Category Archives: IFS

The Economy Stupid


Elections are won on economics: its the economy stupid. Our numbers are bad but they will become worse. If the Eurozone collapsess they will be disastrous. But party alleigances are static. Hello, out there is any one listening. The reasons for static polls are well-known: mcu blame is attached to Labour’s inheritance of deby and the, seconly, the electorate are dogmatically fair-minded – they give credit for trying. The Coalition is trying – but in more than one meaning of the word. So it is a long and hard road for Labour toi convince the electorate that they could do better. 

What will change things are events. Anyone looking back in 2011 knows how difficult it is to predict them. If they are external events there is a breathless pause while the country rallies round. What woul be the public reaction to a forced opening of the Straits of Hormouz if petrol prices doubled. How would the public react to yet another war? Would it really come to that? It might. Would things look bad for the Coalition if unemployment topped three million. Mrs Thatcher recovered from that but then she needed a successful invasion of the Falklands.

Sometimes Government’s implode. What would make the Coalition implode.  European policy might if Cameron was foolhardy. Surely he won’t be tempted but you never know. Perhaps not. The Coalition might split. Not much chance of that. It is in the Lib Dem interest to soldier on rather than than be decimated by the electorate. 

Once I would have been bold and would make a prediction. Should we settle for a quiet life with more of what we have got. I hope not. Perhaps if I predict it we shall get something more exhilarating. OK nothing will happen in 2012.

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Filed under BBC, Cabinet, Cameron, Coalition Government, Deficit, Economics, Ed Balls, Europe, George Osborne, IFS, Labour Blogs, Labour Goverment, Lib Dems, Nick Clegg, OBR, Politics, Treasury, Unemployment

Riding the IMF Horse


There used to be a day when the British economy was not run to please bankers or technocrats in international bodies. Alas, they are passed. However, it is worth asking when you read a forecast, in whose interest is it published? The IMF believes that it is important for its members to reduce public indebtedness and makes it a public objective regardless of the beggering of any nation’s citizens until this goal of public policy is realised. Naturally it is supportive of the budget deficit programme of the Coalition. The IMF  addressed  the issue of a Plan B. You will be pleased to know that if growth remains low the IMF would support monetary easing, keeping interest rates low and putting a brake on cuts (without anyone noticing it). In this way the deficit would not come down quickly in the first two years but would come down faster in subsequent years.

This revelation of the existence of Plan B is hopeful but not reassuring. If growth is slow, the main body of public expenditure cuts is realised , and assuming all other parameters are stable (other than unemployment) the deficit will not come down. The credibilty of the Government in the markets, which Boy George goes on about, will be lost. If then the Government persists it will be confronted with a mountain to climb in years 3 and 4 when credibility is lost and the deficit stubbornly high. If then Georgie  presses on growth will remain low throughout the five years, So what then Grannie do we do next?

Well, dear, says Grannie, it might not be as bad as that. That’s what they all say, says I. What is the use of saying that when the flood waters have reached the bedroom sill? Shouldn’t we have been alerted before this time to leave the house? Hindsight,  says Grannie, it is an easy art.

There are other dangers. The IMF talks bravely about global growth rates remaining high,  surviving high commodity prices and resuming stable growth and low inflation. But then he would, wouldn’t he? But  we know that all recessions and recoveries are unique. Perhaps this depression will last for ten years or more. And what shall we do then Granny, says I. Don’t worry dear, says she, I’ve put a little money aside to cope with the odd crisis. Well Granny, that’s the problem. We have been using it. Using it? No one told me that. The problem Grannie is that debts continue to rise. Good gracious, what did you say about the bedroom sill. Take me there. There’s time to jump. A splash is heard, off stage. Granny, you can’t swim! These words came too late. Poor Granny, poor me -oh, and by the way, poor you.

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Filed under BBC, Budget 2011, Cabinet, Cameron, Coalition Government, David Smith, Deficit, Economics, Ed Balls, George Osborne, IFS, IMF, Lib Dem blogs, Liberal Voice, New Stateman, OBR, Politics, Rising prices, Treasury

The Economy: Now We Know


The GDP figures for Qtr.1 2o11 tell us what we need to know on the vexed and central economic and political dilemma of how to cut the public deficit and grow our way to economic success. No economic growth for six months is bad news. I have commented in previous posts on the optimism of OBR forecasts and that they are consistently behind the curve – and wrong. They were wrong in their belief that the last quarter 2010 figures would be adjusted upwards and that this current quarter would come in at 0.8 percent growth, They are surely wrong in their forecast for 2011.

Does it matter? Yes, it does.  Lower growth means higher unemployment and public debt and  lowers confidence.  If the Coalition intention remains ‘fixed as the Northern star’ another round of expenditure cuts, higher taxes and a spiral downward to economic defeat and long term recession is on the cards.

To echo Lenin, what do we do now? Something revolutionary? To enter into the spirit of things, bring the Coalition to a halt. In eight days time throughout Britain the electorate have an opportunity to inflict  a mortal wound by voting against the Coalition parties, and then there is the time honoured tradition of a motion of no confidence in the Commons (Dream on the Constitution has been fixed. It’s not so simple as you might think). Alas the times may be revolutionary but we are not. ‘No Bolsheviks’ here is the sign outside the House of Commons. We are all Mensheviks now Well we might start by winning the argument. When Ed Balls advanced the proposition that even the Labour objective of halving the deficit in four years might not be achievable without economic depression he was widely derided. What we have seen is that the  squeeze on expenditure started by Labour and intensified by the Coalition has already had a dramatic effect on the British economy. The Coalition tax increases and cuts have only just started. It is asking a lot of business and consumers to reverse that trend when personal incomes are squeezed and small and medium companies denied loan capital.

It may not be in Labour’s power to  change things for the better BUT the much derided and humiliated Lib Dems could do it if they had the will. It is difficult to determine how long the tragedy needs to unroll before they pluck up the courage to say with one (or almost one) voice that enough is enough. I hate to write this but history does help. Look at what happened to the Mensheviks and subsequently to a whole country and a substantial chunk of the European map? If you think that I exagerate you may change your mind as events unfold. I will not write, I told you so.

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Filed under BBC, Budget 2011, Cabinet, Cameron, Coalition Government, Commons, Deficit, Economics, Ed Balls, George Osborne, IFS, Nick Clegg, OBR, Politics, Vince Cable

Lib Dems: They Just Don’t Get It


There is now a Lib Dem mantra designed to show how Government has been materially improved becaus of its involvement in the Coalition. What we have, it might be supposed, is really a Lib Dem administration. The party can come up with a long list of its achievements. One by one Lib Dem policy dreams have been put into place. It is necessary  side for the purpose of this argument to recognise that there are   policies that those of us on the left can support: higher personal tax allowances, improvement of tax credits for the very poor. the triple lock on increases in the state pension, the Pupil Premium to help some disadvantaged poor children. Good on you, say I.

Do these policy changes make people less poor?  Yes, they do in a way. However, alas and alack, the imposition of VAT dwarfs these advantages and the poor will get poorer. I will not dwell on the LiB Dem opposition to any VAT increase in the General Election campaign except to comment the they were against it. We all remember the poster. They were against increases in tuition fees too and then suddenly they were not.

But what is the heart of the matter. Remember, the Lib Dems were against cuts in public expenditure on the scale propsed by the Tories. Now they are not. What they tell us now  is that these cuts are necessary and like Pilgrims Progress to the promised land they bring us all closer to full employment, rising living standards and sunshine. Trust us, you will see how wise we are it is said.

The Lib Dems no longer command trust. But are they right? Certainly the OBR has consistently produced economic forecasts that suggest they might be. We are days away now from a reckoning. The first quarter GDP figures for the for 2011 is soon to be announced. It may be that over the last six months the British economy may not have grown at all, or if it has it will be  at some miserable annualised rate. Unemployment may be rising not falling, inflation will continue to work its way up and not down and real incomes will be squeezed further. I do not know whether the OBR will be asked for a revised forecast but even if they are not asked, it is highly likely that some other respected forecasting institute will make a good fist of doing it.  And what will be observed? I anticipate it: a rising budget deficit and no chance of the Coalition’s economic objective of eliminating the deficit by 2015 being achieved.

Is this not the real charge against the Lib Dems? Not the cavilling  daily objections to their nonsense BUT one overriding error. On the essential and over-reaching issue of how to keep the economy growing and the public deficit falling THEY ARE PLAIN WRONG. The Lib Dems have sold their soul for a mess of potage to find it uneatable. The electorate will not forget it and a day of reckoning is close.

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The Budget: A Tiptoe into Fantasy


A word about forecasting now that the OBR has had its third attempt to plot the economic progress of the British Economy. Like accountants before them the OBR is useful in recording the past but well-nigh useless in forecasting the future. We live in a time of  extreme economic turbulence and uncertainty when at any      time  wars, earthquakes, worldwide  pressure on resources and the stupidities of the human race can turn  nice judgements into inanities. Yet still we persist. It will be better in the future: the economy will grow, employment will rise, inflation will come down and real incomes will rise again. The OBR at least has the common sense to admit that all its forecasts are subject to great uncertainty. Well yes, they say, it may not turn out like this but we hope it will.

I commit myself to several judgements, First, the attempt to eliminate the budget deficit in a five year Parliament is doomed to failure. At  best the Coalition may complete the Parliament having achieved what Labour continues to promise: the deficit could be halved. We have in the Coalition a group of supply side fanatics who have always maintained that growth must come through a smaller state and greater productivity, who are antagonistic to public administration and welfare and suspicious of the state as pump priming anything. Come back Milton Friedman, all is forgiven. Economists have an adage that you can lead a horse to a trough but you cannot make it drink. The IFS has remarked that the numerous supply side intiatives announced in the Budget do not amount to a row of beans. They will add nothing to aggregate demand. What is needed is the pump priming of capital investment in rail, roads and building construction and a real (rather than imaginary) attempt to raise skill levels. Of course the Government is aware of these needs. It is doing something – but too little.

The central issue of George Osborne’s budget is a judgement of whether this Government at this time is right in believing that it is possible to eliminate the budget deficit in five years. If it is right in its belief it will go on to the glory dreamt of by our Dave and Nick. The objectives of financial probity and economic sucess will be achuieved and electoral success will be the reward. If it is imposible for Britain (and I suspect Greece, Ireland and Portugal) to do anything of the kind when will the game be up? I suggest the Budget of 2012 will be the time of reckoning. The Parliamentary rules now make it difficult to get rid of a Government – but not impossible. And at this time who might be leading the Labour Party. Might events work in favour of Ed Balls? The electorate love a winner. Watch this spot!

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Steady As She Sinks


Imagine the scene. Captain Osborn stands on the bridge of the Titanic as it hits the iceberg and shudders to a halt. ‘Panic, ye not’ , he cries, ‘this ship is unsinkable’. Stay right where you are. It is no use running to the lifeboats for there is not room for you all. It is a feature of the design. There are only two pathways: forward or down. For the moment we cannot go forward but who in their right mind wishes to go down. Have faith. We shall overcome.

Of course, it may not be an iceberg and, if it turns out to be one, perhaps only  small. This is a test of leadership. And communication – don’t forget that. Where is that chap Coulson? He is so good in a crisis.  But what if it is a large one? What if the ship is sinking and nothing can be done? Of course, we don’t know yet. One quarter’s provisional slump in GDP is not not the albatross we all might  fear. Wait a while. Courage mon brave. But it must be admitted that the economic prospects look bad.

Over the last few months, I have argued that the outcome of a crisis is usually somewhere between peoples hopes and fears, that we will not get a double dip recession but rather a long grind forward at the expense of much that we hold dear about the British way of life and a great deal of suffering by millions of people. To remain sane in an insane world requires us to think like this. You avoid the worst by confidently believing in something better. No one can say that David Cameron lacks optimism or courage. But far worse than abundance of self-confidence, perhaps they are plain wrong about the Coalition’s programme of deficit cutting, small government and a Victorian strategy of self help and charity.

I confess to an ideological bias of my own. I believe in an enabling society, universal social benefits and rights and a fair degree of central direction and management of the economy. Looking back over the last two hundred years I believe that social democratic ideals work out best. Of course this leads to some people obtaining benefits to which they are not entitled, to benefit cheats and loafing about. It is a price worth paying. That is just my opinion, of course. I would not have set sail in the Titanic or aquiesced in a design with too few life boats or believe in the invincibility of the Captain. Let us all admit it is too late to avoid the voyage we were jockeyed into last May. Each man to his own is the cry as the lemmings force their way to the upper deck and the life boats. Hold on, where’s Nick, Dave and George? Surely they will think it morally right to go down with the ship. Have they somehow slipped a way to fight another battle on another day.? Yet another iceberg, more confident assertions? After all, surely there is no alternative? Steady does it while we sink.

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The Politics of Uncertainty


Economic forecasting is an art and all who practice it are merely players. That having been said there is little doubt that the latest OBR economic forecast gives the Coalition more to crow about than the Labour Opposition. The odds of the Coalition’s deficit reduction strategy, or in fancy language the Consolidation,  working out is now over 50 percent, employment will remain high, the economy will start to re-balance, in the jargon, and all should be well and improving when the next General Election is upon us. After all, as we all know economic growth is cyclical, recessions are followed by recoveries, one is taking place, and all is well with the world.

It takes some believing. Exports bounce ahead with an annual growth rate of 6 percent and investment is sharply upwards despite the fragility of currencies and uncertainties in world trade. It might be right though and as my mother used to say, there really are fairies at the bottom of the garden. Why don’t I see them then, if that’s the case. You don’t see them because they only come put to play in the night, when you are asleep. And no, no camping out in the garden

Might all this happen? Yes it might but then on the other hand it might not. For the moment the Coalition has the better of the argument and yahboo is not an answer. There are many good tactical reasons for vagueness and indecision on the Opposition benches but it disappoints. Were Labour really to believe that growth will grind along in the valley of despair and unemployment and short time working is our fate, what do they propose to save us? If by a freak of fortune Labour became the Government in a few weeks time, what would it do? What for goodness sake is the Labour Party’s platform?

I don’t expect to receive an answer and for this vapidity I blame Ed Milliband. Leaders come in many shapes and sizes but one thing is for certain: they must be Pathfinders. By all means consult, detail is a virtue, listening is good BUT you are the leader and what do you say? Where do you wish to lead the Labour Party? What is your opinion? All these questions can be answered without detailed policies with all the t’s crossed. Tell us where you are and where you are going with this. And for God’s sake do it soon. A few more weeks of empty generalisations and you are lost for ever. Who really, in their mind of minds, wishes to go down in history as the Ian Duncan Smith of the Labour Party. Surely one Ian Duncan Smith is enough. Fail now and you are lost for ever.

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Time To Get Real


On  29 November an updated report by the OBR will be published and George Osborne will give his reaction to it in the House of Commons. In July, when the OBR last reported,  Alan Budd was at pains to underline that his forecast was subject to massive uncertainy and that the Government’s policies to reduce the deficit had only a 40 percent chance of success. Despite these uncertainties commentators in millions of miles of typescript have confidently forecast the future  whether they were predicting runaway success for the Coalition  or double dip recession. Arguably, anything that has happened over the last six months should be written down to the Labour Government, credits and failures alike, but anything that happens from this point is down to the Coalition whose plans have been solidified. What will the OBR forecast reveal?

1. Uncertainty. Levels of uncertainty will be as great for our economic future is in the main determined outside the UK by happennings largely outside our control. World economic growth has slowed, currencies are in turmoil and British export growth is more precarious.

2. Growth and Employment. Alan Budd’s confident 2011 forecast of growth in the economy and high employment will be scaled back. In 2011 there will be no double dip but a churning along in bottom gear. Unemployment will rise in the immediate future before falling in later years.

3 As a consequence tax revenue will be scaled back and progress on deficit reduction  will be slower.

Here is a point then of realism.This is how the pigeons will , most likely, come to roost.  And what is to be done now after the gloss is worn thin? George Osborne will bluster it out. What else can he do? But  this call to reckoning is not for the Coalition alone, for eyes an ears will point at Labour. The electorate will wish to know what Labour would do if the Government. If Labour wishes to be pragmatic and oppositional and take things year by it must at least come up with a clear statement of what it would cut in 2011/2 and what changes in taxation it now supports.  Labour is in danger of losing public respect by obfuscation. It is time for Labour to be transparent and convincing behind a coherent policy agenda.

If Labour does this the electorate can choose. The lists will be drawn and the true battle begin. The economic future will remain murky but the issues will be rendered clearer. For Labour it is a call for Leadership.

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Can Governments Arrest Economic Growth?


I used to deliver a lecture with the title, ‘Can Governments Arrest Economic Growth.’ My considered answer was, yes, if they tried hard enough. The gist of the argument was that, ‘all things considered’ (the usual cop out) entrepreneurs and the rest of us were determined to improve our lot by hard work, skill and imagination, and that hampered as we  were by government meddling and poor policy making, we usually succeeded. That is where we are now. We should expect the UK economy to bounce back from a depression given the fiscal and monetary stimulous it has been given. Left alone, so to speak, we would come out of it and resume our normal growth.

What is different this time is twofold: we have a huge budget deficit which the Coalition is determined to eliminate in four years and a concious decision to run back public service for ideological reasons. What we all need is economic growth and ‘full employment’ and an end to deficit reduction delusions. The Labour stimulous has given us an inflation rate which will not come down and  there can be no more fiscal encouragement or quantity easing. Zilch and minus zilch for incomes per head for price increases will outscore the growth in wages, unemployment will rise as the VAT increase comes in  January,  and Boy George will be in trouble. He will not admit it. He dare not.

I had hoped, delusionist that I am, that we would then  have a change of Government. I do not believe this now. I do not expect the Coalition will change course, the Lib Dems will not rebel in sufficient numbers, and the Tories will maintain most of their support  amomg eectors as the  the country endures bleak times (there is something masochistic in the British psyche). And so we shall muddle on hoping for the best. It will be said that the British lose every battle but the last. So Boy George will cling to the mast, violently sick, together with the rest of the crew, but buoyed to the last with the conviction that the storm will blow itself out and the ship will find a harbour.

Well it might. It is possible but I plead unlikely. No one in their last mind would want George to fail for we would all go down with the ship. What do we do then as the crew is washed overboard? Best to do whatever there is to be done sooner rather than later you might conclude. Mutinies sometimes succeed but not often. As our Dave might say, if you want to have a mutiny, have a plan. Can someone help me. What, please is the Plan?

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Elasticity of Demand


Everyone is an economist these days and many of these new pundits have never read an economics text book. Alan Johnson is not the first to admit it and rumour has it that James Callaghan was sent  on a course at Nuffield College. Of course, some of their advisers  have read something along the lines of economics . So it was a relief to me to  tune in to a debate in the House of Lords on the proposed rise in tuition fees and hear economic terms being used.

An issue discussed was would an increase in tuition fees reduce the number of people applying for a university place particularly the ‘deserving poor’. The Coalition argues that when Labour did it applicants dropped for a short time and then the rise resumed. Well as any economist knows whether it rises or falls  depends on the elasticity of demand for university courses and their supply in the past and in the future. It is possible to calulate the numbers for the earlier period and make some reasonable forecasts now when the determinants of demand have changed. Has any one done that? if so please speak up. Obviously when Labour did it the demand for university places was rising and their provision expanded to meet this demand. The total number of applicants were on that part of the demand curve that was rising quickly.  The potential supply of students is not infinite and we would expect the rise in the percentage of the population going to a university to level off within its limits. Of course there is the issue of rising population and overseas students. No one said that forecasting was simple?

Then there is the issue of rents in London  the elasticity of demand for the properties occupied by 17, 500 hapless Housing Benefit families. What we might wonder are the demand  and supply curves for this accommodation in London. There is no doubt the population of London has been growing fast and the demand for rented accommodation has been rising. What is the percentage of these 17,500 homes to the total number of such properties in the whole of London by segment? Let’s guess. Pretty small I hear you say. And what is the demand for them? Well, you might say,  getting into the swing, the curve must be rather steep. After all who can get a mortgage these days? Atta boy you are getting the idea. What we need to predict are the growth rated in family establishments and the need and aspirations of people to settle in London. Look, you can stop at this point. I think you get the drift of this. What I am saying is that when you are seeking to change Housing  Benefit it is reasonable to predict the consequences and not make up fairy tales.

I am a prodigious borrower of books from my local library most of which comes from the British Library at £3.50 a book. My librarian tells me that the charge is to rise to £10 a book which is the real cost of the British Library lending it. I consult these books rather than read every word in them. At the British Library there is no limit to the number of books I can borrow in a day. Let us assume I work in the British Library on ten books free of charge which is quite usual for me. I can get there by train for £25. I resolve not to borrow these books  through my local library. It is a matter of elasticity of demand you see. Anyone know what it is? At the end of the year some accounting Wally will argue that there is no local demand and the Council should withdraw the facility.  And so on.

What is my gripe? The illiteracy of many people, and especailly, the politicians who debate these important public issues.

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