Plan B is crazy
On Monday, a handful of Lib Dems wrote a letter to The Guardian (itself hardly newsworthy!) expressing “broad support for the Compass Plan B proposals reported in the Observer” the day before. Notwithstanding the fact that these are the “usual suspects”, Lib Dems that have proved very keen to cozy up to the Labour Party, the question remains, does Compass Plan B have anything to say about how we might resolve our economic woes?
Let’s first consider the Compass proposals:
What would Plan B entail in the short term?
- The cuts would be reversed until the economy is growing strongly.
- A new round of Quantitative Easing (money created by the central bank) would be directed to a Green New Deal, to insulate and prepare large numbers of buildings to generate renewable energy.
- Increasing some benefits for the poorest who are then likely to spend any extra income, this would help get the economy moving again.
Let’s look at those first three points in turn:
Reversing the cuts would be a disaster. Firstly, it would send a clear message to the markets that the UK has even less fiscal rectitude than Greece. At least they are implementing an austerity budget, albeit half-heartedly. If we now reverse our cuts, we the markets will panic and our borrowing costs will sky-rocket. And for all those anti-market fundamentalists out there who may want to dismiss “The markets”, in this context “the markets” are all the people who are actually able to lend us money; without them, we will need to find another £150 billion of savings TODAY!
Furthermore, as even the devout Orange-booker Gareth Epps knows, ripping up a budget mid-year and telling the entire public sector to go back to the spending-drawing board would be massively disruptive. It’s not easy to turn the tanker around: in many cases, departments and even whole organisations have been abolished, and staff have already been let go. But in addition workers will be left in an upsetting limbo, unsure of whether their jobs have a future or whether they are only being kept on for as long as the government remains in panic mode.
And is Compass really saying that all the cuts are bad? Has nothing been abolioshed that was not a waste of money?
Frankly, the government would be better off looking for extra unnecesary expenditure and cutting that too, using the tens or even hundreds of billions saved to cut taxes. That really would stimulate demand.
The proposal to reverse the cuts is economic genius compared with the proposal to use a new round of Quantitative Easing (money created by the central bank) to fund a Green New Deal. At this point, a little distinction is worth noting. While QE is inherently dangerous and inevitably inflationary, so far the QE that we have experienced has been used to re-capitalise the banks and encourage them to start lending more. This isn’t good, but it’s not the Weimar Repblic. Credit Easing – making money to lend directly to companies, is probably even more risky. But neither of these are what Compass is suggesting.
No. Compass is suggesting that the government print money to fund government spending. And that, dear reader, is the Weimar Republic. Using QE to pay for a Green New Deal would repeat the greatest mistake in the history of government, which was pithily summed up by an economist, usually referred to fondly among Compass-leaning Lib Dems and even Labour chancellors:
“…Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”
What about increasing benefits for the poorest so that they spend extra? Would this really help get the economy moving again? Firstly, one has to consider where the money is coming from. If it comes from taxes, it’s simply robbing Peter to pay Paul: there is no increase in “aggregate demand”, just a shift of demand from those who earned the money to those who did not. Whatever your enthusiasm for redistribution, don’t pretend that you can re-distribute something bigger!
What if it is funded by borrowing? Well, it may seem superficially attractive if you ignore the points about markets above, but unfortunately, the evidence suggests that people respond by saving more in anticipation of the higher taxes to come, thus killing off any extra growth. No dice, I’m afraid. It’s a non-starter.
Actually, Compass do seem willing to fund some of their spending through increased taxation:
- It would cancel Private Finance Initiative debts, saving the nation £200bn in debt repayments.
- By Introducing a Financial Transaction (Robin Hood) tax on the banks
- The £70 billion in yearly uncollected tax would be closed.
The third is too ludicrous not to brush aside first. The idea that any government is simply ignoring £70 billion in yearly uncollected tax is absurd fantasy. Either it’s made-up fantasy-tax (like the £6 billion that Vodaphone don’t owe the British taxpayer) or there are very good reasons why it’s not being collected, and a Compass-led government would find it no easier to collect that the current one (or the last one!).
Cancelling all PFIs is nothign more than populism. Indeed, it would be illegal without (and possibly even with) legislation. Effectively, PFIs are a loan – a private contractor gives something to the government (say, a new hospital) in return for a revenue-stream that repays the loan. If HMG starts passing laws repudiating their loans, then it will be treated as a default and Britain will be declared bankrupt. What is more, it will shatter the confidence of investors and prevent the UK ever getting help financing capital projects again.
Finally there’s the Tobin Tax (Robin Hood, it is worth remembering, fought against tax-raising government officials!). There simply isn’t space enough here for this one. Suffice to say that it will simply make it more expensive to lend and borrown money, and so there will be less of it, which means a less efficient economy. There’s much more to say, but where to begin? (Well, maybe that imposing it unilaterally in the UK will simply destroy one of our biggest industries to the benefit of the French and the Americans).
According to Compass,
Plan B would mean that the Government pays down the deficit through growth and spending adjustments only when the economy is in good enough shape to
which is a little like saying that we can’t thrown the ballast out of the hot air balloon until we’ve got the damned thing off the ground!
In summary, then, Compass’s Plan B is, in reality, Plan Crazy. It would massively destabalise the UK economy in both the short and long terms, and cause untonld damage. It is rather a shame, therefore, that a handful of Lib Dem malcontents felt the need to so publically support it!
November 2nd, 2011 at 8:10 am
“benefit of the French and the Americans”
More likley Singapore, Hong Kong and Dubai. But a valid point.
November 2nd, 2011 at 9:35 am
A Tobin (transactions) tax has become the sort of general purpose solution to all the country’s problems.
But AIUI when it was introduced in Sweden it raised massively smaller amounts than was projected. I think when it was originally proposed Tobin saw it more as a stabilisation mechanism than a revenue raising one (something which does not make it a bad idea)
November 2nd, 2011 at 4:49 pm
@Psi: That’s the price you pay for writing at 2am! I meant to say “the Germans and the Americans” as I still think that Frankfurt and New York are bigger plyers in the international financial markets. But you are right that there are other, newer competitors as well.
@Hywel: Another problem with writing at 2am is that by the time you get beyond paragraph 10 you tend to be a bit tired, so I didn’t go into the Tobin Tax as much as I should have done. That, and this was already a longer post than I’d planned.
I agree that it has become a bit of a panacea amongst those who are looking for a source of other-people’s-money to spend. I suspect that it has been spent ten times over, too: some want it for international development, others to create a bank stabilisation fund, and Compass want it to fund regular expenditure.
I suspect that part of the problem is that it hasn’t really been examined properly and in depth, which is why a lot of the discussion has been led (and “informed”) by people who want it to be a success.