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The big Conservative tax and spend rethink...

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Paul Mason | 08:24 UK time, Tuesday, 9 September 2008

In a move that has shocked no-one who talks to Conservative politicians, the party's spin doctors have put out in the Times, Sun and FT that the Shadow Chancellor is "rethinking" the Conservative commitment to match Labour's public spending commitments until 2011.

Here's what I am told: I've been trying to stand it up but now consider it stood up. That the party would commision an independent review of the public finances on achieving office, and that if the said finances were in any way found not to add up, would summarily reverse its commitment, maintaining the pledge on core services like health and education but abandoning it on, for example roadbuilding. This has been "mooted" in Cameron-Osborne circles.

However, I now think the political situation is moving fast enough for the Tories not to need this cunning plan. Since Gordon Brown's CBI speech last week it has been crystal clear that the government believes Britain is "under-borrowed" compared to other major economies: 37.5% of GDP on official figures (though as commenters on the blog point out, what happens if you include PFI?)

I had expected the coming FISIM rule change in measuring GDP to give heardoom to borrow several billion more without breaching the sustainable investment rule (40% of GDP). I read Gordon Brown's speech as saying, forget 40% as a rule - as Johnny Depp puts it in Pirates of the Caribbean, "it's more of a guideline".

Hence we have the makings of a serious political battle shaping up, even before we get to Crosby (see below): I expect Labour to cut taxes in the PBR, focusing the benefits on low-income voters, and pay for it out of borrowing, pushing the national debt higher than 40%. I expect this will - and is designed to - give the Conservatives political "permission" to abandon the "match your spending" pledge and thus open clear water between the parties.

Given much of David Cameron's fiscal philosophy has been shaped around the idea of delivering a lower tax take from growth rather than actually cutting taxes, this now has to be re-thought: there's no growth, the tax take under the present budget is falling off a cliff and he will have to cut spending unless he raises borrowing if he becomes PM.

Conservative insiders believe in any case the public mood is changing: we've had the tax rises, public services have not got better, goes the argument, so the willingness to pay more tax declines; especially in a period of high inflation. Anecdotally - though I do move more in the world of cabbies and cameramen than social workers - I think they might be right: ie I think that is becoming the prevailing public mood among the tabloid reading classes.

Now to Crosby: Will Hutton on Newsnight clashed amiably with economist Diana Choyleva over the need for a bailout of the mortgage market. We could see two banks go under if house prices decline by 30-40% said Will; let it fall said Diana. Throughout Will was mightily worried about a bank falling over and mightily pro the Crosby solution (now dwarfed and precedented by the Fannie/Freddie nationalisation) of a £40bn extension of the Special Liquidity Scheme to underpin mortgage issuance.

My guess is that Will's thinking reflects an emerging line of thinking in government. They will probably split the difference, as they always do, but they will do some form of Crosby mortgage bailout.

Actually what is emerging here, and what has already emerged in the USA, is a battle royal between the two dormant economic philosophies that - in my youth - used to underpin politics but which under Blair+prosperity seemed to go away: monetarist neo-liberalism, which says the market mechanism must sort out crises, no matter what the short term pain; and Keynesian liberalism which says the state must underpin the market. Small state versus big state is also coming back; and rows over public spending with it.

Virtually every political institution in Britain is either lined up over all this or split: Bank of England calls the Crosby suggestion dangerous; Bank of England ready to wind up the Special Liquidity Scheme. Treasury refuses to rule out Crosby etc.

And the interesting thing is that a whole new generation of politicians, Labour and Conservative, is having to grapple with it having grown up believing, implicitly, that this would not come back; that we were "post" this ideological divide; and that "triangulation" solved everything.

Comments

  • Comment number 1.

    FUNNY YOU SHOULD SAY THAT

    "Will Hutton on Newsnight clashed amiably with economist Diana Choyleva"

    In the interest of balance: I saw a man in torment who could not make eye contact with the object of this 'amiable clash'.
    This might seem to have nothing to do with the matter in hand, but I suspect it nuanced his offering somewhat!

    I should add that I read Paul Mason with interest (and total gullibility, where finance is concerned) but feel well qualified to comment on matters human!

  • Comment number 2.

    the market mechanism depends on one thing. How do markets arrive at a price?

    what are the factors that determine price? Supply and demand [ some stop there]. Are those the only 2 things that determine price? or can we add perception? What we think its worth because of the beliefs about it.

    Take the justice system in the uk there is a belief expensive justice is 'good' justice. If someone offered you a cut price nuclear reactor would you take it? This idea the more expensive something is the better it is, is the basis of the perception part of price. So markets do not only follow supply and demand but also perception.

    When we see perception is part of price then we can understand how important managing that perception is and how it affects profitability.

    so will not those seeking profit focus on perception? e.g the British Gas leaflet explaining 'high prices' by showing a graph with price at the height of the july spike.

    Is the State an arm of finance or finance an arm of the State?

    If we think the first then the State is there as an expression of finance and one might say traditions such as the Head of State having to ask permission to enter the City of London is a nod in that direction.

    Can finance break govts or can govts break finance? Has it not been shown that no country is greater than the international markets opinion? e.g. ERM? The current slide in the pound is a reflection that the markets think the BOE has got it wrong and will have to lower rates. Who will win that bet?

    So if we believe that the State is an arm of Finance and that politicians are 'pr frontmen' then it is logical the State should serve finance [with bailouts, tax breaks - office cleaners paying more tax than executives etc] and always will.

    so the 'debate' is among those who believe finance is a creature of the State and those who know the State is a creature of Finance. Those who think the cart goes before the horse and those who put the horse before the cart?

  • Comment number 3.

    No 10.30 deadline today?

    In case you are bereft of topics at the meeting, might I suggest a return to matters green, if more mundane?

    Last night ITV ran an expose of the state of our national recycling policies and systems, whereby an OAP seems eligible to be sent to Elba for popping an extra cabbage leaf to their bin, yet the person in charge of such a policy at their LA has no clue where container loads of 'recycling' (note: the tonnages box-ticked are only on what it is (might be); nor whether it is any use to man nor beast) goes, but for sure will be ready first in line to get their bonus for an all round sterling job.

    http://www.itv.com/News/tonight/episodes/Arubbishservice/default.html

    I am minded of a BBC expose back in Dec 2005 that covered pretty much the same thing.

    http://junkk.blogspot.com/2005/12/tiger-in-turkey-hut-more-like.html

    What, if anything, has changed, bar the bonus structures on an index-linked basis, plus what's shaping up as a terrific 'guilty 'til proven still guilty' revenue-collection system?

    Maybe when our convoy of governance has got back from its outing to trying to run the country again without more wheels falling off, maybe one of the succession of environment Ministers (past and present... maybe even Mr. Milliband?) might be invited to waffl... comment on how we have come so... er.. far.

    I really don't see much point in all these stories if they are not followed up and the protagonists held to account.


  • Comment number 4.

    WE ARE RUBBISH AT BOTH (#2 and 3)

    The global village is rubbish. We are a global CITY with all its ghettos, gated communities, mafia, vice, industrial drugs, gambling, animosities, anonymities, instabilities and waste disposal problems.
    When we lived in small communities with just enough weaponry to balance out being toothless, clawless, slow animals (and in equilibrium with our drugs) without the wheel or money, we had our niche and fitted in.
    For the global village ever to be viable, it would be necessary to redesign man. Just as Gordon's 'end to boom and bust' and Hitler's '1000 year Reich' have passed away, so, it seems, must the global village and its over-confident, under-competent villagers.

  • Comment number 5.

    Tories are tories and they always act for the benefit of their class. They always have done and they always will.

    We have a tory Labour party that has for the last decade been acting for the benefit of the nation's tories too. The Labour party has cut itself off from its roots and connected with aspirational toryism.

    The mood in society has moved against Labour, not for any deficiency but because the economy has turned sour and the people expect the government, which ever party is in power, to protect them.

    The few people in any of the parties who can do simple arithmetic have realised that New Labour's tory spending plans of the last decade cannot be kept going into the next decade so it is hardly surprising that the Tories have said so - indeed what is surprising is that Labour has also not said so.

    I expect austerity to be announced by all parties before the next election. It is a question of who cons the more people to believe that they will be best protected by their party. No party can protect the people of course, but they can pretend and they will.

    Labour can construct a recovery by protecting the poor, or convincing the poor that they will be best protected by Labour, similarly the Tories can do the same thing. Interesting times for journalists! But in the end the credit crunch's liquidity reduction has to work its way through and who ever gets into office will be hard pushed to keep in power as it is highly unlikely that the (dishonest) expectations of financial protection that they will use to gain victory can be actually achieved.

    What price a National Government!

  • Comment number 6.

    What is the current PFI debt ?
    What interest rate guarantee were given as part of the deals ?
    How long are the loans over ?

    Then you got PPP, that locks public sector bodies into contracts for services from private companies, for a new building.

    What is the combined debt of these, the last thing I heard was the Government saying details of these deals were too commercially sensitive for public publication ?

    I think this is part of what the other political parties are referring to as this Governments financial black hole, it's an unknown !

  • Comment number 7.

    We need another dose of realism. Another generation has grown up without the dicipline of Maggie's purse. You might like that holiday in Spain, or latest mobile phone, but if you can't afford it you don't get it.

    NuLabour is old Labour tax and waste but in Tory clothes.

  • Comment number 8.

    To get technical, Keynsian economics was there all the way through with militarism - No neolib govt has had any qualms about propping up the arms industry with public money, ever. Especially in the UK version of Export Credit Guarntees - over 50% of the £ of this scheme go to the arms industry. This supports arms exports to dodgy governments underwritten by UK tax payers.

    That's apart from govt procurement here, where all pricing etc is secret - if its not 'commercial confidentiality' its 'national security'.

    High profit, not too many employees, and all secret. Not a bad welfare deal for arms corp shareholders.

    Old free market Thatcher was pretty close to that action.


  • Comment number 9.

    Diana Choyleva was absolutely brilliant. Calm, informative and in control despite the rude and boorish Will Hutton constantly scaremongering interrupting. Please bring her back again!!

  • Comment number 10.

    paul, please look at FISIM some more. i want to know about it. we now have the first GDP figures to account for FISIM. ramifications? please answer.
    nick

 

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