STATE OF THE UK ECONOMY'S GENERAL ELECTION

After a month of electoral canvassing and 'presidential' debates the media has concluded that the result is not the only matter that is the least predictable. Apart from 30-40% of voters remaining apparently undecided until the last moment according to the pollsters, there is a general view that the parties have failed to be "absolutely clear" about their budgets, especially their draconian budget cuts. The parties and the media have manufactured the idea that economic policy is only the government's borrow, spend and cut plans.
There is no doubt that a blackmail is being exerted in the money and bond markets and by the ratings agencies helped by the sovereign debt and cost of funding crisis hitting Greece, Spain, Portugal and Ireland, and others. This, and the Conservative Party's successful campaign claiming that government finances are in a mess, has propelled all parties into accepting that steep spending cuts are essential, whether they really are or not. That they might not be, and the unpleasantness involved is also a factor in parties being somewhat vague about spending cuts. This is a reasonable position. It is not normal for budget cuts to be spelled out in precise detail ahead of time.
All Chancellor candidates and real experts know that efficiency savings continue all the time. Mostly they are generated by moral and ethical imperatives within the public services to apply the money saved to other essential more urgent priorities. They also know that long term plans can be cut and that there is a continuing programme of asset sales. Annual efficiency savings and asset sales are worth about £35bn. The Conservatives want to take most of that out of the government budget while Labour want to re-apply most of it to support welfare priorities and continue to directly support economic recovery. Conservatives believe in more indirect supply-side support by entrusting the private sector to know better what is best, by how much and when. The Liberal Democrats policies lie somewhere in the mix between these two arguably ideologically polar opposites. That is also the parties traditional positions. The Conservatives want to take the current recovery's sustainability for granted while Labour does not.
Recession and public spending cuts seem abstractions to most voters, those who have kept their jobs and actually grown their savings (net personal savings rising 8% annually) while not having had to sell a property at a loss. Property values appear to be rebounding upwards very fast. Therefore, the whole hair shirt debate about cuts seems as real as a 3D shark. It is undeniable that the Labour Government is jaded and tired and doughy faced. They have been on the field of play for 13 years. Conservatives and Liberal Democrats appear full of bounce, energised and fresh-faced. The civil servants are filled with the gleefulness they always relish at the prospect of yes ministering to relative novices.
'Time for change' is consequently the catchphrase of the election. Coming from the lips of Labour politicians it seems perforce least convincing. The electorate is being asked at this anxious time to vote for the devils they know or the devils they don't. It should be no surprise therefore that they are feeling shifty, misled, suspicious of 'snake oil' and therefore unusually uncertain who to vote for, and not least for the fact that so many MPs are retiring following the expenses scandal?
I respect the parties' ideological differences and wish they would make more of them. The many new MPs who will enter the House of Commons regardless of the outcome of the election are however probably the least ideologically opinionated generation since the middle of the 19th century! When ideology is weak then technical attention to the true complexity of economics facts, to the real SNAFU world of unintended consequences, has to be that much greater. Will they see through the fog of electoral war to see the true state of the battlefield?
Currently the fog of political battle is a pall over the fuzzy majority called the 'great majority, the 'middle classes', the 'hard-working families,(blue-collar and white-collar) and not only their income and net wealth issues, but also the very uncertain quantitative facts and qualitative and legal realities of migrants.
We have a fudging in the middle ground because it is perceived that only there are the few thousand swing votes required to make the difference.
The last hours of the campaign have for example hotted up in Scotland because, ironically from the point of view of the Scottish National Party, it is there that the pollsters have most recently decided the outcome of the UK general election will be decided. What none of the parties are saying is that for every £10 of lower borrowing spending has to be cut by £13. None are predicting how much the budget deficit will narrow as the economy's growth is restored to 2% GDP growth and above.
The general election debate has discussed the crisis of the economy as if it is a crisis only of government finances, budget deficit and debt. The economy is centre-stage we are told by all pundits and politicians, but in fact only that quarter of it that is government and only the part of the general government budget that any government has the power to change, less than one fifth or about £120bn. This is enough however to either add 1-2% to general economic growth against trend or to subtract that impetus.
The idea that the budget deficit and debt in the short term is all that economic policy of government should be about is of course absurd. It is as if the short term collective memory has been wiped. No party refers to the tripling of private sector debt over the past decade when, until the recession hit, government deficits and debt remained steady and at times fell in ratio to GDP. Banks alone will this year borrow three times as much as government will borrow.
Private sector debt will cost current and future generations more than public sector borrowing and debt, even if there are tax rises, but it is the latter that has attracted all political scare-mongering. This is the price we must inevitably pay for ya-boo politics, and may be an important factor in why the third party, the Liberal Democrats have been elevated into a share of the popular vote that is likely to dictate that we have a coalition government forming after May 6th.
What the politicians are not discussing with the general public is that there is much more to public finances than money in money out or the Maastricht criteria. There is also much more in the government vaults, and more than the gross debt or empty hole imagined. Government is holding more than sufficient financial assets to make the debates during the general election totally redundent. The debate about the £800-1,000bn size of the government debt and deficits of $160bn falling to £100bn reduced to whether to raise National Insurance or cut £6bn this year, but is not discussed alongside the £45bn of bank shares that could be sold, or the £185bn government bonds bought in (to add to another £200bn government debt owned by the government and merely owed to itself) any of which could be in due course sold, or the nearly £500bn in banks assets owned at the Bank of England earning about £40bn annually or the £200bn of other public sector assets available potentially for sale, or the balances of national enterprises, and so on and on. Public finance apparently may only be discussed in small bit sizes that the public can understand.
The amount that the budget deficit will recover automatically with higher economic growth is not a quotable figure. Politicians fight shy of hostages to fortune. They 'fight' politically as much by what they fail to say as by what they do say, what they feel they can say without being satirised by their opponents. Satire is a major player in British politics. The general public are feeling not only angry but satirical towards the banks while merely satirical towards the government and other political parties. The automatic closing of the deficit leaves what is called the structural deficit. All parties have said they intend to close the structural deficit by making spending cuts even though this deficit was not required to be closed in years before the Credit Crunch and Recession. The truth is that it dare not be closed for fear of denuding banks, pension and insurance funds of the government bonds they need every year to add to their capital reserves and investment funds. The politicians will not tell the public that there is a minimum amount of government borrowing that is simply irreducible because it is essential to our savings and to the health of our banks.
Much is made, variously by all parties about the size of government in our economy. It is often heard in the national regions that 60% of jobs depend on government when any simple scrutiny of publicly available data shows that the true figure for Scotland, Wales and N.Ireland is 30% and not much different for regions of England and Wales.
Poorly schooled pundits, politician and others believe government s as big as its budget (over £600bn) is a 43% share of GDP (over £1400bn). The size of the government sector in the economy is only half that figure because one third of government spending is not part of GDP and anyway it is also taxed. Government pays more in tax on its spending than the average for the rest of the economy - about 28% of government revenue is taxation exerted directly on its own spending. It is reasonable politics to worry that government is too big, but not if the perception is totally out of proportion with reality.
There is a half-submerged issue about membership of the European Union and the extent to which we are governed by Brussels and not by London. The debate fails to see the greater proportion of our policies and laws that we derive every year from examples created in the USA, not because we have to but because our governments and parties choose to. Our economy's recovery similarly is dictated more by growth in the USA than in the EU. But, this along with other practical realities is never, or very rarely, mentioned in our political debates.The parties competing for government are of course focused on how they can be better trusted than the others with hands on the tiller of the ship of the UK economy, especially that part of the engine that is the public sector finances and how these may dictate to private sector finances. What should be clear is that the parties actually do not believe they have as much navigational choice and engine horsepower as the public are told to believe. The Conservatives want to make the power of the public sector greater to change direction but smaller in ability to power, to finance, any change. Labour are not seeking more power for Government, but do not want that engine power to be made weak.
The Conservatives see general acceptance of spending cuts as an opportunity to reduce the size of 'big government' and to some hard-to-measure extent replace it with 'the big society' where there will be more initiative available that central government does not dictate.
They have constructed an argument that says this will boost economic growth by growing 'the real economy' and not harm growth or risk a double-dip recession as Labour claims. The precise policies for helping business are not very different between the major party manifestos other than Labour has more of them (the advantage of being in government and having published a full budget) and more where there is actual money committed. All parties have a problem in drawing a line between the national interest and voter segments self-interest. On balance, it seems that the parties believe voters are more compelled to vote according to short term self-interest than what is in the longer term national interest. Perhaps this is why Labour has not successfully sold the quite true story that it made the right calls to save the banks and save the economy and to lead in international coordinated action. Like Churchill in '45 Gordon Brown is failing to convince the electorate that because he managed to gain victory in war he should be entrusted to manage the peace. The psephologists say the election outcome will be dictated by women who are the majority of the 'swing vote'. Gordon Brown was the only PM candidate to mention women (implying policies for women) in the three television debates, perhaps also because he does not believe he can appeal to them televisually?
The voters believe that budget cuts and whatever they will have to pay because of those results from them having bailed out the banks. The parties are not willing to say that taxpayers money was not involved, to explain that the banks were saved off-budget and 'off balance sheet' or to predict how much taxpayers will reap a profit that will do more than anything else alongside recovery in economic growth to balance the budget. This is a dimension too far it seems for politicians to risk telling the voters just how innovatively and cleverly the system of public finance can operate.
The parties all seem to under-estimate that 15% of voters work for the public sector other than promising no cuts, or very limited ones, in health and education, and of course in Defence and Police. All say that only back-office not front-line cuts in public services are planned. Economists, civil servants and disbelieve their assurances. That front-line workers disbelieve that their jobs are safe has much to do with the fact that one third of them are part-time employees.
What none of the parties are prepared to say is that the cuts they propose are trivial and in some measure self-defeating i.e. that revenue can fall when spending falls. The likely outcome of whoever gains the command of HM Treasury is that the composition of government spending my change slightly, but it is unlikely to fall in absolute terms. The trumpeted cuts will not cut as much as intended. There will be false economies. The abstract belief that a smaller government share of the cake means a bigger private share is very entrenched. The idea that the cake is smaller when the government slice is reduced or the cream taken off the top is not understood.
The big question about whether we return to a property-led credit-boom approach to economic growth or do something to re-orientate the economy more to productive business and export-led growth via manufacturing - which has in the last decade received only a small share of bank lending while being responsible for most of UK exports, while banks have lent 70% of loans to mortgages and property developers. In export-led economies like Germany and China the opposite has been the case. UK banks lend more to foreign manufacturers than to UK manufacturers! All parties say it is essential to do more for small businesses, the lifeblood of the economy, only source of new jobs, business of the future, hard working, under-valued etc. But actually, if the banks don't take orders from government on doing more to support small firms long term, then not much can change. Banks (and finance sector generally) have been caught up in three ways in the election debate. Politicians appear to agree that the UK economy became over-dependant on finance, big banks may need to be broken up, and the Labour government was misled by Big Finance.
The finance sector is very large in the UK economy. It is the next biggest sector after Government when all indirect as well as direct business employment is counted. It is an important competitive advantage of the UK that does do much to make up for UK trade deficits. If we had more than the big 5 banks responsible for 70% of domestic bank lending we might improve the competitiveness of the UK domestic banking market.
The traditional economists assumption was that banks were neutral with respect to the performance of the macro-economy. The Credit Crunch was a shock to that idea. We can now see that banks did not diversify their lending across the economy but concentrated too much on mortgages and property. German banks for example lend three times as much to small firms who employ half of private sector jobs as UK banks, in ratio of 12% of GDP compared to 4% of GDP. None of the parties have policies to help business and to boost capital investment that approach the scale of the problem. None are prepared to tell voters that speedy restoration of property values and mortgage lending is not desirable. As recovery strengthens there is little indication that a return to a credit-boom economy will not be automatic.
The parties are not committing to relieve the housing shortage by a return to building public housing. Council house building was abandoned thirty years ago - a large factor in the UK property price boom. Housing associations and policies to encourage house-building and affordable housing and sell-offs have not made up for the gap caused by the ending of public sector housing investment.
Labour says it has renovated 2 million public sector homes but will in the next few years cut back capital investment by government as a major part of its spending cuts! Capital investment in the UK is currently extremely low by international comparison, a tenth of what it is in extreme export-led growth economies of Germany and China.
All parties want to boost capital investment by industry. Only Labour has put some numbers behind this, but very modest ones.
Only Labour's Gordon Brown in the three debates, mentioned 'women', but none of the parties have explicitly stated a fact well-known to economists that women, children, disabled and pensioners are 80% of Welfare State dependants. The biggest direct responsibility of government in terms of quality of life and income are pensioners, especially the third of pensioners living in poverty whose state pensions are only worth half of what they were 60 years ago! If any of the parties had been sufficiently desperate to win the election outright they could have promised over a decade say to double the state pension. The trouble is that to justify this when public spending is poised for major pruning requires explaining the roundabout way in which the economy really works. Pension costs after tax are low because pensioners and all poor people spend whatever they get.
Looking at the difference between the gross cost of public spending and the net cost to taxpayers after tax was a practise at The Treasury that ended in 1979 and has never been restored since. Not even the Institute for Fiscal Studies any longer looks at revenue and spending in those terms? The result is that the politics of house-keeping in the public finances is heavy with myth-making, light on practicalities.
The public sector is not less productive or less efficient than the private sector or more debt-ridden. The public sector is not much bigger than the minimum size it needs to be to be effective. It is not outside of the real economy any more than the banks are. There are many myths at work. Politics is war only by other means, civil war perhaps. The propaganda in peacetime is only be exceeded by propaganda in wartime. Everyone should vote for whichever party they believe knows the difference between propaganda and what is more essentially true, however paradoxical, and is more likely to betray the propaganda before betraying what is in the real national interest that will serve all and not merely a minority or merely the majority. That is my wishy-washy recommendation.