Mark had decided to lay in to the superb Fairtrade Foundation on the grounds that it misled people because it didn’t argue that the best driver of growth and living standards was free trade.  Leaving aside that this must be one of the lamest shots at a bit of media coverage by setting up a fake conflict, it struck me that anyone who can still make that claim in today’s world has simply given up on any evidence based reasoning. 

I’m very wary of protectionism but it is blindingly obvious that the countries that have generated huge leaps in living standards for themselves over the last three decades (e.g. Korea, China, Japan) did so by developing domestic industries and capacity behind barriers before very slowly opening themselves up to the world market.  Indeed China, currently growing at around 8% per year, still operates behind considerable restrictions on investment for example.  And I’m sure if Mark were to lecture Asian countries on the benefits of the current inflationary free flow of Western money into their economies, he’d get a pretty big flea in his ear as well.

So if religion is really about faith in certain principles without recourse to evidence (and I mean no disrespect at all here – to religious people, at least), then surely neo-liberalism fits the bill.  However, if I had to choose, I’d much rather be a Jedi Knight.

Download the 3rd Economic Report

The TUC’s latest Economic Report contains the usual round-up of the latest data plus a detailed briefing on public deficits, debt and what the cuts could mean for individual departments and welfare.

As I’ve pointed out before, this sort of post-crisis tension, should worry us all.  It should also leave us wondering whether the biggest political debate of coming months and years might not be austerity (or at least, not austerity alone) but how the UK should react to a round of competitive devaluations and, more widely, how it should respond to the rise of China.  It might be wise for Labour to start considering its response now.

PS. It is worth noting that the response of at least one influential policy maker to Ireland’s problems has been to say that austerity has not yet gone far enough.  Note to the UK’s future: never assume that abject failure will deter a deficit hawk!

In the pre-election period, members of David Cameron’s senior team would privately argue that the state had become so bloated under Labour that they would find plenty of fat to cut before they hit bone. They believed quite a lot of the deficit could be mopped up through “efficiency savings”.Now they know better. It is one of the easiest cries in opposition to shout: “Cull the quangos.” That is proving hard to do even for such reflexive quango-cullers as Tories. One Conservative minister says: “At first glance, you think: that can go. Then you take another look and you find that a lot of these organisations exist for a purpose.”

Some ministers say they are finding examples of wasteful spending that can be terminated without much impact on the public. Others have gone looking for relatively pain-free savings and come back empty handed. One minister says: “I keep thinking that if I dig deep enough I will find something, but to be honest there isn’t all that much.”

Then there is the human factor. Labour tribalists won’t believe this, and the Treasury axemen won’t like it, but it is quite rare to find a minister, Conservative or Lib Dem, who relishes firing people. They are already having to confront the personal cost of cuts when making decisions about their own civil servants. One Tory minister says: “We all attacked ‘faceless bureaucrats’ when we were in opposition. They aren’t faceless anymore. They are people working in the department and they are nice people. They are people with children, people with mortgages to pay.”

Much more of this sort of stuff from the Coalition and maybe we’ll soon see Gordon’s Fault opening up somewhere under Whitehall.

One of the recurrent claims of the Government, repeated to much fanfare today, is that Labour got us in to our fiscal mess by spending too much. In particular, it is often claimed that if Brown had paid down debt and built a surplus before the Crash, we would not be in the position we are now.

It is interesting, therefore, to look at the pre-Crash fiscal condition of some countries now with high deficits to see if this is borne out.

According to the OECD (PDF), seven of its member countries exceeded the OECD average deficit of -7.9% by the end of 2009.  The table below shows what their deficit as a percentage of GDP was in 2007 compared to 2009:

So, in fact, three of the countries now in the direst state had surpluses before the Crash and four were in deficit.  Indeed, Iceland had one of the healthiest fiscal positions of all OECD nations  in 2007.

The one thing these countries do seem to share is not a bad deficit position prior to the 2008 meltdown but economies heavily reliant on banking and/or construction - the sectors probably hardest hit by the Crash and recession.  There must be a lesson there but I’m not sure it’s the one this Government has drawn from the experience of the last three years.

There is also some confusion about whether the OBR is predicting jobs growth of 2 million or 2.5 million by 2015 and how this fits, if at all, with the HMT’s leaked forecast of 2.5 million new jobs.  The key point, however, is that either level of jobs growth could credibly create new work for all those who have lost their jobs since the recession began and those who are likely to lose their jobs as a result of the cuts announced in the Budget. An issue of some economic and political importance to say the least.

One can debate the OBR’s forecasts in a number of ways. One possible method is to compare it to the historical record on jobs growth.

For the sake of argument we can say that the OBR is predicting either 2 million or 2.5 million jobs growth over five years off the back of average annual GDP growth of 2.5% (as stated in the OBR Budget Forecast).  How does this compare to the experience after the 1980s and 1990s recessions?

Assuming that the OBR’s forecasts begin around the second quarter of positive growth after the end of the recession (which was roughly where we were at the beginning of this fiscal year), we can see the following:

After the recession of 1980/81, 2 million jobs were created in the economy over a period of seven years off the back of average annual GDP growth of 3.6%.  2.5 million jobs were created over eight years with GDP growth of 3.5%.

After the recession of 1991/92, 2 million jobs were created over a period of nine and a half years with average annual GDP growth at 3.2%.  Creation of 2.5 million jobs took eleven years with growth of 3.1%.

Against this experience, the OBR forecasts do look optimistic: it is predicting that post-recession employment will rise significantly faster than in the 1980s or 1990s on a slower growth rate.

It may be that the OBR has extremely good reasons to expect a much faster pick-up in employment.  In its Pre-Budget Forecast and Budget Forecast it suggested that demographic factors, low labour costs and early stabilisation in the labour market gave it cause for optimism. But all of these factors are only mentioned without any detailed account of their significance or impact.  Indeed, the Budget Forecast seems to give equal weight to other factors which might hold down a labour market recovery: a collapse in demand and a rise in labour costs.

This makes it very difficult to make any strong assessment of the OBR’s reasoning and hence its forecasts.  This might not matter if it wasn’t for the fact that the OBR’s work is clearly not only crucial to the decisions being taken by the Chancellor but have also become matters of intense political, market and public interest.

Usually we might be able to rely, to some extent, on the fact that the National Audit Office would provide independent scrutiny of the underlying assumptions as it does for the Budget itself.  But all we have had so far from the NAO is an assessment of whether the OBR is operating independently – nothing on the content of the OBR reports themselves.

Given how important the OBR has become and how much uncertainty both economically and about its own methods it is generating, I would have thought this should at least be an issue for an urgent inquiry by the Treasury Select Committee if not the Treasury itself.

UPDATE: This blog post has been covered in The Guardian today.

The model reveals that:

the average annual cut in public spending on the poorest tenth of households is £1,344, equivalent to 20.5% of their household income, whereas the average annual cut in public spending on the richest tenth of households is £1,135, equivalent to just 1.6% of their household income.

The graph based on the data tells its own remarkable story (you can click on it for a bigger version):

The Observer has a report on the study today.

The IFS analysis concludes pretty bluntly that the:

overall impact of yesterday’s measures was regressive.

This a pretty serious dent to Osborne’s proud claim that his deficit reduction will be fair.  But also to his oft-repeated assertion that he is being straight with the British people.  There could be an uncomfortable few hours in the news studios to come!  And expect Labour to throw this at the Lib Dems and the Government over and over again.

So why, a casual observer might ask, is George Osborne about to slash spending and raise VAT – measures which will damage confidence, reduce growth and spending and hence drive down those desperately needed tax revenues?  I know the Tories have never been too hot on evidence-based policy but this has to be a new low.