Monday, 15 February 2010

Worse than Thatcherism, some more clarity emerges on Tory economic plans - by Michael Burke

The Tory Party leadership has attempted to camouflage its calls for swingeing cuts in public spending in recent weeks. There has even been some attempt to move over to the ground occupied by the government, in arguing that timing of spending cuts depends on the pace of economic recovery. As a result, some Conservative supporters have become anxious that the slash and burn approach to public spending was being abandoned. A number of economists have written to the Sunday Times arguing for a clear timetable and battle plan, to attack the public sector which the Conservatives have latched onto.

Those worried about a Tory retreat for savage cuts and slash and burn need not have worried. The day before the letter from the economists was published Tory Shadow Business Secretary Kenneth Clarke provided the reassurance they were looking for. He also provided some welcome clarification of the actual stance of Tory economic policy. In Clarke's interview with The Times on 13 the key passage of the interview is as follows: 'This is the longest, deepest recession anyone alive can now remember. In percentage terms the level of spending cuts we are contemplating is probably [going to] exceed those of any modern government. We are going to have to be much tougher on public spending that Margaret Thatcher ever was'.

To be clear, the Thatcher recession was an economic slump induced by policies that included driving down incomes through mass unemployment, cuts in welfare spending and entitlements and wholesale privatisation of publicly-owned enterprises.

What Clarke’s comments expose, in a media outlet unlikely to use his words to attempt to lose votes, is that Tory plans for the economy amount to following the worst British recession since World War II with the same Thatcherist policies that brought about the second-worst recession in that period. The rationale given for spending cuts, the extreme depth of the recession, is a repetition of the economically illiterate policy that helped turn a severe recession in the Great Depression of the 1930s. SEB has previously shown how such cuts are counter-productive and actually push the deficit higher. Spending on investment does the opposite; boosting activity so that tax revenues rise and the deficit is lowered.

Clarke is a significant figure in leading Tory circles who clearly participates in the discussions of economic policy at the most senior levels. But in case there should be any doubt as to Tory intentions on economic policy, it is worth looking at policy where they are currently in power, such as Birmingham city council, where they govern in coalition with the Lib/Dems.

Lessons from Birmingham

In Birmingham, the council’s inner cabinet has announced £100 million of cuts in the current budget, with a massive reduction in public services and up to 2,000 job losses. Schools, care homes for the elderly, pay, pensions will all be cut, even while there are increased subsidies to private landlords and to Network Rail. The council admits that the actual ‘saving’ will be just £25 million, once all the costs associated with closures, contracts breakages and redundancies are taken into account At the same time, the council is spending £100 million on transport PFI projects alone, in addition to PFI spending on education infrastructure. There are reports that this is rolling programme of cuts - with up to 7,000 job losses and further reductions in services.

The plan is not only deeply damaging. Just like Tory national policy, it is economically illiterate. The council has simultaneously announced its intention is to repay accumulated debt, so that the net council debt will fall by £35 million in 2012/13. Yet interest rates are historically low at 4.5% from the Public Works Loan Board, from which the council can borrow, and the rate of return on capital projects exceeds that. The Tories are taking no account of the wider impact on the local economy and the impact on council revenues. The latter are already depressed by falling economic activity, particularly through small business bankruptcies and the consequent shortfall in rates. In addition, central government finances will also come under pressure from increased welfare payments and social spending.

The fightback in Birmingham has already begun. Nationally, cuts also remain deeply unpopular. In the Clarke interview he refers to George Osborne's speech at the Tory party conference last year where Osborne outlined some of the cuts in public spending the Tories have already lined up. According to Clarke, who says he cautioned against this degree of honesty, 'this was a gamble that came off.'

This is not supported by opinion polls - even in the Tory press. In August 2008, the Tory poll rating was 46%. Now it is below 40%, having taken a sharp dip in the wake of Osborne's speech as the graph from the Daily Mail below shows. SEB has previously shown that there are deep-seated structural difficulties for the Tories in lifting their share of the vote.

The programme of cutting your way out of recession is doomed to failure. It could even lead to economic disaster and is guaranteed to bring deep and senseless social suffering. It is deeply unpopular with voters and deserves to meet fierce resistance.

1 comment:

Bemused Economist said...

The Tories support has been in decline for decades - Thatcher couldn't reverse it and nor will Cameron. If they win, it will be purely because Labour have alienated millions of voters with their right-wing policies.

The frustrating thing is that if Labour were to tack to the left and put some clear red water between them and the Tories, they could clearly have the election in the bag. The electorate don't want cuts and they don't want to foot the bill for the failures of the ruling class.