Dear Ed and George.
Today, on the Andrew Marr show, the debate between you on public finances and macroeconomic policy seemed to reach new lows.
1. The focal point of today was the part-leak-part-preannouncement of policy. Surely better for all to wait until the Autumn Statement itself? Instead, George succumbs to the temptation to try to extract more good news and a weekend political victory, hoping to catch Ed out on the sofa.
2. For your part, Ed, it was mystifying to hear you say simply that your NHS funding plans would be on top of whatever the Tories were announcing or meaning. Presumably there would be some extra amount of money that would mean the Mansion-Tax-funded £2.5bn a year would not be needed?
3. Both of you are stuck unable to describe fiscal policy in macroeconomically literate terms [insult borrowed from Simon Wren Lewis]. Why don’t you face up to the fact that, right now, with interest rates pressed against the zero bound, and QE of uncertain impact, large deficit funding is needed to support monetary policy? We can be fiscally virtuous, but not now.
4. Ed, you are onto something when you curse Coalition fiscal policy for being too tight, and deepening the recession. But that criticism, which you repeated today, is out of date. What you should be pointing out is that the Coalition did relax fiscal policy, pretty much as you would have recommended, and it was because of that that growth resumed.
5. George, your describing the government’s conduct as following through on plan A doesn’t help the quality of debate either. Much better to say that initially caution was needed, until it was clear that we were not going to be viewed in the same light as the Southern European sovereigns, and only then was it possible to turn on the taps again. If you had set out a contingent plan in the first place, you would not have needed to confess to a change of direction. As it is you place the need to look like a government of resolve above the need to look like a government of rationality. And you seemed to reveal that the future consolidation would be of the same ‘come what may’ variety as the last one that you (thankfully) didn’t follow through on. I guess that you therefore calculate you weren’t caught out last time. You might be right, which is a depressing thought.
6. Ed, the Mansion-Tax for NHS top up proposal is gimmicky. Hypothecating tax revenues might be arguable in a state that was failing, illegitimate and unable to collect taxes. But not in ours. Where would such a process end? [Before you answer that, could you just tell me who is paying for the replacement of Trident? Is it me?] The gesture seems a perversely reactionary one. Why offer an explicit financing plan for this tiny part of the NHS budget, before you customarily knuckle down to costing the entire budget? This is a case of presentational imperatives trumping all. You are reluctant to maintain explicit, all-encompassing fiscal plans, preferring instead to keep as much time for vague ‘oppose everything’ strategies, but in order to look serious, you pick out micro-policy-costings like this. But following this strategy, you risk it being judged that the case for taxing high value houses stands or falls on the existence or otherwise of an NHS funding problem. Which is not the case. You don’t help the debate about social justice and redistribution – surely exactly what your party is for – by tying the two together like this.
7. George revealed that the next come-what-may consolidation would be achieved entirely through spending cuts. To me and others this looks like an opportunistic shrinking of the state, right when it’s most hazardous to attempt it [when monetary policy cannot or will not compensate]. You must know that people judge such an extreme tactic as undeliverable, not just practically, but politically? Yet you risk uncertainty festering about just what you will do by taking up this position. I find it hard to believe that your median Tory target voter really wants it either.
8. Oh, and there was the confusion about how much new money was really being announced. It was trailed as £2bn extra money. But this wasn’t quite true, was it? Actually 0.7bn was a reallocation within the existing NHS budget. That was a particularly petty piece of media warfare. Catch Ed out on the sofa, then leave the less important facts to work themselves out in the chattersphere.
9. The two of you make an excellent case for delegating more control over fiscal policy to technocrats. [You might think: he would say that wouldn’t he?]. I don’t know how such delegation, over levers of iconic democratic importance, could be made politically acceptable. Especially when our economics profession is licking its wounds after largely failing to realise that the financial system was going to explode. But some way has to be found so that your successors can have a better conversation. A debate about the average size of the state, the strength of the automatic stabilisers, whether discretionary fiscal policy is needed on top of that (eg at the zero bound), and, if so, on menus of latent measures that could be triggered as such stimulus or tightening was needed. Such a conversation would involve you setting out explicit and different positions on how much risk sharing the state should be doing across regions, income groups and generations, which spring out of your different political philosophies. I hope at least that Ed’s proposal that the OBR should be tasked with vetting your manifestos will prove hard to resist, and that this might be a first step along the way to the utopia I and other economists are seeking.