Well Ed, Keynes might not have been on side..
Ed Balls’ recent announcement that Labour would prepare its Shadow Budget within Coalition spending limits came less than two weeks after the IMF urged George Osborne to slow the pace of cuts.
So why did the Shadow Chancellor meekly abandon his position just as it received tacit endorsement from an organisation that was hitherto austerity’s biggest cheerleader?
Keynesians were flummoxed. However, for all Balls’ indignation over austerity, Labour’s previous prescription was really just austerity-lite: they were still going to cut, just a bit more slowly.
Balls has recognised his limited room for manoeuvre. With the UK having lost its prized AAA credit rating in February, a slowdown in the pace of cuts – never mind a net spending boost – may ultimately increase the cost of borrowing and balloon the deficit further still.
The name of Keynes has been invoked by the Left to damn the austerity drive across Europe, while the Right ripostes that imprudence during the boom left the finances too fragile to countenance more stimulus spending.
Often overlooked is the fact that Keynes preached fiscal constraint in the boom times to leave a budgetary surplus to draw on when the economy contracts: “The boom, not the slump, is the right time for austerity,” he wrote 76 years ago.
Achieving a tri-partisan compact to pursue such policies seems a forlorn hope if you subscribe to the axiom that voters tend to vote for parties that spend heavily during boom times but lurch rightwards when the economy nosedives.
The rise of fascism is often cited as exhibit A: European trends have often supported this theory. With the debt contagion threatening to engulf the Eurozone, a wave of Rightist victories left only Belgium, Denmark, Austria and Slovenia of 27 member states with left-leaning governments by 2011.
The election of François Hollande in France and electoral breakthrough of Leftists in Greece has reversed the polarity somewhat, but we’re a long way from 2007 when 10 left-of-centre administrations held power in the Eurozone.
The undeniable hardening of opinion against benefit ‘scroungers’ amid the biggest squeeze on living standards since the 1930s further validates the theory that voters grow less receptive to social justice narratives when their own economic situation deteriorates.
But people don’t simply become hard-hearted.
Swing voters – because most voters are solidly right- or left-leaning regardless – often vote for parties whose spending patterns mirror their own when income rises or falls.
But it’s counterproductive, cry the Keynesians, for the state to emulate a private household’s eminently sensible approach. Cut spending on eating out by £100 a month and a household saves precisely £100 a month. Income is entirely unaffected.
Between government spending and income, however, there’s a feedback loop, the so-called ‘paradox of thrift’: slash public spending and you put people out of work, thus increasing the benefits bill and reducing income tax receipts. Rising unemployment reduces consumer demand and fewer public-sector contracts are available to private businesses – again stunting growth and reducing the tax take.
Perhaps, then, swing voter should defy their intuition and vote in governments that implement countercyclical spending policies – so parties of the right to ‘fix the roof when the sun is shining’ and then of the left to cushion the crash.
Canada, which turned a budget deficit of 9 percent of GDP into a surplus in just three years following a humiliating ratings downgrade in 1992, represents a good case study for countercyclical spending. Scarred by the early 90s recession, there was a bipartisan consensus to avoid deficits, so the Canadians were better equipped for stimulus spending when the 2008 crash hit. Canada has created more than 600,000 jobs since the slump.
Perhaps European governments should practice what they preach to Northern Rock and RBS, who are forced to keep greater reserves of capital to act as a safety buffer during unforeseen events. “When you have an extra kidney, you don’t have to predict the source of harm – whether it’s going to be a snake or cancer or whatever,” said Nassim Nicholas Taleb, author of the Black Swan, on Radio Four last year.
“Likewise if you have a lot of savings, you don’t have to predict the cause of the next crisis. But if you have debt, you need to be very accurate in your forecast of the future.
“To emulate nature, we could just say we don’t want government debt […] we want a surplus in the good years. It is completely immoral to stick your descendents […] with the cost of your mistakes. Even if debt is economically efficient, you’re not bearing the risk.”
Increased spending during downturns and retrenchment amid booms would surely result in a more serene economic cycle; lower peaks, sure, but shallower troughs too.
It seems an impossible utopia. Across Europe policymakers have coalesced behind a consensus that deficit reduction should trump growth spending. Meanwhile, the Tories berate Labour for its profligacy during the boom times, forgetting conveniently how David Cameron had promised before the crash to “share the proceeds of growth” between tax cuts and spending rises – which surely would have resulted in a similarly huge deficit.
It seems that neither the Tories nor Labour have the stomach to challenge voters’ understandable instincts over state spending, whether its indulgence of largesse in the good times or approval of self-defeating austerity in the bad.
One can hardly blame them: had the Tory Party advocated punitive cuts between 1997 and 2007 their trio of General Election defeats would surely have been far heavier.
In that sense, when it comes to boom and bust, it’s neither the fault of Labour nor the Conservatives – we, as voters, sort of get the economy we deserve.
That said, the correlation between voting patterns and the state of the economy doesn’t consistently fit this model if you examine UK electoral history.
Labour governments were elected during the 1930-34 and 1973-76 recessions, although the early 80s downturn ushered in Margaret Thatcher and the Tories also presided over the next contraction, between 1990-1993. The 2010 General Election, the first since the 2008 financial crash, again returned a Conservative Prime Minister, albeit the Tories failed to win a majority despite the incumbent Labour administration having presided over the worst slump since the 1930s.
Winston Churchill is often quoted – falsely, it transpires – as saying:
“If you’re not a liberal when you’re 25, you have no heart. If you’re not a conservative by the time you’re 35, you have no brain.”
You might also tell swing voters that if they don’t lean right during a boom and left during a bust then they’re fuelling a boom and bust cycle (a less catchy saying, I know).