Economics

Fiscal foolishness

Budget Cuts sign with clouds and sky backgroundI’ve had an unusual and vaguely discomfiting experience. I found myself largely in agreement with a leader in the Economist. I may need a lie down.

I can console myself with the thought that what the Economist is saying – that the Conservatives’ fiscal plans for the next Parliament are damaging nonsense – would seem to be pretty much the majority, if not the consensus, view. Seeking to legislate to remove the deficit through slashing spending while at the same time delivering a tax cut is not the most impressively coherent agenda ever advanced. It will undermine public sector functions that are vital to the overall success of the economy. And it will almost certainly slam the brakes on the economy at the same time as inflicting further pain on some of the poorest in society.

The main difference of opinion seems to be around Osborne’s intentions. Are his proposals serious? In which case, he’s a bit of an idiot. Or do they signal an implicit acceptance that the Conservatives are not going to win next May? Osborne is simply trying to stake out a position he will never have to implement but which will provide a platform from which to mount an attack on the incoming government’s actions when they are, inevitably, less fiscally stringent. In which case, he’s a bit of an idiot.

Most commentators might think Osborne is talking rot, and that, at the very least, Labour’s proposal to exempt infrastructure spending from the self-imposed fiscal straightjacket is a step towards a more plausible policy. But fewer have offered alternative approaches towards bridging the gap in the public finances.

Here the Economist comes off the fence and sets out a distinctive proposal.

The solution is massive increases in taxes on the rich. After all, many of the richest have benefited mightily from the Government’s approach to dealing with the global financial crisis, as wealth is redistributed upwards. So it’s only fair that the Economist’s principal constituency coughs up.

Only kidding.

The Economist has pensioners in its sights. Its proposal for reducing the deficit is to reduce the rate of uprating for pensions and to remove state pensions from the top 20% of retirees. This would require abolition of the Coalition’s ‘triple lock’ on pensions. The Economist is aware that, even if we thought this approach was economically desirable, it is politically problematic, to say the least.

I don’t necessarily agree that the answer to our fiscal woes is targeting pensioners. But if it were a trade-off between targeting pensioners and further benefit cuts to working age adults or young people then I’m certain that pensioners have more headroom to absorb the cuts than younger people.

My bigger point is that while I am not averse to ringfencing in principle, there comes a stage at which it is counterproductive. By fettering discretion in this way resource allocations become hopelessly distorted and inefficient. This is the really basic economics of opportunity costs.

I have always been less enthusiastic about the pension triple lock than many who see it as one of the Liberal Democrats great achievements in government. Pensioner poverty surely needed dealing with, but the triple lock, as a rigid rule, inevitably means that in the longer term – if the overall budget envelope is not going to expand – spending under some other heading is going to have to be continually reduced to accommodate more spending on older people.

We can see the same thing happening in the health context. Pledges to protect the NHS budget translate into swingeing cuts in other areas. While this might be politically desirable, it is practically perverse. So we end up with deep cuts in social care and housing budgets which mean that people cannot be discharged from hospital back to their own homes or suitable accommodation in the community. It should be no surprise to anyone that the problem of bed blocking has re-emerged in the hospital sector. That was an inevitable consequence of the decision to ringfence health spending but slash complementary budgets. It was entirely predictable.

Of course, in the health sector it would have been possible to avoid this. If policy had been more holistic and framed in terms of maximising health and wellbeing, rather than spending on healthcare per se, then there would have been more room to manoeuvre. Spending on “the NHS” might have been lower but population wellbeing would have been higher as a result of maintaining spending on domiciliary care or extracare housing, for example.

But this is a more complex argument to make. It’s more difficult to package in a soundbite or fit on a leaflet. Even though we’d actually be better off as a society, this approach would leave politicians open to accusations of undermining the NHS. And we all know there is no worse accusation than that in UK politics. Electoral suicide.

Political imperatives resulting in suboptimal policy? Seems hard to believe.

Image: © gustavofrazao – Fotolia.com

Update (01/12/14)

Reblogged to:

Guerilla Policy (30/11/14)

Pieria (01/12/14)

 

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3 replies »

  1. Interesting post, thanks for this. Your arguments about prevention – investing in health and wellbeing up front rather than later spending on the NHS – are very pertinent at the moment but I can’t help but think they could also apply to later life too; e.g. thinking about how we can improve outcomes and reduce costs for those who are advanced in years by acting earlier. Some of the ideas in this report (http://www.community-links.org/earlyaction/looking-forward-to-later-life/) might well be of interest to you!

  2. Alex, hope you don’t mind me coming in again today. Had thought of commenting when I first read this. You seem to be accepting without question the desirability of targeting a current balance by 17/18.

    Actually if we this aim were pushed out to end 2020, we could have virtually cover the next Parliament with just the announced cuts (ie for 2014/15).

    Why have a chimed in now?

    Because apparently the Resolution Foundation is also pointing to this option:

    “Taking longer to reduce the deficit and continuing to borrow for capital spending gives the other parties a lot more room to manoeuvre. For example, by extending the target for a current budget surplus to the end of the decade and borrowing for capital expenditure, a future government would only need to make a further £4 billion in cuts after 2015-16. And that figure includes the increased debt payments brought about by higher borrowing.

    “Using the OBR’s projections for growth and tax revenues, the Resolution Foundation reckon that this would still enable a government to run a small current surplus by the end of the decade. It would be much a slower reduction than the one the Conservatives are advocating but the overall debt-to-GDP ratio would still start to come down by 2020.”

    • Hi Bill – happy for you to come in as often as you feel the urge!

      I guess my point was that even if one were committed to pursuing the target for overall spending then the way in which it is being pursued is not very sensible – in terms of how spending is prioritized. Whether the target itself is sensible is a different matter. There is little in your comment I disagree with. Osborne has yet to make a credible case for why his proposed approach is in any way economically desirable.

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