Sunday, June 28, 2015

Responding to Hostile Questioning on Austerity, Jobs and the Deficit

When Diane Abbott appeared on Sunday Politics on 21 June – the day after the massive End Austerity Now demonstration took place in London – there was room for improvement in how she responded to Andrew Neil's tough line of questioning... 


What could she have said that would have made her responses more convincing?

DISCLAIMER: Though the facts are factual, the opinions contained in these responses are my own, and do not necessarily reflect the policy positions of Diane Abbott, Jeremy Corbyn or the Labour Party.


Diane Abbott, let’s look at alternatives to deficit reduction and to cuts in public spending, which is what the (#EndAusterityNow) demonstration wanted yesterday. Does the deficit matter?

It matters a lot less than people are being led to believe by politicians and the media. Unfortunately some leading Labour politicians are also buying into the rhetoric that our biggest economic priority right now is to drive the deficit down and that we need to be looking at spending cuts in order to do that.

It’s a very narrow view of the economic situation. The UK dipped into deflation last month (May), interest rates remain at record lows. What really matters is that we achieve growth, and do so in a way that is sustainable.


Growth may be coming right now, because average real wages are rising by almost 3%...

That is true (Guardian), but it’s important to consider this growth rate - like that of the economy - in historical and economic context. 

The UK’s recovery from the recession caused by the financial crisis of 2007-08 was slowed considerably by the imposition of austerity policies following the election of the Tory/Lib Dem coalition in 2010 (Simon Wren-Lewis). Only a year ago, 2014, average real wages were down at 2004 levels (Guardian). From such a weak base, the growth seen this year is far less impressive than it might initially sound. 

At this point, it would make sense to mention that Osborne changed tack in 2012 and increased spending but. because of the questions asked later on, that will come later...

Also, it’s important to bear in mind what the data actually mean: “average real wages” are average wages adjusted for inflation. As I mentioned earlier, UK consumer price inflation actually went negative in May 2015. In July 2014, it was +1.9% (data). Therefore, the low inflation rate is actually masking weak wage growth.


So should we be borrowing billions more and running a bigger deficit? 

There seems to have become engrained in the public psyche a perception that somehow running a deficit is something that only profligate governments do. But actually when you look back at the records, the IMF’s figures, the Tories ran a structural deficit every year between 1979 and 1997 (Huffington Post) - that’s 18 straight years.

[The government] shouldn’t be taking money out of the economy by imposing austerity policies, but instead listening to what pretty much every eminent economist is saying (Paul Krugman; Ha-Joon Chang et al [Guardian]) and stimulating the real economy. Promoting economic growth and increasing tax revenues, thereby boosting GDP, are often the best ways to get the debt-to-GDP ratio down, and indeed that is the case in the UK (Touchstone Blog; EconomicsHelp) Austerity has been tried and the results are in: it doesn’t work (Krugman (link above; for still more detailed analysis, Mark Blyth’s “Austerity: The History of a Dangerous Idea”).

At this point, Neil would probably have asked his question about Greece, but as the interview actually went he left it til the end - so feel free to jump ahead to that point then come back here!


[Savings from eliminating Trident] don’t save you anything in the next couple of years, and you don’t get much from raising taxes on the rich. Let me be clear, you wouldn’t borrow more?

Trident

Firstly, I support scrapping Trident because it’s the right thing to do, a step in the right direction towards a nuclear-free world (Jeremy Corbyn). Also, I think what a lot of people don’t appreciate about Trident is that it’s not an independent deterrent but is actually largely American-owned (Another Angry Voice). 

We acknowledge the economic impact on Argyll and Bute (where the Faslane base is a major employer) that will result from the discontinuation of Trident (Ian Jack, Guardian) and some of the savings should be re-invested in the region. 

Taxes 

We first of all need to tackle this defeatist attitude that it’s not possible to increase our tax income from the wealthiest individuals and corporations. Unless we get a grip of this, the inequality that has got out of control, and accelerated massively since the financial crisis (Guardian) will just keep on getting worse and worse. Already, the five richest families in the UK own more than the poorest 20% of the population (Guardian). 

There are policies that we could bring in that would go towards addressing this inequality; we need to look at the mechanisms that are being exploited by wealthy individuals and companies to avoid tax and how we can close loopholes. We need to change our relationships with firms that facilitate tax avoidance (SpinWatch). We need to make sure that multinationals that profit from sales to British consumers pay their fair share (Pearson). Where international co-operation is needed to address these issues, we should take a leading role in driving that co-operation.


I’m trying to explore the alternatives; how you would get out of this [deficit]. Given that raising taxes on the rich doesn’t get you that much, in fact it may even be negative, would you raise taxes on Middle England as Jeremy Corbyn suggested in his Newsnight interview? Going into the 40% bracket, should they be paying more than 40%? 

Yes. What I think people sometimes forget is that the higher rates of tax - be they 40%, 50% or whatever - apply only to income above the higher rate threshold. Everyone, even your CEOs and your Premiership footballers, pays basic rate tax on the first tier of their income; no-one actually pays 40% tax on all their income. The 40% really isn’t a high rate by UK historical standards - in the 1950s and 60s it was 90% (Wikipedia)! 


Where does the money [to invest in housing, education etc to create growth] come from? It doesn’t grow on trees, so are you going to borrow more or tax more to get this extra money? 

In the short-term we will borrow more. Despite what the Tories have been telling everyone for the past five years, that’s really not a problem. Our borrowing costs are lower than they’ve ever been (FT), interest rates are near-zero and so is inflation. There’s absolutely no reason aside from right-wing ideology why we shouldn’t borrow more and grow our way out of this slowdown. In the medium-to-long term, as we begin to achieve sustainable growth at the same time as tackling the tax avoidance I talked about earlier, the debt-to-GDP ratio will come down.


How much are tax cuts for the wealthy cost us? How much does the cut in the top rate of tax from 50% to 45% cost the Treasury? 

That all depends on how much the wealthiest individuals (who will have earned the most income over and above the top-rate threshold) managed to avoid! I believe we’re looking at a cost to the Treasury of £3–4 billion per year (Guardian).

More broadly, there is an idea that has been popularised – particularly in America – that tax cuts for the rich can boost revenue rather than costing the Treasury. When economists have actually looked at the data following tax cuts by Republicans in the U.S., they’ve found that it’s untrue (US News). One has to wonder whose interests the people spreading this myth are serving... 


What would happen if we hit the next recession and we still had a massive budget deficit? 

First off, we really don’t have a “massive” budget deficit. We have a modest deficit by historical standards (Data). 

We do need to be prepared for the next recession, and we do that by building our economy on strong foundations for growth, rather than being excessively dependent on the financial industry and on rising house prices (particularly in London; Guardian). Tory policies are leading us down the wrong road, and putting us at risk of a worse downturn in the future.


[If you cannot come out of a recession by making cuts alone], why have we now come out of recession? Why have we now got the fastest-growing economy in the G7?

I think what you’re doing here is taking statistics out of context to make a point that's actually misleading. Yes, we had 2.8% growth in 2014-15, but it’s been 7 years since the crash and onset of the recession and we’re only now just about getting back to where we were beforehand. 

We’ve wasted nearly five years (Simon Wren-Lewis), and that’s been because of the austerity policies of the coalition government. Up to the end of 2012, our recovery was the weakest of all of the G7 countries apart from Italy (Full Fact). Especially considering we’re not tied to the Eurozone with all of its currency’s structural problems, that’s really weak.

What has actually happened - and the Tories have been really sneaky about this - is that it obviously became apparent that austerity wasn’t working. And so, while the government didn’t change their rhetoric, they actually changed their spending policies to reduce the rate at which they were making spending cuts in 2012. The growth that was achieved in 2013 and 2014 follows on from that (Simon Wren-Lewis).

Unfortunately, it looks as though the Tories, now they’re in with a majority, are going to revert to the austerity policies of the coalition’s first two years in office, and we will likely see a downturn as a result. 


If these jobs are so low-wage and so insecure, why are we now in the middle of the longest spell of sustained retail spending since records began? 

I’m not too sure where you’ve got your figures from… The ONS reported that May 2015 represented the 26th consecutive month of growth (ONS). That’s consistent with the GDP data showing that we began to grow in 2013 after the government eased off on their spending cuts (see above) and after three years of weak to non-existent growth since the crash.

Of course, average sales volume data doesn’t tell you all you need to know about retail, and people have seen for themselves the impact of the recession and our slow recovery on their high streets, especially in more deprived regions where the renewed house price boom has had less effect on our towns (Guardian). 
We need to invest in the regions, do what we can to support small businesses and independent retailers and pubs and cafes and restaurants, and make sure that a rising tide lifts all boats and not just the biggest ships. When we put money into the pockets of people with the lowest incomes, and reduce inequality, we’ll start to see real social as well as economic recovery (IMF, via Guardian).


Unsecured credit is now lower than it was as the start of the recession [implying that the increase in retail spending isn't explained by people making more purchases on credit]...

This is misleading, because we’re not comparing the same timeframes. Yes, it’s lower than at the height of the boom (Trading Economics), but it’s growing fast once again. UK consumer credit grew by 6.6% in the year to February 2015 (Bank of England, PDF), so it is likely that a significant proportion of the increase in retail sales volume that we’ve started to see in the past couple of years.


There are 700,000 unfilled vacancies – there are jobs around, and three quarters of the jobs that are being created are full-time jobs...

When we look at the statistics on job vacancies, we see between 2001-08 there were somewhere between 550,000 and 700,000 vacancies in every three-month period until the crash. These numbers therefore represent a typical rate of turnover in the labour market (data from ONS, PDF).

That then dropped to 430,000 in early 2009. Not until the second half of 2013 did the number rise back above 500,000 (data source as above) – once again we’re looking at the impact of the misguided austerity policies imposed in the first couple of years of the coalition government. 


Where are the statistics from the ONS to show that these are all or nearly all low-paid jobs?

They’re not all low-paid jobs but many of them are. The median wage (that of the middle employee if they were all lined up from lowest-paid to highest) makes sense to look at when we're talking about low pay, because it’s less distorted by the extremes at the top end of the scale than the mean wage data are. In 2014 the full-time employee earning the median wage was actually earning less in real terms than they were in 2010 (Full Fact; Full Fact). The median wage is getting closer to the minimum wage (UK Parliamentary Business) – that shows that low pay became more prevalent under the coalition.


If running big deficits and racking up huge debts was the answer, why isn’t the Greek economy booming?

There are so many reasons why that’s not a reasonable comparison to make. First of all, most obviously, Greece is a member of the single currency, the Euro, and it really shouldn’t ever have been admitted. They fudged the figures (Independent). They have structural problems owing to years of corruption (Economist) and massive tax evasion on a scale unheard of in the UK (Guardian), and the austerity is only making the situation worse (Paul Krugman; Paul Krugman [chart below]).



Unlike Greece, the UK controls its own currency, and therefore have fiscal options aside from austerity. That doesn’t mean we think it's a good idea to go out and devalue the pound in lieu of responsible budget management, but rather that the flexibility that we have is reflected in our borrowing costs which are far lower than those of Greece (Benjamin Studebaker). 

Once again, the sensible thing for the UK to do, in the short-term, is to borrow more in these favourable economic conditions of low borrowing costs, interest rates and inflation and invest in infrastructure, housing and a sustainable future for this country. With the boost that the investment will give to the real economy, we’ll start to see our debt-to-GDP ratio go down and equality and social welfare go up.

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