From the TUC

Ed Balls and Martin Wolf: why the Government’s economic policy is wrong

03 Sep 2010, by in Economics

Ed Balls made a speech to Bloomberg last week, and Martin Wolf commended his argument in the Financial Times today. Both are worth reading in full, but for the time-challenged, here’s a summary. Government policy rests on four pillars: Labour is to blame for the UK’s economic problems; the Government needs to cut expenditure massively because the markets are nervous of continued borrowing; lower government expenditure will lead to increased private sector spending which will create growth; and people who disagree with the Government are ‘deficit deniers’ who would wreck the recovery.

All four are (at least probably) wrong. Here are the rebuttals, in brief.

The current economic position of the country is the result of the global financial crisis (there is an argument that liberalisation in the finance sector caused this, and Labour are responsible for that – but it was the Thatcher Government that started to liberalise).

All the evidence is that the markets are not worried about UK government borrowing – Greece, Spain and Ireland are all facing market jitters over their recessionary budget cuts, instead.

There is little evidence that, with global demand still weak, private sector investment will create jobs even to compensate, let alone outpace, the cuts in employment resulting from reduced government expenditure.

And, finally, if all the previous points are valid, the ‘deficit deniers’ are actually right – you get the distinct feeling that Martin Wolf’s (quiet) outrage is mostly the result of being lectured about economics by George Osborne.

Despite the hugely cogent argument advanced by Balls and Wolf (and, for over a year now by … ahem … the TUC), the real political poser is this. Will the public desert the coalition as the cuts develop from proposal into grim practice? Or will the superficial intuitiveness of treating the public finances as if they were household finances (a problem identified by Keynes in very similar circumstances) mean that while people oppose cuts which directly affect them, they fail to translate that into generalised opposition to the Government’s overall economic policies?

4 Responses to Ed Balls and Martin Wolf: why the Government’s economic policy is wrong

  1. Gilbert Hall
    Sep 9th 2010, 9:11 am

    If you take into account the ever increasing unfunded public sector pensions and the Public Private Partnership, Labour was borrowing about 7% of GDP per year in the boom years. This is why we are in such a mess now and the country would be in a much better economic position if the Labour government had taxed more or spent less. On other occasions Martin Wolf has blamed Gordon Brown for the extent of the mess we’re in.

    The bond markets are certainly not worried about UK government borrowing but then we have a Con-Lib government. This shows that the markets are not worried that the cuts will push the UK into a major recession leading to even greater government borrowing. Maybe the markets would be worried if we followed the policies suggested by Ed Balls and Martin Wolf. We simply don’t know. Martin Wolf seems to be suggesting that a government can responsibly borrow and borrow until the markets start showing their concern. I think that would be a crazy course of action. The bond markets can change their opinion overnight. Even Greece could borrow cheaply a year ago. By the time the markets are working to a different story it’s too late! Even the Con-Lib government is counting on borrowing huge amounts over the next 5 years.

  2. Owen Tudor

    Owen Tudor
    Sep 9th 2010, 11:16 am

    Gilbert, I take your points.

    Certainly the TUC wanted a greater role for taxation in funding public expenditure, and we still want to see a greater role for taxation in bridging the current public sector deficit (alongside growth and, in due course, reductions in certain expenditure) – hence our support for a Robin Hood Tax on financial transactions.

    In terms of the point you make about the markets, I understand it and don’t totally disagree: they can be capricious and bullying. But I do still think that:
    (a) Britain is not Greece;
    (b) massive cuts which risk a double dip recessionjust in case the markets don’t like Government borrowing is a huge gamble and I’d at least like some evidence that markets were actually worried rather than potentially worried; and
    (c) I don’t think the coalition’s policies on cutting public expenditure are actually principally driven by fear of the markets anyway – I think it’s driven by a desire to shrink the state.

    Especially for that reason (ie I don’t think George Osborne actually believes his own rhetoric), to suggest that people opposing the coalition’s cuts policies are ‘deficit deniers’ is an insult to the intelligence. Continued borrowing to keep public expenditure up so that recession is avoided is of course also a gamble. But I think it’s a better course of action.

  3. Owen Tudor

    Owen Tudor
    Sep 9th 2010, 2:46 pm

    The point I make above about Osborne using the public sector deficit as an excuse to make ideologically driven cuts to the public sector is more fully explored by Angela Eagle at http://www.progressonline.org.uk/articles/article.asp?a=6715.

  4. Unlikely opponents of coalition cuts | ToUChstone blog: A public policy blog from the TUC
    Sep 10th 2010, 5:09 pm

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