It was only a matter of time I suppose but the IMF is now focusing…
British Shadow Chancellor promising the impossible
The British Labour Party officials and politicians have all been cock-a-hoop over the last week in Liverpool as they participate in their Annual Conference with the latest modelling suggesting they may win a “landslide 190-seat majority” at the next national election leaving the miserable and incompetent Tories with only 149 seats (currently 352) (Source). The contrast between the two national conferences this year could not have been greater. The Tories looked and sounded divided and like losers. The Labour Party looked like winners and united (although that latter condition has only come from the Stalin-like purge that the leadership has conducted on the Left of the Party). The Labour Party is now schmoozing the corporate bosses and each day that it passes it sounds more like what the Tories used to be like, before the rabid Right took over. That assessment is based on the promises that the Labour Party made at its recent Annual Conference. While the details are still relatively general, my assessment of the fiscal promises the Shadow Chancellor made last Monday and elsewhere is that the conditions that would be required to satisfy them will prove impossible to achieve.
I had a lot to say about the so-called Fiscal Credibility Rule that the Labour Party took into the last election.
The first version of it was poorly conceived and was internally inconsistent.
There was no way under any known conditions that the Party would have been able to satisfy that.
At the time, the economists who advised the Labour Party on the construction of the rule were highly abusive towards me on social media for daring to question their judgement.
It turned out that shortly before the election, the Rule was changed, without any fanfare or acknowledgement, to try to shore up the weaknesses that I had identified.
The economists were silent on the changes.
So the point of these Rules is political – the Labour Party want to appear responsible managers of the economy and have been scarred by Tory claims that once they get into office the Labour Chancellor will go on a spending spree.
The problem with holding these rules out as a demonstration of competence is that you then have to satisfy the conditions.
The worst thing that can happen is for a political party to define competence in terms of some aggregate that they have limited control over its final evolution, and then miss the benchmark.
In my view that is worse than having no rule at all.
The general problem with fiscal rules, is as stated above, the government of the day does not have the capacity to directly control all variables that come together to determine the final fiscal outcome.
I discussed that issue in this blog post (among many) – The Weekend Quiz – December 17-18, 2022 – answers and discussion (December 17, 2022).
The point is that essentially non-government, spending and saving decisions, determine economic activity in tandem with government spending and tax decisions; and tax revenue and welfare spending are functions of that economic activity.
So, if the non-government sector reduces its overall spending, then other things being equal, economic activity falls and tax revenue declines, and as unemployment rises, welfare spending also increases.
The net effect is that the fiscal deficit increases or a fiscal surplus declines.
What this means is that government forecasts of projected fiscal outcomes are notoriously inaccurate, and should condition caution in promoting such fiscal rules.
The other situation that typically arises is when a government tells the people that the fiscal deficit is too high and embark on an austerity campaign, which reduces the net public spending and, in turn, slows economic activity.
They then wonder why the fiscal deficit is rising, as unemployment rises.
But the explanation is obvious.
At the British Labor Party conference over the last week, the Shadow Chancellor and the leader have been talking relentlessly about how they will offer cast-iron fiscal discipline,once they take office after the next National election.
On Monday, the Shadow Chancellor outlined the Party’s plans in relatively broad terms.
Jargon was seeping out everywhere and it appears we have a new term – ‘securonomics’ – aka a sop to business leaders who believe in fiscal rules and all the banter that surrounds them.
The corporate sector seems impressed though by this new descriptor of what is effectively just neoliberalism dressed up in softer terms.
While the detail is still to be published, it appears that the British Labour Party will offer to the people the following as part of this ‘securonomics’ platform:
1. Plenty of corporate welfare – either directly in handouts or indirectly via further deregulation.
When Labour was last in office we had the ‘light touch’ regulation which effectively became no regulation or oversight.
That led to the GFC and the collapse of some of their main financial institutions.
Expect more of the same.
The corporate sector cannot be trusted to deliver outcomes for the workers – and last time I looked the Party was still the Labour party.
2. A series of fiscal type promises that they will not be able to keep, but, in their efforts to meet the targets will undermine future prosperity.
The Shadow Chancellor claimed in her – Conference Speech (October 9, 2023) – that:
… a Labour government will not waiver from iron-clad fiscal rules.
We will see about that!
3. The depoliticisation of macroeconomic policy will continue:
… we will protect the independence of the Bank, the Office for Budget Responsibility … I will put forward a new Charter for Budget Responsibility, a new fiscal lock.
Guaranteeing in law that any government making significant and permanent tax and spending changes will be subject to an independent forecast from the OBR.
4. More economic fictions:
Taxpayers’ money should be spent with the same care with which we spend our own money.
Our own money is the taxpayers’ money.
We pay taxes for sure.
But the government doesn’t use our money, we use their money!
5. Fallacious household budget analogy perpetuated:
I remember my mum would sit at the kitchen table, with her bank statements and her receipts.
We weren’t badly off, but we didn’t have money to spare.
To my mum, every penny mattered.
6. Incoherent goals:
… we will slash government consultancy spending …
Inconsistent because she did not say the Party would expand the public service employment.
The reason consultants have proliferated is because many of them used to be public servants who were shed as successive governments cut spending and outsourced, privatised and more.
In the second-quarter 1992, public servants accounted for 23.1 per cent of total employment in Britain (Source).
By the June-quarter 2023, that percentage had fallen to 17.9 per cent.
In the December-quarter 2008, the total public sector employment was 5,249 thousand.
By the June-quater 2023, that number has fallen to 4,989 thousand.
Those cuts came with cuts to services, research skills, information skills etc even though those skills remain essential for economic and social policy making.
Neoliberal solution: enter the consultants.
So, I will await the Shadow Chancellor’s promise to significantly increase public servant employment.
I will be waiting a long time!
7. As if she was back in Blackpool in 1976, the Shadow Chancellor claimed in her – Conference Speech (October 9, 2023) – that:
You cannot tax and spend your way to growth.
Juxtapose that against what James Callaghan told the Conference in 1976 (Source):
The cosy world we were told would go on for ever, where full employment would be guaranteed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone.
That Speech really epitomised the first political turning point to neoliberalism and Monetarism in Britain and the world by the social democratic political movements and parties.
Callaghan went on to establish the NAIRU as the centrepiece of Labour Party policy:
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.
Reflecting on the Speech by Rachel Reeves on Monday, one concludes there has been very little progress in the 47 years since Callaghan abandoned the Labour Party charter to priortise working people.
They still talk as if they care about the workers but their policies and stances are quite different.
8. Some have interpreted her Speech as indicating a large public investment in climate change etc – a state-led campaign to revitalise infrastructure etc.
Nothing could be further from the truth – the Shadow Chancellor said:
As our competitors understand, there is a role for government in encouraging and de-risking investment in new and growing industries.
The Labour Party is really just following Biden’s approach hoping that the largesse and breaks they give corporations will translate into a higher investment ratio.
It really hasn’t worked in the past.
And the degraded public infrastructure, and I include all the privatised utilities in that that have been milked dry by their corporate raiding owners, will require a massive investment injection.
And that is before we get to the climate issue.
Stay tuned for a poorly constructed infrastructure plan that will fall short by far of what is required yet deliver massive profits to corporations.
9. On that, the Shadow Chancellor said that they would:
– ensure recurrent expenditure was matched with tax revenue (she used the erroneous term ‘paid for’) – in other words, balance the primary fiscal position (which is expenditure net of interest payments on outstanding debt minus revenue).
– reduce the debt to GDP ratio over the five-year term.
– They will invest an additional £28 billion per year on green investments by the end of the five-year term, beginning in the second half of the five-year period in office.
How do we assess all that?
First, I did some regression analysis as preparatory work to assess the tax elasticity – which means I just tried to work out how responsive over a long period of time is the growth in tax revenue relative to overall real GDP growth.
That gave me some starting parameters to see what might happen to tax revenue under different GDP growth assumptions over a five-year horizon, assuming that the Labour Party was now in office (so I could use June-quarter 2023 known data as my starting point for simulations).
It is approximate and if the Labour Party want to hire me to do something more detailed then they have my number (-:.
Recurrent expenditure has been growing on average at about 4.25 pre cent per annum over a long period if we exclude the pandemic.
If we exclude the pandemic, then the British economy has grown on a compound annual basis by 1.7 per cent per annum since the end of 1998.
My rough calculations suggest that the British economy would have to grow at around 2.5 per cent each year from now for the 5 years of the term in office for the tax revenue to catch up if the growth in recurrent expenditure growth was unchanged.
If we add in capital investment, then things get even more tricky.
My conclusion is that under reasonable circumstances, there is no way that the British government will be able to cut the debt-ratio over the five year period without significant cuts in recurrent spending.
That also makes it much harder to achieve a GDP growth rate anywhere near what would be required to meet the tax equals recurrent spending part of the rule.
The only way it could be achieved would be for the British private sector to invest at rates never seen in the modern era.
Pigs might fly!
Second, the required growth rates to get any where near the fiscal parameters necessary to meet the conditions of these sort of rules, will likely be beyond the nation given the state of the labour market.
There would have to be a massive mobilisation of those that can work but are currently out of the labour force and/or a massive migration plan.
They might be able to get more labour into their stated areas of expansion – battery factories, etc – if they drive the carbon-intensive industries out with tax and regulative rules.
But I see none of that in their narratives to date.
Third, Rachel Reeves told the Conference that:
Labour will commit itself to rebuilding that security.
To restoring that hope.
Labour is ready to serve.
Ready to lead.
Ready to rebuild Britain.
If the Labour Party really wants to do those things it has to start the massive repair job that has been left by the Blair years, the Brown years, and then the last 13 years of disastrous Tory rule.
That massive repair job will have to include fixing the health and education system, the restoration of local government capacity, more public sector workers (teachers, nurses, doctors, etc), not to mention addressing the shocking state of transport, water supply, electricity generation, and the rest of the privatised essential services.
How much spending will that require?
Off hand, lots.
They will not be able to do all that within the rules they are claiming will be iron clad.
Either the debt-ratio will have to rise, or taxes will have to go up, or they can do the right thing and abandon all that sound finance machinery and start using their fiscal capacity properly.
Conclusion
I will write more about this when the situation firms up and we get an actual policy document from the Shadow Chancellor rather than hot air.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.
“in other words, balance the primary fiscal position (which is expenditure net of interest payments on outstanding debt minus revenue).”
My understanding is that the sleight of hand is to exploit the difference between accrual accounting and cash accounting – one of the reasons the last Labour government switched British government accounting from a cash basis to a resource basis in the first place. It allows for more obfuscation.
Reading some of the output of those who are clearly listened to in Labour circles, they appear to think that if they invoke the magical power of amortisation, that will mystically spread the physical requirements over time to the same extent as the financial ones.
Which is what happens when you have a core belief that there is a one-to-one relationship between money and stuff.
The physical flows don’t add up. They simply don’t have the manpower to do what is required and likely wouldn’t have even if they blocked private sector activity. Too much of British labour capacity is tied up in fluff industries.
Moreover why does five years investing in training medical graduates have to be matched by ‘tax revenue’, but five years of people building a bridge does not? Same number of labour hours invested in both cases.
The madness of clowns.
In Portugal, the latest polls have failed miserably in predicting the outcome of the general election in January 2022 and also recently in the Madeira Island regional election.
As many of us already concluded a long time ago, polls are paid for and the ones who pay have the intention to bias the outcome.
No diferent from the UK.
The traditional parties have become lobbyists of large corporations and those corporations are paying for a service.
They are paying fot vassals, not polititians.
Tories or labour are expected to do exactly what they are told to do.
Remember Trussnomics?
Well, shock therapy only worked in the 1970/80′ and they kicked her to the middle of the street.
They want smart vassals.
But, somehow, voters have changed their behavior and polls mean nothing now.
As Anat Admati (Professor of Finance and Economics at Stanford Graduate School of Business), wrote, “Corruption has become the system.” (thanks to Pam Martens and Russ Martens at “Wall Street on parade”.).
And, as history shows, corrupt societies all end up in the same way – doom.
It is Labour’s messaging that is real. The economic plan is in fairyland. I am not an economist and I wish I was. I wish I understood it like most of the country. We do not learn economics at school either. I thought after 2008 econmics was all washed up. I wish I could argue like you. But I do know how important the Labour Party in its current iteration sees the messaging around trust and economic literacy, because of its history. It feels it has to win over the City and listen to its wealthy donors who certainly do not and never have had workers’ interests at heart. It was Brown’s goal to be applauded at the Mansion House. Light touch regulation offered in exchange for applause. Look wehat happened. The confidence fairies all live in the brains of Mandelson, Reeves Mattinson and Starmer. This is not to say that they won’t try and go after the Covid fraudsters, but it will cost them more to do so than they will ever get back I suspect. Its a mere bagatelle really. Messaging again. And the Tories have left no cream. Anything that could be raided has been ad gone into theirs and their friends’back pockets. The money is all spent basically, and those instiutions we have got that we wanted to keep such as the NHS, are already suffering from profound structural damage through underfunding and privatisation already well-linked in to public sector fiunds in so many areas since Blair and growing exponentially. There is no hope. Capitalism is in its death throes.
Who attacked your analysis in 2019 from Labour Bill? Anyone close to McDonnell? I am a fan of McDonnell who does support workers but am definitely not a fan of Rachel Reeves. Hers was a speech rooted in political messaging not in economic reality. Focus groups have shaped political speeches and messaging. Everyone was on a tight leash before during and post Liverpool. It is axiomatic that Labour concentrates all its PR efforts on sounding confident. Every promise in its Party Political Broadcast post conference is they announce firmly, costed! Labour’s fears are rooted in history. Hattersley and Labour in 1987 were simply not trusted with the economy and it was the weakness that Mandelson and Mattinson learned and that swept Labour into power in 1997 on an upturn and a dot com revolution that fizzled out. The wants and the needs will never be satisfied by a Party that puts power before people’s needs which is what this Labour Party is all about. For power, messaging is more iomportant than real policies that can work. To get in, it has to be believed to be trusted even when it does not really know what it can do or is doing. The Britain has been raided consistently since 1979 and weakened even at the height of its monetarist excesses. Now, wealth can be injected or taken away by massive corporations and lender countries entirely on the basis of how much more they can make out of a drained Britain. We have no beneficial European stake other than in NATO and no energy resources other than small fields which will go to corporate foreign licensees. We could be likened to a supermarket with empty shelves and few friends.
Guardian editorial on Friday –
“The economist Bill Mitchell blogged this week that under Mr Hunt’s self-imposed debt rule “significant cuts in recurrent spending” would be needed unless, under the fluttering wings of confidence fairies, businesses invested at unprecedented levels. Even if the money were there, wrote Prof Mitchell, the workers – barring massive migration or a rapid decrease in unemployment – are not. The Labour party ought to take note.”
Not a direct quote, but the online version includes a link to this blog.
Thanks so much for this post, Bill. I need to better digest before sharing it on social media and with my fellow LVT campaigners, with the apology that it’s not about the land issue, because so far as I can see you are the only MMT economist (the only ones that matter) who is interested in the plight of us poor sods here. (I’m glad that you don’t do this too often as I have lots of other work to do.)
I used to be on Labour’s National Policy Forum, Economics Commission (only because not enough people applied) and at the last meeting I recommended Reeves read the Deficit Myth – your Reclaiming the State would be far too leftie for her. She may well have done – after all she has a PPE Oxon, one of the worst qualifications for economics. Ed Miliband has the same – I have a story about meeting that waste of space. Reeves has told me several times at Labour events that she supports LVT… I’d better not go on and on.
@ George S Gordon The Guardian occasionally teases us that someone in its editorial team reads Bill’s blog (not the likes of its ‘economics’ team such as Phillip Inman obviously). Pity though that either by design or idiocy they look at an entire article responding to what the Shadow Chancellor said and then write about ‘Mr Hunt’s self-imposed debt rule’ and that the post-war consensus held till 1984, even though Bill compares Reeves’ speech to Callaghan’s to the 1976 Conference. My comment politely pointing out the error was deleted.