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Tuesday, June 15, 2010 

The perils of independence and progressive intentions.

In politics, giving independence to certain bodies is often considered the ultimate no-brainer. Labour and Gordon Brown especially gained instant credit for handing responsibility for monetary policy to the Bank of England - something they may well have later regretted when the Bank failed to cut interest rates fast enough as boom turned to bust.

While much of the motivation behind the independence of the Bank of England was to prevent a rerun of Black Wednesday, as well as to be seen as handing over power, with the handy side-effect of not leaving politicians in charge of something they could be blamed for, not entirely the same principles were behind the setting up of the Office for Budget Responsibility. The clue itself is in the name: that under Labour all such respect for the principles of sound money were thrown out of the window. It's true that it's difficult to argue against the stated aims of the body, to remove the temptation for government to cook the growth and debt figures, yet it was also apparent that this was also about giving the last government a kicking through showing that they had been involved in exactly those practices, whether they genuinely had or not.

The problem with independent bodies is that they have a curious habit of not doing the bidding of those that set them up. Not only George Osborne, but also Nick Clegg had their speeches and talking points written in advance, ready for a first report that was going to castigate Labour's recklessness with the economy, which cut through their lies and showed up how they were living in fantasy land, and how only the new Con-Demolition would be able to put things right. Sadly, apart from revising down the growth figures for the next few years which Alistair Darling had pencilled in back in March, and it has to be recognised that governments always tend to be more optimistic in their forecasts for obvious reasons than other organisations are, the coalition didn't get the obliteration of the previous government's books which it had bargained for. The best it got was that the structural deficit was going to be slightly larger than Labour had predicted, hardly the "it's worse than we thought" which the new government has been crowing about for the last week.

Not that you have to take my word for it. Fraser Nelson, that noted Labour sympathiser, comes to much the same conclusion. His advice however is that rather than pretending we're all doomed, the Tories should make the "moral" case for cutting the deficit. Nick Clegg yesterday, in what was a remarkably fatuous speech, tried to do a little of that while still keeping to the script written before the OBR report was released. Everything was worse than they ever imagined, if they refused to act on the structural deficit then we would be committing our "children and grandchildren to ever greater indebtedness", as though presumably any government that didn't follow the chosen path of the Conservatives and Liberal Democrats would still be paying off the debt in 20 years time, and lastly, that the crisis in the Eurozone means that if we don't act then the markets it will. The latter is the Liberal Democrat justification for abandoning their previous alliance with Labour on not cutting this year, a handy excuse which has presented itself even though the markets have shown no sign whatsoever of suddenly deciding our debt is a problem, and also while the pound yesterday went up (not helpful to the recovery in manufacturing, incidentally) after the OBR report suggested things weren't as terrible as the government has been desperate to suggest.

All of this would be easier to take if there was at least some recognition of exactly why the deficit is so large - not because of the irresponsibility of the last government as it increasingly being painted, but because it bailed out the banks. (Update: I boobed here rather badly, as pointed out in the comments, confusing debt with the deficit. The point remains that this was a failure of the private sector, albeit not helped by a corresponding failure to regulate the banks properly, which the taxpayer and the public sector are now having to pay to fix.)

You can argue about whether it should have been done in exactly the way it was, and whether the Conservatives were genuinely opposed to a bailout, yet few at the time were screaming about there being "nothing progressive about condemning ourselves and our children to decades of debt, higher interest rates, fewer jobs", which is the ultimate conclusion as described by Nick Clegg of that bailout. All we are being offered by the new Liberal Democrat consensus is "progressive cuts", where the party can still promise a "pupil premium" for the most disadvantaged, as well as improved access to healthcare for "disadvantaged neighbourhoods" but almost nothing else. When Nick Clegg calls "for greater fairness between the public and private sectors" he fails to acknowledge the sacrifice we have all already made for the private sector, and that there is absolutely nothing progressive about lashing out at everyone equally just because someone has already been hurt.


Cuts are coming, and taxes are going to have to rise; it's unavoidable. What should be avoidable is inflicting damage on the most vulnerable and the poorest in society, yet even as Nick Clegg spouts such platitudes it's almost certain that the coalition next week will raise VAT, the most regressive of taxes which will hurt those who can't afford to save the hardest. It's already scrapped the Future Jobs Fund, is set to the abolish the Child Trust Fund, is cutting the number of university places and now also seems to be putting the recovery itself as risk through starting the pain before it is completely necessary to. No amount of invoking of progressive intentions, an ever more meaningless dividing line, is going to change any of that.

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All of this would be easier to take if there was at least some recognition of exactly why the deficit is so large - not because of the irresponsibility of the last government as it increasingly being painted, but because it bailed out the banks

No, this is flat wrong, which is a shame because the rest of the piece is good stuff.

The bail-out of the banks caused a one-off rise in the national *debt*.

The *deficit*, ie the annual increase in the national debt, exists because tax revenue has fallen below expectations due to the recession, and because welfare spending has risen above expectations due to the recession. None of this is in any way connected to the bail-out of the banks.

The absolute size of the national debt isn't a big problem at the moment - even including the banks' liabilities, it's still well below most Western economies. The reason markets are a bit nervous (although not as nervous as right-wing commenters like to paint them) about UK government debt is because we have one of the largest deficits of any country.

"because it bailed out the banks"

This is a factor, but it's a tiny amount of the deficit, as John B mentions.

The structural deficit - the bit that we would have had even if there had been no recession at all - is the problem.

- Julia

Thanks for putting me straight. I would make the excuse that it was late, but it just goes to show that you shouldn't attempt to write with such authority and criticise in such a high-handed manner when you're capable of such an elementary mistake yourself.

You're not wrong at all! Take a look at this from Chris Dillow:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2010/06/what-structural-deficit.html


-Julia

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