Firstly, Keynes is dead. The entire budget is a paean to monetarists. Which should be great, as I am one. Tim Worstall notes the nice big experiment should be worth reviewing too as it will prove who is right or wrong. However, there is an worry for me that the deflationary effect of the fiscal cuts is going to push inflation lower (Blue Eyes was right on this yesterday in the comments), even with VAT rises and commodity price rises. As such, where is the money supply policy - where is more Quantitative Easing suggested? It will be needed if the economy starts to tip over again and money creation drops off.
Secondly, some of the measures of the economy, like the output gap, have little credulity. This is quite a shame, as rather a lot depends on them being accurate. The ever wise Chris Dillow has looked at this at more length as regards the structural deficit - which is another odd concept that is bandied about but in truth is like trying to nail jelly to a wall.
Finally, somewhat like the Labour Government, these cuts of 25% to public sector budgets won't be known until after the spending review. sadly this is before the pensions review that may have made a decent dent in this aim. Burning Our Money has a good point here, even the famous Geddes cuts of the 1920's barely made it to 25% and this caused the General Strike, the Jarrow March and led to Britain having its first ever labour Government - a disaster from which we have never recovered. So are these cuts really going to happen?
Of course maybe some of these issues will cancel each other out, the cuts won't come but then the spending may help to keep the economy out of recession. The output gap maybe smaller in which case the return to growth will be much quicker - time to be positive. A Keynsian budget would have the markets in crisis today - instead they continue there serene drop...
Glad you agree with me!!! Very nice to be deemed "right" by the great CU!
ReplyDeleteI think the government will struggle to find the cuts it wants, but the headline sums had to be published to reassure the debt markets that Britain is serious about returning to sanity.
Either the economy will start to pick up sooner or faster or both and the cuts won't need to be so harsh or in a couple of years time the government has to say "well we tried cuts but you didn't like it, here's a tax rise instead".
Osborne has, right from the start with his "sharing the proceeds" slogan, been trying to get us to understand that he will reduce the role of the state as a share of GDP in the longer term.
That is the important thing. Getting there will be very tough but like Thatcher we will thank him in the end.
"... the government will struggle to find the cuts it wants, but the headline sums had to be published to reassure the debt markets that Britain is serious about returning to sanity."
ReplyDeleteThat's what I was going to say.
As for industrial action in the public sector - is there any way of separating public sector trades ?
A massive union like Unison must surely have the equivalent mobility of flying pickets. If 5-a-day coordinators get the axe no-one will give a shit (or be able to because of lack of veggies) If they go on strike then even better - who will notice ? But if road sweepers and bin men come out in sympathy through some tenuous linking then that's different.
What can be done about this ?
But the 'cuts' are actually more or less freezes that depend on private sector expansion, private sector wage inflation and therefore inflation in the tax take.
ReplyDeleteThe whole budget assumes that we will return to sustainable GDP growth and that inflation will stay positive. Where is the GDP growth coming from? The last bout came from a borrowing, construction and consumption boom where masses of spending (private and public) was brought forward.
The fact you allude to more QE perhaps being necessary brings us back to the Japan scenario we've discussed on here before I'm afraid. I'm not expecting 90% falls in stock prices or 65% falls in land values, but years of wage deflation/stagnation and <1% GDP growth? Yes - that is what will happen.
It is not a good budget, there is nothing radical, just long term spending freezes dressed up as big cuts, shavings to middle class benefits and unimaginative hikes in VAT, IPT and beer duties.
They really need to get their skates on and think about how they are going to get us out of this mess.
Western economic dominance over a weak East is coming to an end, the **** is hitting the fan for the euro, energy is getting more expensive, house prices can't go much higher even with 0.5% interest rates and the credit system that has developed over teh lat 30 years has a blown turbocharger that no one knows how to fix.
This is the great unravelling!
QE is the plan B then if growth is too low?
ReplyDeleteSL: I would say that a 15% reduction in overall spending is quite a bit more than shuffling the paperclips around a bit and a bit more than holding down public wages compared to private ones.
ReplyDelete"Where will the growth come from?"
Where does it ever come from? Productivity, enterprise, new products and services, innovation, etc..
In the 1980s we had deflationary budget after deflationary budget, huge unemployment and strikes. What happened? The private sector was able to surge.
BE, on re-reading it I guess we'll have to wait for the Autumn spending review really, but I'm still pessimistic.
ReplyDeleteIn the 1980's increased spending, decreased taxes and increased borrowing whilst at the same time embarking on an ultra-tight monetary policy of destroying money. It was coordinated both sides of the Atlantic - Reagan and Volcker did the same thing - and we started the decade with near 20% inflation.
This is the opposite, an ultra-loose monetary policy against a fiscal tightening, increasing taxes, reducing spending and reducing borrowing. It's new, we haven't been here before in our lifetimes.
If you look at how we calculate GDP growth, we basically deduct exports minus imports. So while we're running a trade deficit of 5% we have a major obsticle in our way. In the 1980's energy was cheap too, we privatised the utilities and modernised the city kick-starting growth. We sold oil licenses. In the 1990's and naughties we sold mobile spectrum and had the tech/communications boom.
I sincerely hope that over the course of 5 years (providing the coalition can buck the trend and stay together) the private sector does grow in real terms as the public sector shrinks. However, I'm just not that optimistic it will pan out like this.
Without credit expansion (and bank bashing prevents this) and without wage growth (and VAT rises + high unemployment prevents this) I don't see how we are going to grow much.
I'm sorry, but I'm still staring into a horrible economic void. I hope I'm being over-pessimistic.
Firstly, Keynes is dead
ReplyDeleteDoesn't this presume 'he' was alive to begin with.
Doesn't Keynes attitude's presume that the expenditure of the state can take the place of "the lack of private companies income" assume that the state has 'banked' previous years' excess to spend?
Rather than spend the next 10 year's income in acheiving the same goal, while igoring the interest on the borrowing of same amount?
Pontificating Shall Commence ....
ReplyDeleteI have long thought the historical comparison with Geddes was a little specious in that we have just been through a period of 55% adjusted increase in Government spending prior to stabilisers becoming an issue. We are going back to 2000 not the 1930s and whilst productivity has risen in comparable sectors (where computers have actually reduced costs ) productivity in the Public Sector has become atrocious
I think you are right to question the reality of the cuts .You would think to read the blogasphere that real life and policy were separated only by the flick of a policy lever. Balls ...and not the Edward kind. Each bureaucracy will fight its corner front line services will be cut back room left good services dispensed with and bad ones kept. This is as unavoidable as hosing loafers with taxpayers money so as to ensure real want is catered for .
I happen to know about the shenanigans surrounding which courts will be shut in Sussex .I promise you the Nation`s weal is in no-ones agenda and the same goes for schoolsJust as New labour never delivered their tax revenue estimates , or in the early period ,their spending commitments , these cuts will be slower messier and as political than EconomicThis is why we have to start hard and fast because the outcome will be far less so. (Incidentally the OBR pointed to some inflationary pressure arising form this budget )
Given that, like Caroline Lucas , I have the unimpeachable qualification of a crappy Degree in English Lit , I have forgotten , you may rest assured I know best about the Economy .Everyone be quiet and listen to me ...now let me see where were those tea leaves ?
Looks like a certain ex-Treasury official agrees with me - there are no cuts!
ReplyDeleteSee! Nick? Blue Eyes? Told you so! Or as we say oop North "Teck it on the chin!"