As the senior economist at IPPR, I am one of providers of the ‘pages and pages of the most expert advice’ about the ‘easy-complicated’ choices that Steve Van Riel identifies in his chapter (at least I hope some of my advice is ‘expert’!). So it is good to be reminded that there are other decisions – the ‘hard-straightforward’ ones – that need to be taken too.
But I am not sure that I agree with Steve that an economist cannot answer them. Yes, there are choices that everyone, economist and non-economist alike, can have a view on; but I think years of observing and analysing the economy gives economists a bit of an edge over non-economists. To take his first concluding question: when should we take a risk for growth? The answer lies in assessing the balance between the chances of success and the costs of failure. What has happened when similar risks have been taken in the past – in this country and in others – will inform that assessment. Economists should be better able to interpret this information. (At least they would be if they spent more time on economic history and less building unrealistic models of the economy, but that is a separate point).
I do think, though, that the key point Steve makes is an excellent one. There are some relatively straightforward decisions that the next government will have to make, but will find extremely hard to do so. Perhaps the biggest one is the decision over the size of the state.
Historically, government revenues in the UK have very rarely exceeded 38 per cent of national income (GDP). It will be very hard for a Labour government elected in 2015 to do all it wants to do with revenues at this level. In the short term, it is likely to have to continue to reduce government borrowing and, if it is not prepared to increase taxes, spending will have to be cut further. In the medium term, after the austerity of recent years, it will want to spend more on building schools, hospitals, railways and roads. And in the long-term, it will have to deal with the implications of the ageing population for spending on health and social care.
From these problems, flows a stream of other ‘hard-straightforward’ decisions. Given rising demand for what are now largely public services, will it be necessary to accept some of these might have to be provided by the private sector? To keep services public, is there more scope for increasing fees or charges? And is it more important to preserve universal services, such as health and education, or universal benefits?
It is a cliché to say that the UK electorate wants US-level taxation and Scandinavian-level public services and benefits but, like most clichés, there is a lot of truth in this one. In the past, rather than address this problem, politicians across the spectrum in the UK have fudged it. They have been able to do so, in part, because they have been lucky that spending in some areas – particularly defence and debt interest (thanks to the ending of the cold war and a shift to lower inflation) – has declined. That luck has run out, and the demographic time-bomb is ticking louder. The question now has to be answered: how much tax are we prepared to pay for the public services we want?
But there is one more hard-straightforward choice that needs to be made first. In a democracy like ours, if the next election is a close-run thing, can the Labour party put the options of higher taxes or cuts in public services to the electorate. What is the bigger gamble: asking the question before the election and risking losing it as a result of being branded the party of higher taxes; or not asking it and then having no mandate to do anything other than muddle through? That’s one question this economist cannot answer for you.
—————————————————————————————
Tony Dolphin is associate director for economic policy at IPPR
“but I think years of observing and analysing the economy gives economists a bit of an edge over non-economists.”
I am not an economist, my dyslexia makes me ‘thick’ at most things BUT if someone like me was able to predict the recession, long before it even became trendy for Vince Cable to do it, I think I disagree with the Economists know better line.
How did I find my great fountain of knowledge, that could predict what the banking fraternity could not and their Government overseers couldn’t either?
It was simple. I went to get a mortgage with a friend who knew nothing about them.
My friend was offered something that, in real terms, he simply could not afford. Not only would it need him to do overtime every week, it would also need some assistance from his then partner but soon to be wife’s income as well.
Any disaster, never mind a simple “sorry folks there is no overtime this week”, would have brought major problems to his ability to pay but the sell of the lender was that ‘we’ wouldn’t offer if ‘we’ thought on your current wage you couldn’t pay ‘us’ back.
The current wage count included overtime and bonuses that simply could not be relied upon.
Sadly and later regrettably, my friend took the lenders advice and the house that he wanted (not the house he could afford) became his.
Needless to say a few years, after working 7 nights a week with over time, when it was available my friend ended up not being able to pay but was lucky in terms of his property could still be sold, he was able to downgrade and more important get something that could be paid for, on the advice I’d given him which was based on basic wages less household and ‘life’ costs.
My friends problems signalled to me exactly what was going on in the industry, years before any recession but I was still able to predict that if these types of mortgages were on offer then it wouldn’t be long before ‘banks’ started asking for their money back, those on the boarder-line payments would struggle to do it and the knock on effects would be huge.
The sad thing is I told ‘Government’ about the state of the mortgage industry and the future consequences, should the industry continue to provide on the scale it was but, as per usual, on writing to Mr Brown’s department (at the time) I got a very nice letter full of spin saying that a crash wouldn’t happen.
You can employee as many experts or none experts as you want but it’s only when a Government listens and stops burying it’s head in the sand will it every be really successful for the people it is supposed to represent.