck of extra Government spending appears to be greater than many have assumed.

There are a number of conclusions that I draw from this.

• First – as Portes notes – there is the utter contradiction of using fiscal contraction as a means of restoring stability to economies after the 2008 blowout.  The feedback problem – that austerity is trashing tax revenues to the point where more austerity becomes necessary to achieve deficit reduction – is already savagely at work in the Greece, Spain and Portugal and is happening in the UK too.  The effect of the IMF’s shift in position is essentially to knock the legs out from underneath radical austerity.  Portes points to the contradiction between the aim of long-term stability and austerity’s effect of short-term upheaval and instability is crucial.

• Second, in shifting its position, the IMF is actually – if probably not explicity – responding to one of the fundamental Marxist critiques of capitalism, that the growth of capital requires, among other things, buoyant consumer demand to allow capital to expand.  Crises of demand could in the past be assuaged by things like colonial expansion and the monetization and privatisation of common assets, but the scope for doing that no longer really exists.  The IMF understands what politicians – with their ideological hostility to the state and their apparent desire to pursue regressive policies that transfer wealth from poor to rich – apparently do not; that economic stability in a capitalist society is dependent on people buying things (indeed, one can argue that the transfer of wealth from people who predominantly spend to those who accumulate has its own multiplier effect).  The IMF’s tone sounds rather like that of Keynes, whose mission was not to abolish capitalism but to save it from itself.  There are long term arguments about whether capitalism based on mass consumption is sustainable (my own view is that it isn’t) but the point is that on capitalism’s own terms the evidence against Plan A is becoming overwhelming.

• Third, as I have argued before, there is a huge failure on the social democratic left to challenge the austerity narrative with one that is altogether more grounded and evidenced.  The failure of the British Labour Party is salutary in this respect.  Ed Balls is far from being a stupid man, and is certainly one whose technical understanding of economics far outstrips that of George Osborne.  But he has become part of a political consensus that is simply unwilling to challenge the fundamentals of austerity, and to argue that even measured against the aim of achieving stable capitalism it simply isn’t working.

For me, one of the most frightening aspect of the politics of the right in general and of the UK Coalition in particular is the way in which ideology repeatedly triumphs over evidence – a major theme of the three weeks of party conferences that have just finished.  Is there anyone left in the political mainstream who is prepared to champion an evidence-based critique of austerity?

Omnishambles, Chloe Smith and a Government without grip

On the internet today, in Britain at least, it is impossible to avoid comment about Economic Secretary Chloe Smith’s disastrous attempted defence in Newsnight last night of the Government’s decision not to implement a 3p per litre increase in fuel duty, due this autumn. The consensus is that she was utterly shredded by Jeremy Paxman, and completely failed to defend the tax change.

I’ve commented before on the unravelling of George Osborne’s budget proposals – drawing on my experience of working on Budget vehicle tax proposals in my Civil Service days.  Responding to Tory MP Douglas Carswell’s claims that the Civil Service had got hold of the Budget process, I concluded that that Budget process was so political that this was unlikely.  Since then I’ve seen a blog post by former Treasury official and adviser (and former colleague on a couple of Budgets) Damian McBride, whose explanation is closer to Carswell’s; that the politicians had lost their grip.  On the basis of yesterday’s events I conclude that Damian’s  thoughts were rather closer to the mark than mine originally were.

What was obvious from that interview was that Chloe Smith was appallingly badly briefed – something that suggests that the Treasury machine was caught badly on the hop.  The inability to specify beyond a vague reference to Departmental underspends where the money was coming from was an extraordinarily basic error; it’s difficult to believe that the Treasury machine, used to defending hard decisions and with a deeply-ingrained horror of unfunded commitments, could have swallowed that one.  That in turn suggests that this decision was a last minute political caving-in to a populist campaign run by the Murdoch media. As late as lunchtime yesterday, according to Newsnight’s Paul Mason, the Conservative line was to rubbish the deferral of the tax rise as opportunism.

The politics surrounding this decision are strange.  Labour chose to make this issue a point of attack, doubtless influenced by their old friends at the Sun.  It’s odd because  the recent falls in fuel prices have made the policy easier to defend; but in any event a cut in a tax which is overwhelmingly paid by the better-off (fuel use is closely linked to income) at the expense of spending on services which are more likely to be used by those on lower incomes is a curious position for Labour to take (even if it’s far from atypical – all of a piece, for example, with Labour’s backing for a council-tax freeze in Brighton at the expense of services).  And in real terms this is a tax cut – as Paxman pointed out repeatedly in the interview, if the Government is serious about deficit reduction, what business has it doing this?

And, yet again, a high-profile Budget measure is abandoned – this one at considerably greater cost than the others. I cannot think of any precedent for a Budget that has been so completely shambolic. If a Labour Chancellor had done this, you can only imagine the headlines.

The answer surely lies with Osborne, and the way in which he embodies what looks like the defining characteristic of this Government – that it wants to do politics, not government.  In a week when we have seen Cameron speculating in a wholly evidence-free way about ending housing benefit for the under-25s, based on a narrative which posits the hard-working against those on benefits when he knows that the vast majority of those receiving that benefit are in work, this is one more example of the bigger omnishambles at the heart of the coalition; the abandonment of evidence in favour of ideological narrative.  Labour Chancellors like Gordon Brown and Alistair Darling – and indeed old-style Tory Chancellors like Kenneth Clarke – knew that the detail mattered.  Osborne, who substitutes arrogance and entitlement for intellect and application, appears incapable of understanding this.

At the heart of all this is a simple question. In the midst of the worst economic crisis in living memory, can Britain really afford a Chancellor who prefers to play at politics than getting to grips with his job?

The Budget Blame Game

Writing on his blog, Tory MP Douglas Carswell has claimed that unpopular measures in the Budget resulted from civil servants rather than Ministers taking decisions on issues like the so-called Pasty Tax on hot takeaway food and tax changes for pensioners. It’s a view that has been widely reported – Carswell appears to be arguing that Ministers need to get a grip on the Budget to make bold proposals.

It seems to me, as a former Civil Servant actively involved in a number of Budgets before my retirement last year, that this is likely to be excuse-mongering of a strange and low kind. If it’s true, though, the implications are pretty significant.

Yes, it’s undoubtedly true that officials – both in the Treasury and in other Departments – have measures that they have long advocated, usually for  good reasons (I can certainly see how the VAT purists in the Treasury might have been gravely offended by the messy situation on tax on takeaway food, a mess that itself looks like the outcome of a political compromise).  It is routine for Departmental Ministers to write to Treasury Ministers with their list of budget proposals – a process that itself sits at the peak of routine discussions between Departmental and Treasury officials.  Many of these are rejected, for a variety of reasons.  Space in the Finance Bill is always limited – there are always measures, often quite technical and uncontroversial, which Ministers and officials regard as desirable but are ruled out of the Bill on the grounds of space.  Measures were constantly reviewed and may be changed or dropped at any stage in the process.  Ministers frequently asked for work, often at very short notice, to evaluate different options.  Draft clauses – and notes on clauses – for the Finance Bill were drafted and scrutinised. The Budget and Finance Bill was always intense and exhausting – and my involvement was not normally with headline proposals.

But the point about the Budget process is that, certainly in my experience, it has always been intensely political.  Ministers and Special Advisers have always taken the lead on shaping the Budget, with officials often exploring combinations and ranges of options up until the weekend before the Budget announcement.  The idea that Civil Servants’ pet schemes could slip through without Ministers noticing is – or was – absolutely inconceivable.

Unless, of course, things have changed and the process in which I participated under Gordon Brown and Alastair Darling has been largely dismantled – and for such a thing to have happened would have been as a result of Ministerial rather than official action. The Budget and Finance Bill culture is too deeply ingrained in Whitehall for there to be any other explanation.  Essentially, for Carswell’s explanation to be accurate, it would mean that Coalition Ministers had taken their collective eyes off the ball and to have withdrawn from active participation in the process in a way that is, frankly, inconceivable.

So what is the substance of Carswell’s claim? The implication appears to be that, if this is more than excuse-mongering, Coalition Ministers have lost their grip on the Budget process to an astonishing extent.  I have no inside knowledge of what this year’s Budget round was like, but the idea that high-profile tax changes could be made without serious Ministerial scrutiny suggests that Ministers have abandoned even the most basic disciplines of Government.

Although excuse-mongering still looks like the most plausible reason for Carswell’s comments, the alternative – that Treasury Ministers have lost their grip and are badly out of their depth – seems all too plausible.  Not just on the basis of almost every interview that Danny Alexander gives, but because repeatedly this Government, having sacked enormous numbers of experienced civil servants, has shown time and again that it just cannot do the basics of government.  I’ve posted examples before – for example here and here – and remain convinced that this is a Government that is more interested in ideology and politics than governing, a government that values ideological narrative above empirical reality and is simply not interested in the serious business of evidence-based policy-making.

If Carswell’s comments are a piece of political excuse-mongering, it’s a piece of low politics that probably doesn’t matter very much.  Kicking decent public officials who can’t answer back is cheap and cowardly, but that’s Tories and Liberal Democrats for you.  If it’s actually an honest view of what went on in Whitehall before the Budget, it’s an astonishing insight into the sheer incompetence of Osborne and his Ministers.

50p tax rate and Tory triumphalism

Widely-circulated predictions that George Osborne is about to announce the end of the 50p top income tax rate for those earning more than £150,000 have attracted much comment.  The obvious one is fury at the naked unfairness – here is a handout to the wealthiest in society that comes at the same time that those on the lowest incomes are seeing their living standards cut (for example the estimated 900,000 people on low incomes who will lose nearly £4000 per year due to changes in tax credits in April).

Then there are also concerns about the economic justification. There’s no real evidence that this will do anything to stimulate the economy; this looks like a case for the confidence fairy if ever there was one.  Moreover, macroeconomic theory suggests that increasing the incomes of the poorest is much more likely to stimulate the economy, as they spend all (or nearly all) their income; cutting tax for the lowest-paid, or increasing public expenditure is a far more effective stimulus.  And there’s  the Treasury spinning of the figures  - in the absense of any hard numbers for tax take, claiming that the 50p tax rate is raising “hundreds of millions rather than billions” despite predicting that it would raise £3 billion per year (with tax expert Richard Murphy arguing convincingly that the take could be as high as £6 billion - the TUC paper to which that article links is essential reading).  At a time when benefits and services for the poorest and most vulnerable are being slashed in the name of deficit reduction, it’s an astonishing policy – a naked, obvious wealth grab on behalf of the wealthiest paid for by the poor and those on middle income, at a time when Coalition rhetoric still claims that we are “all in it together”.

And it’s a sign of Tory self-confidence and triumphalism.  I wonder whether the the events of last weekend’s Liberal Democrat conference were on Osborne’s mind as he contemplated the policy – a conference voting in two different ways on the NHS as their MPs and Peers prepared to trip happily through the Parliamentary division lobbies in support of a bill that effectively breaks up our National Health Service.  Perhaps he was reading the opinion polls, which showed that even when presiding over economic policies that have eviscerated the living standards of the vulnerable, hit Middle-England hard and enriched the 1%, or when presiding over the effective privatisation of Britain’s once-beloved NHS, the Tories are only a few percentage points behind Labour (with the added advantage that boundary changes and the deserved collapse of Liberal Democrat support will, in terms of seats in the House of Commons, greatly benefit the Tories).  Or perhaps the decisive moment was when Ed Balls signalled the raising of the white flag on economic policy, implicitly accepting the neoliberal economic agenda by effectively backing tax cuts.

Every one of these represents a Westminster political culture in which the Tories are utterly dominant.  Of course there is opposition outside the political class – all the evidence suggests that Coalition policies on health, on tax, on public expenditure are widely unpopular, although one of the most sordid aspects of the Coalition’s tenure has been its casual demonisation of the disabled, the sick and the vulnerable who depend on benefits.  But that is outside the Westminster bubble – and one can hardly avoid the conclusion that nearly all the most obnoxious aspects of Coalition policy – NHS privatisation, benefit cuts, workfare, tuition fees, the privatisation of public space – are simply the policies that Labour followed in office taken to their logical conclusion.  Ed Miliband wrote the 2010 Labour manifesto in which many of these policies – in a softer, cuddlier form – were advocated;  New Labour luminaries like Liam Byrne continue to trash the legacy of Beveridge and the welfare state.  No wonder Labour has been so utterly useless in opposition.  The Liberal Democrats, allegedly a moderating influence on the Tories (which they were never going to be – read the Orange Book), are in disarray.  The best they have to offer in response to the abolition 50p tax rate is Clegg arguing for raising tax thresholds at the bottom – which of course will ensure that the rich benefit twice – or a possible commitment to a Mansion Tax. In principle.  In the long term.  If it’s workable.  ”All in this together” is a slogan that accurately describes the position of the British political class.

It’s been sad to read some of the comments on Twitter to the effect that the Tories really have blown it this time.  They are not stupid – they are resurgent.  All they have learned from the events of the last two years in Government – helped along of course by their yellow-tied useful idiots, and assisted by Labour’s refusal to argue for a real alternative  - is how easily they can get away with it.

Is Osborne tanking the UK’s credit rating?

An excellent blog post by Duncan Weldon at False Economy argues powerfully that the real news yesterday was not the measures announced in George Osborne’s budget, but the economic numbers that accompanied it.

Despite Osborne hailing ‘a Budget for Growth’, OBR growth forecasts were revised down for last year, this year and next year.

Unemployment was revised up and is now expected reach over 8% this year. Alongside this inflation was revised up and average earning growth down. In other words prices will rise faster than expected, and wages slower – meaning the squeeze in living standards is set to intensify in 2011 and 2012.

The downward revisions to UK economic growth came despite the OBR revising world economic growth upwards – Osborne’s spending plans will continue to crimp UK economic performance.

The impact of all this on the deficit was predictable. It was revised upwards, with the government now expected to borrow an additional £45bn over the coming years.

Osborne’s ‘growth package’ – a further cut in corporation tax, some relaxation of planning laws and the creation of 20 1980s-style ‘enterprise zones’ – is unlikely to have a major impact. The OBR concluded that the effects of these measures would be ‘minimal’ and ‘unlikely’ to raise the trend growth rate of the UK economy. Despite this they were widely praised by many in the business community – but then who doesn’t like a tax cut?

But more extraordinary was his reference to a story from Reuters that credit ratings agency Moody’s had raised the possibility that the UK’s sovereign debt rating could be downgraded from its present AAA if slower growth and a consequent failure to reduce the deficit allowed the position in the UK to worsen.

It suggests that there are at least parts of the world financial community who see the UK at risk of falling into an Ireland or Portugal-like spiral of decline – directly as a result of Osborne’s economic policy and his apparent lack of grip.

It’s ironic when you reflect on Nick Clegg’s claim in his recent Liberal Democrat conference speech that the Coalition’s economic shock doctrine had ensured that control remained with the Government:

By cutting the deficit decisively we have restored confidence in Britain.

Essential – because without confidence there can be no growth.

We have helped keep interest rates lower for longer, helping families, helping businesses.

It has meant making difficult choices.

But at least they have been our choices…

Not forced on us by the bond markets as they have been in Greece and Ireland.

But the Moody’s announcement raises the prospect that the Coalition’s economic policies are producing precisely the conditions and uncertainties that Clegg claims to have avoided.

The steady unravelling of Osborneomics

What’s the big headline message from the Budget? It’s that George Osborne’s economic experiment is, predictably, in tatters.

The Budget announcement provided the latest in a series of bad economic numbers for the Coalition.  Inflation running at 4.5% with, apparently, no prospect of its slipping back; a second consecutive Osborne Budget in which growth forecasts have been slashed; unemployment continues to rise.  The central premise of Osborneomics – that, once freed of the burden of public debt, the private sector will generate jobs in their hundreds of thousands, more than offsetting the jobs lost in the public sector – is looking more risible by the day.

Against this background, Osborne continued to promote regressive economic measures in a budget that benefitted corporations and non-doms, and at least gave the illusion of assisting motorists (one imagines that the 1p cut in fuel duty will very quickly be offset by the price effect of the Coalition’s Big Adventure in Libya).  And, according to indefatigable tax blogger Richard Murphy,  it’s looking increasingly clear that some of the biggest winners from the Budget will be tax evaders.

And elsewhere on his blog, Murphy provides the underpinning for the central critique of Osborneomics – that even if the deficit is the problem the Coalition says it is (and I’m on the side of those who argue that its importance has been hugely exaggerated), it’s a problem of tax revenues, not of spending.  Tax revenues fell off a cliff after the banking crisis of 2008 and the problem has been exacerbated by a huge problem of unpaid tax – the Tax Gap – with the numbers suggesting it’s far bigger than the Government’s (internally inconsistent) estimates suggest.  How will the long-term erosion of Corporation Tax and the gentle treatment of Non-Doms get to grips with this, at a time when cuts at HMRC ensure that tax enforcers are working with one hand tied behind their back?

In the face of this, the only rational conclusion appears to be that this Budget was not about economics, but about ideology and politics.  The few crumbs thrown at Middle England simply cannot disguise the fact that Osborneomics has locked us into a vicious spiral of cuts, falling output and increasing borrowing.  Osborne has form for talking up Ireland as a model economy but I guess this isn’t what he meant.

And the Liberal Democrat contribution to all this?  The cynic in me would like to think it’s the £100m for fixing potholes – an appropriate measure to represent a party of pavement politicians who have so clearly failed to hack the political big time.  Nick Clegg’s message to his activists suggests … clamping down on tax evasion, and the increases in tax allowances (more than offset, of course, by the VAT increase in January) But it’s difficult to see their role as anything beyond providing the lobby fodder that makes Osborneomics possible.