Policy Research in Macroeconomics

How Labour’s Ed Balls was trapped

David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit – and was promptly trapped.

That framing goes as follows. We (the government) have spent beyond our means. And the way to pay for it, is by cutting (public sector) jobs, and raising taxation – like VAT.

Ed Balls’s speech concedes (as Labour has done since Alastair Darling’s time at the Treasury) the deficit-reduction-emphasis agenda set by his opponents. And by so doing – implicitly concedes the need to cut public sector jobs.

But I am being unfair.  Balls began his speech by mentioning Labour’s “emphasis on jobs and growth” But the speech immediately morphed into Labour’s concession to the Coalition: that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.

But the highlight of the speech – the sound-byte that his spin doctors no doubt intended the media to emphasize-  is a call for a cut in VAT “to boost consumer confidence and jump-start the economy.”

Cameron flashed back his retort: “slashing taxes” he argued, would only make the UK’s fiscal deficit worse.

And so Balls is trapped.

The debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.  ‘Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’ – we have to raise taxes, like VAT.   “Slashing” VAT – when it’s higher VAT returns that are paying down the deficit – is unacceptable to the Coalition, to the Treasury, to orthodox economists and to the bulk of the British public.

But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’ – i.e. higher taxes – to pay down the ‘credit card’.

But the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit – which I and others have argued it cannot do –  but by employment.

Put 2.43 million people back to work, and hey presto! the deficit will vanish.

Get 2.43 million people – including thousands of skilled and unskilled workers, clever and talented student graduates –  to address Britain’s very real insecurities in energy, food and health – and hey presto, the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month).

And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.

Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment.

The only thing that will restore confidence will be: employment. And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security, rising fuel and food prices.

So Ed Balls’ speech should have gone like this.

Jobs will cut the deficit.

Look after unemployment – and the budget will take care of itself.

And if the private sector can only create 88,000 jobs in 3 months – while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits – andcausing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.

Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs.

That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.

Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment.  Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is REALLY IMPORTANT. For the Coalition it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.

So let’s go on emphasizing the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising!

Simultaneously posted on LeftFootForward and Debtonation

One Response

  1. Hi Ann,of course ed balls doesnt agree with the coalitions strategy if you read his bloomberg speech last year you can conclude this.the real culprit is alistair darling he was the one that fell into the trap!with his i will make greater cuts than thatcher.
    i know in ed balls heart he would do things different but politically david cameron has been able to frame the debate around deficits.i think he is playing safe so labour can win and hopefully pick up the pieces when the coalitions economic strategy fails

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