Ed Balls looks like he's going to do it again. For the third year running it looks like he is planning to deliver a disastrous speech on economic policy to the Fabian Society. Why does he do it? Why do they ask him back?
The shadow chancellor, Ed Balls, is to give a binding commitment that a Labour government will be running a budget surplus by the end of the next parliament, putting himself under severe pressure to deliver big public spending cuts if the party wins the next election.
The significant move means that Labour will now face the dilemma of either raising taxes after the election or adopting a similar daunting level of cuts in day-to-day departmental spending already proposed by the chancellor, George Osborne.
Last December I wrote a blog on why the last thing this country needed was an economic surplus. It was aimed at George Osborne. Let me reprise the arguments.
What I argued then and what I rep[eat now is that there is no merit in a budget surplus, not least because such a surplus is part of an accounting equation. At the macro (national) level, which is what we're talking about, there are some accounting equations that hold true in economics. One is that the economy does in fact balance, always. It may well balance at the wrong point with a result that we do not want, but it does balance. And what that means is that if someone is in surplus then someone else is in deficit.
There are not too many variables in this equation either: just the government, consumers (that's you and me), business and trade. So, if the government runs a surplus someone else has to run a deficit. It's pretty obvious really: the books will balance. So, a government surplus is matched by increasing consumer debt, business spending or money flows via trade.
We have remarkably little control over trade. First, we almost invariably run a deficit and secondly we have (unless we suddenly and ruinously begin using interest rates to alter exchange rates) almost no control over that rate so let's treat that as fixed to the extent that it is beyond control. And let's also be aware that such is the state of the Eurozone we should not be looking for much hope from that source — which is our biggest market.
In that case we're looking for a government surplus to be matched by consumer borrowing and business spending on investment.
Now, again, let's deal with the easy one — business spending. This would be on investment of course because we can't imagine they're going to start a free for all in pay rises for anyone but bosses right now. But as we know, whilst they're laden high with cash (which right now they lend, in practice, to the government) they appear to have no intention of spending that and worse still appear clueless as to what they might spend it on. There is no hope of them creating a deficit on their budget, and so they will not create a surplus for the government.
In that case we're down to consumers to start borrowing heavily to make the government surplus happen. I stress, this is the only way this can happen. This is exactly why George Osborne is creating a borrowing bubble right now - and why it seems to be delivering growth. In pure maths terms it has to do so. But what Ed Balls is saying is that he is guaranteeing that this will continue until there is no deficit.
You can't achieve that by cutting. That takes money out of the economy and simply balances it at a lower level than before.
It's hard to do it with tax increases unless - and it's a big unless - they're heavily redistributive, which can work.
So all that can create this balance is increased consumer spending from borrowing and growth - growth which will not be happening because government will be spending less.
What Ed Balls is suggesting is incredible - but I mean that in its literal sense. It is not credible. It just cannot happen. This is plain bad economics. And with it Labour's economic credibility is in tatters.
Why, oh why, does Labour want to fail so badly?
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I think it is because people imagine a national economy is like a household: something they have been encouraged to believe because it is the mainstream story and is trotted out all over the media and by politicians, who may or may not believe it. What is certainly true is that alternative analyses are seldom presented, not even by the BBC, which is supposed to be impartial. Balls has no interest in improving our economic situation at all: he wants his party to be elected. While the people believe this is a good idea he will promise it. He may not even know the consequences and he certainly does not care that he will not deliver. From the point of view of new labour TINA lives
It is no surprise, however: for there is no labour party as that term is normally understood. They are neoliberals, same as tories and lib dems. Do not expect any choice in how to run the economy when considering who to vote for, for there is none.
Your last sentence is spot on
The Greens may be the exception
“Why, oh why, does Labour want to fail so badly?”
Ah, but this is the point – they want to succeed, which is defined as ‘get back into power’ not ‘fix the economy’, and because the coalition have succeeded in convincing the voters that the defecit is bad and needs to be reduced, so Labour must follow suit, repeating the the same narrative.
To do otherwise would invite mockery from those who think they know better, that is the voting public who are ‘educated’ by coalition propaganda, repeated without balanced criticism, or in some cases amplification, by much of the mainstream media and in particular the BBC.
In general, the public are either completely ignorant of macro-economics or deluded by neo-liberal economics propaganda – which is remarkable, considering the power economic decisions have over their whole lives, and the lives of their children.
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Mark Twain
And, if Balls does say this, it’s the most craven cowardice. He needs to remember his name and grow some. Utter, utter stupidity.
I am one of the macroeconomic illiterates – who has been convinced by the mainstream messages that deficit is bad (deferred taxation or increased borrowing costs).
I always vote Green because I think they are the only ones to take a long view. (I recognise it will be said this is a luxury they can afford because of the nil chance of being tested by reality.)
Would welcome a more expansive treatment of the arguments in this post – or a link.
Will see what I can do
Paul,
Please take a look at the short online book “SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY” by Warren Mosler, which is an excellent take-down of mainstream thinking (NB: though written from a US perspective, it equally applies to the UK).
In case you doubt Mosler’s credentials, the foreword is by noted economist Professor James K. Galbraith, son of one of the great economists of the 20th century – the late Professor John Kenneth Galbraith.
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
I will take a read
So Keynes was wrong then?
Of course not
He said governments should spend to clear deficits
The Balls plan is the exact opposite which is why it will fail
Keynes was right
What I am saying is Keynesian
I assume you have forgotten about the run a surplus in the good times, part of Keynsian economics….?
We have not got good times
You may gave forgotten Labour did run surpluses
“I assume you have forgotten about the run a surplus in the good times, part of Keynsian economics”
I assume you’ve forgotten he was talking in an era of fixed exchange rates, which we no longer have.
“In that case we’re down to consumers to start borrowing heavily to make the government surplus happen.”
Can’t see that this can be correct.
For before the crash we had government running a budget deficit. And we’ve also been told endlessly, by you and others, that consumers were enormously increasing their debt burden at the same time. So either corporations or trade must have been changing to allow that to happen.
And if it could happen only 10 years ago not sure why it cannot happen some years into the future as well.
Note the assumptions made – I said this is the case given what Osborne and Balls are saying
As ever you draw inference incorrectly
I presume it is deliberate
My understanding is that, up to 2008, the UK Govt was running a deficit (fairly modest) & the UK economy was running a deficit (absolutely massive). The UK Govt used the money to invest in public services, which could have been expected to produce a return. The UK private sector used the money to buy & sell houses at ever-increasing values which was, to any sane person, a disaster waiting to happen. The latter part of the whole fiasco has been reactivated by Osborne’s despicable ” help to sell your house at a grossly inflated price” scheme.
How I wish the Greens were in power. They are the only ones that really get it.
However, I think one of the reasons Labour don’t copy them (and do as you suggest) is that the voters don’t appear to want these policies. It is obvious the Greens don’t get a lot of votes — only 1% at the last general election, a lot of them concentrated in one successful seat (1 seat is clearly not enough). They are going backwards from 2005. Across the country the Greens did even worse than the BNP which got 1.9%.
It seems the vast majority of the voters are stupid me-me-me neo-liberals who vote for politicians who are stupid, neo-liberal AND power hungry with a desire to crush the poor and weak just for fun.
Just a vicious cycle. Unless we all do something drastic, we will be having this conversation forever.
The only hope left is for us to be governed by Society. I’m sure she finally knows what’s good for us.
It is not true the majority of voters are neo-liberals (whatever that means anyway!). They are lower middle class earners wanting to preserve their standard of living and their Easyjet empowered holidays in Toremolinos! And they read the Daily Mail without understanding the small right slant of that paper.
The neo-liberals read the FT, the Economist and criticise the BBC to be too much on the left.
But there exists an alliance at the ballot box between the 2 groups, even though they never want to share anything else!
This alliance is what creates the opportunity in our flawed democratic system to have a chance against the Labour left, which is not any more democratic, as we all know. Where is David Milliband?
The lady thing we need us David Miliband
Indeed -I now feel neo-liberalism is well suited to and thrives on an anti-intellectual ‘culture’. It is the Bush Jr. phenomenon writ large. I think labour feels it has to pander to this.
I caught a bit of the Today program yesterday morning when the dreadful Humphries interviewed a 17 year old about whether the Govt was letting down youth. This young man was already taken in by the ‘austerity/work hard and you’ll get on/there are jobs out there’ guff that the Tories perpetuate -maybe he was parroting his parents’ views but I felt sad that a young man should not have any wider view than ‘my own patch is ok’. neo-liberalism has become the psychological wall-paper.
I’m voting Green next time for exactly the same reason. I believed for years the Lib Dems would shake up politics and especially make society greener. But it turned out they too are every bit the be-suited neo-liberal clones we see in the Labour and Conservative parties.
You make similar points to Russell Brand about the political monoculture and the futility of voting. Yes I’m going Green and, though I have huge sympathy for brand, I hope many others are too. We really should fear for democracy the way things are going.
Chris in Hastings
The Greens got a seat. Respect have got seat(s). (never sure how many as Galloway seems to hop from seat to seat like a sweaty, glaswegian version of Frogger). The BNP haven’t got a seat & won’t get one. That, in itself, should tell you that the British people are, fundamentally, decent.
They’re also confused & angry.
On average, they spent too much on a mortgage on a house they never wanted, they work too long in a dead-end job that was all they were offered, they worry that they can’t pay the energy bills, the mortgage, the phone, the insurance. They hardly ever see the children that they’re supposed to be doing it all for & the weather is getting worse. Bitter ? Bitter doesn’t begin to cover it.
In those circumstances, it isn’t hard for people (the same people that created the situation) to say “blame immigrants, blame spongers, blame gypsies. If you’re in the private sector, blame those in the public sector. If you’re in the public sector, blame those in the private sector. Just don’t blame us”
Chris in Hastings
In other words, the people (the same people that created the situation…..
The people have been subjected to gross distortion of fact (primary example being Duncan-Smith’s admitted preference for what he believes, not proven facts) by the current government precisely to drive wedges between different sections of society and, in their fear for their own and their children’s futures, the people have done exactly what the government intended, turned on one another.
This all sounds far too much like Germany in the 1930s for my peace of mind. The only difference I perceive is that this government uses pauperisation, instead of physical violence, as its weapon of choice with which to attack large sections of society.
Unless we challenge the crap we’re fed, fear will go on feeding yet more fear and, when survival becomes the predominant concern for the majority of people – and that’s where we’re being led – the outcome will be truly terrible, and bloody.
Those greens seeking election are too honest for the voters.
Their problem being that there is a common assumption all politicians are liars, so someone who tries to be truthful tends to stand out.
And, of course, messages of impending doom are rarely well received, even if true!
Then there is the international green, which tends to be part of the current problem and not part of any resolution of same.
The Greens are running at around 3% in most opinion polls – up from around 1% before 2010. That’s substantial growth, albeit from a very low base. I think the Greens will gain further over the next Parliament if Labour wins in 2015 as the consequent economic failure (due to Balls’s wrong-headed fiscal policy, as Richard has outlined in this post) and resultant “Pasokification” of Labour will lead to collapse in Labour support and the Greens are one of the parties who will gain. That said, under first past the post we are still a very long way from a Green government.
It would be useful if people like Meacher and Carswell (and others) decided to leave their respective parties and joined the Greens on the basis they’re the only party with anything like the right idea of how to fix the economy. If something like that doesn’t happen then we’re heading for disaster as the basic function of the economy, which is wealth extraction, means more is always taken out than is put in. It’s a one-way street with complete collapse at the end and we’re getting further and further up it.
Well said -Bill Kruse! We need an anti-oligarchy-kleptocracy-plutocracy/croney-capitalism/anti-neo-fuedal-debt-peonage Party! This could involve an alliance of small-staters like Carswell and big-staters like Meacher because the break up of the corporations and banks stradle this divide. Once the neo-feudal set up is challenged then the other details can be slogged out. The Americans managed it at the end of the 19th century and we can now. Why is Carswell in the Tory party and why is Meacher with labour-probably because that’s the only way they could conceivably be elected – we need a courageous group of M.P.s from all parties who stand for this change – WHY IS THERE NO COURAGE AROUND????
Change it to: ¨In general, the public are completely ignorant of macro-economics¨
They don´t do too good at home economics either, which is why politics gets away with economic murder.
This is more evidence that we are living in a one party state (or a no-party state if we consider the corporate capture by banks/multinationals). Alternatives are their: Modern Monetary Theory -Sovereign Money Creation that could infuse money into socially useful job creation. This won’t happen because it hinders wealth syphoning and housing bubbles.
Some Lib Dems support LVT -why don;t they talk about it -why don’t politicians have a positive educative function by talking about the REAL issues? They did this in 1945-does that mean we need another war as a wake up call -a bit costly if we do!
I assume Balls knows he’s talking nonsense but assume he does so for the benefit of the voters who by and large are so uneducated in these matters they don’t know a nation’s economy isn’t like a household’s.
Will Labour’s intention to increase the top rate back to 50% make their plan more credible Richard? How much would those earning over 50 K have to be taxed to make Ball’s plan realistic (if growth rates stay a heady 2% or so). Or are the poor and destitute going to get hammered again, but this time under Labour? Thanks for the brilliant blog.
It will help
But not enough to correct the folly of the economic policy
See latest blog
May I ask your views on “fiscally conservative” Labour? (I’m stirring with a spoon.) Here’s a random, recent article by Hopi Sen, a proponent of “in the black” Labour. There’s no mention of a definite target such as a surplus, but there’s plenty of Labour’s need to wear a hair shirt to achieve electoral credibility (which in turn seems to be based entirely on opinion polls). (For my part, I don’t believe that anyone has pinned Sen down sufficiently to learn what “fiscally conservative” means other than to balance the books in the long term. Isn’t that the goal of all Governments?)
I have Wittenberg on the issue
These people and the left are in my opinion natural opponents, their ideas being anathema to anyone with social concern, economic sense or a desire justice
Can you google it though – I am in a hurry
I have to say, I’ve never seen Hopi Sen write anything which would differentiate him from a fairly mainstream member of the Tory party. He’s probably the worst example of LINO (Labour In Name Only) I’ve come across, with the possible exception of John Rentoul (and Dan Hodges, but Hodges doesn’t count now as he left Labour over the result of the Syria parliamentary vote.) I wrote a Compass pamphlet called “White Flag Labour” a couple of years back which sums up everything that is wrong with the “In The Black Labour” approach; unfortunately Ed Balls seems to be a paid up member of ITBL despite showing during the 2010 leadership contest (Bloomberg Speech) that he has some basic grasp of Keynesian economics. I wonder what went wrong?
The people of Morley and Outwood deserve better than this. They are going to suffer when Balls sends the economy crashing into a recession. One that is completely avoidable and unnecessary.
Balls is not fit to be an MP, let alone a minister of state.
Agreed -whether the dumbing down is deliberate or the lack of intellect authentic, I don’t know. In the case of the former it is despicable ,the latter, tragic.
Ed Balls spent the summer in the US with his old mentor, Larry Summers… king of Clinton’s deregulation and arch Neo-Keynesian. What a disaster Balls is .. and how un-keynesian is neo-keynesianism!
Totally agreed R&D neo-Keynesianism
Geoff Tily opened my eyes to this
I have just watched Ed Balls on the Andrew Marr Show.
I wish Andrew Marr would just shut up sometimes.
The truth needs to come out that it was not Labour’s overspending that created the deficit or the huge national debt…it was the financial crisis. It was obvious that Andre Marr didn’t want to hear this.
Andrew also has a problem understanding that poor and middle income families shouldn’t be picking up the lion’s share of the bill for the financial crisis.
Andrew also continues to spin the ripping yarn that the increase in the income tax rate to 50% will only raise £100 million.
I agree!
But don’t the top 1% of earners already pay 1/3 of income tax? Seems like a lion share to me.
They do not pay 1/3 of tax
They pay a high proportion of income tax
That is not the same thing at all
And the reason why they pay so much is because they have captured so much of all available income to be taxed
The BBC is now unwatchable -no-one, I mean no-one, asks the most obvious and necessary questions -these ‘celebrity’ journalists live in a media induced cloud-cuckoo-land. people like paul mason, Flanders never did this -try Al Jazeera/RT if you want something more than neo-lib propaganda (you don’t get so much UK news which means you avoid going red in the face listening to our Governments’ mendacious guff!).
According to this they do pay a 1/3 of income tax. http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10368203/Top-earners-to-pay-third-of-all-income-tax-despite-rate-cut.html
But apparently they only earn about 10% of the income. So looks like they’re really pulling their weight if you ask me.
Please get your facts right
They command much more income and that ignores what they hide in companies, trusts and offshore
I’m sick and tired of the oft repeated lie that the top 1% pay 30% of the tax bill. The last time was last night on BBC News late night review of the papers – and neither the chair nor the other interviewee corrected her.
Agreed
They do pay a high proportion of one tax – by not all by a long way
And even on income tax this is because of their extraordinary after allowances incomes
Many people think Clinton’s budget surplus in the late ’90s was a great success. Obama speaks positively about it. However, an examination of the sectoral balances chart for that period shows the USA’s budget surplus was matched by an equivalent private sector deficit, as Murphy discusses above. Of course, private deficits cannot be sustained and so came the recession at the start of Bush’s first term in office. Admirers of Clinton get the causality wrong. They claim that the budget surplus caused the boom/bubble that accompanied it, whereas the the latter was the case due to the accompanying restrictive tax rates. Without such a bubble the search for a surplus will just bring a recession immediately as we see in Europe’s periphery.
All of this concern with fiscal surpluses is completely unnecessary as the UK Government faces no affordability constraints. It has its own sovereign fiat currency which it allows to float, unlike Eurozone countries. The government can never run out of GB Pounds. The Modern Money Theory (MMT) literature sets out this point clearly and in great volume. A country like the UK does not need to tax or sell bonds to spend. The sale of Treasuries is not a funding mechanism but a reserve draw. It offers banks with excess reserves the opportunity to switch these reserves into an interest bearing account, no more. Why do the banks have excess reserves? Because the Government increased its deficit spending. The sale of government bonds is not the private sector doing a favor for the public sector but the reverse.
The only sources of a sustained recovery is an increasing Government deficit. The only way to fund the greening of the UK society is through an increasing UK deficit. The only way to address the long term income deficiencies at the the lower end of the UK society is through an increasing deficit, preferably spent on a Job Guarantee. The only way to repair private sector balance sheets is through an increasing public deficit. Do not worry, a growing public deficit means growth in the safest category of privately held assets. That should sound good.
Anyone for the DeutchGewerkshaftBund (DGB:German TUC) Marshall plan for Europe?
I fail to take Balls seriously when he states that they will just spend whatever they raise in taxation!
So he’s going to put tax rates up to 90 percent or run a zero deficit and crash the economy?
Of course he isn’t, because he must realise he is talking misleading rubbish.