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Thursday, July 01, 2010

A brief return to politics - the Budget

Following on from my pre-Budget "Sceptical look at the economy", I thought I'd return to politics and the Budget.

The financial position seems to be largely what was expected before the election and the size of the proposed cuts seems consistent with the scale of cuts in Spain, Greece and Ireland.

What I would have done? I suppose I prevaricated in my last post on what I would have done in the recent Budget. To be a bit more explicit: I would have put probably something like 3p on basic rate tax, lifted the lower threshold of basic rate and brought down the threshold to the higher rate. And looked to cutting something like 15% across government spending with no ring-fencing. I may have put up capital gains tax a bit more at the higher rate and not reduced corporation tax - but to be honest these measures don't bring in much cash anyway. As for benefit cuts, I'd probably have gone for means-testing things such as child benefit, winter fuel allowance and so forth. My impression is this would approximately fill the appropriate gaps (but I haven't done any calculation).

But then nobody voted for me, and the Liberal Democrat experience is if you offer the voting public an increase in income tax they say how great this is, and how they'd really love you to spend the money where you've said you'll spend it, and then vote for someone else who has promised not to raise income tax. Of the national parties the Green Party manifesto was the only one to imply they would not make any cuts, but increase overall taxation to cover the structural deficit; electorally the Green Party didn't do that well in the General Election with about 1.0% of the vote.

As it stands the Budget was somewhat different from my preferred option. There are a few mitigating factors but I'm not convinced that VAT rises are a good way to raise tax (it has been suggested that they are better than income tax rises because they do not fall on essentials and they are "voluntary" to a degree, which income tax rises most definitely are not). It seems rather notable that there was much symbolic "dipping of the hands in the blood" by Nick Clegg, Danny Alexander and Vince Cable, you'd have though the Tories would have been a bit more forthcoming about defending a budget in which they were the majority partner and which largely matched their electoral commitments.

The Labour Party has started pointing out that this is a very political Budget, that's true, and so was their idea of defering cuts into next year. For the Opposition this has the positive political benefit of not needing to be clear about what you would do until well after the General Election (and not even then) and allows you free-reign to criticise cuts by the incoming government without proferring an alternative because obviously you'd be doing this next year when things would have become magically better.

I've come to the conclusion that macroeconomics is almost entirely about politics, and the vehemence with which economic opinions are presented leads me to believe that everyone realises they don't actually know what they're talking about and that by shouting loudly they can get away with it. Presumably MP's and ministers feel they have learnt to run the economy through the odd lecture course on the infamous Politics, Philosophy and Economics undergraduate degree course at Oxford. It seems notable that prior to the election the global consensus appears to have been for "economic stimulus" and after it is for "deficit reduction" (with the exception of the US). I'm not clear how this has happened, because I can't believe it's entirely driven by the UK election.

Inferring what the voting public want from elections and opinion polls is always a tricky business but the evidence seems to be they're happy with the Budget and it's pretty much what they expected. I suspect the reason for this is that the majority of them will be in the private sector and over the past few years the companies they work in would have laid people off, been on pay freezes and, over a longer period, treated employees less generously in pension terms but this largely hasn't happened in the public sector. The same opinion poll shows fairly good support for maintaining the state pension whilst "cutting benefits for those of working age". 

The Office of Budget Responsibility is pretty upfront in saying it's estimates for GDP growth are subject to large uncertainty (see p10 of this report, and also Annex A on how figures are derived - hat-tip to Christopher Cook for that). The biggest problem seems to be that recession are utterly unpredictable. I'd be interested to see similar analysis for unemployment figures - can't help thinking they're not going to be good.

My useful pieces of contextual information for the day: UK employed population is about 30million, of which about 5million are in the public sector.


twaza (@wassabeee on twitter) said...

Thanks for a very useful analysis.

My eternal frustration with politicians, the media, and managers is their inability to explain (and probably also to understand)that all measurements and predictions have error bars (as you would call them or confidence intervals as I would want them called), and that the error bars in economic predictions are very wide.

Tigger said...

Macroeconomics itself is not just about politics.

The problem is that to say anything true involves huge amounts of uncertainty, complexity, what ifs, psychology, assumptions which ought to be more clearly stated... (yada yada yada).

Politics consists mainly of soundbites aimed at Sun & Daily Fail readers and (almost?) all politicians are economically illiterate.

Real, proper, macroeconomics is *difficult* and politicians can't be bothered with it - that's even if they realise the complexities and uncertainties exist at all.

SomeBeans said...

@wassabeee and @tigger it's interesting that closer to home (for me) the communication of uncertainty in science is a big issue. The problem being that any hint of uncertainty can be attacked mercilessly on rhetorical grounds.