Trust and Politics



The BBC's economic editor, Robert Peston, wrote an interesting article for The Times the other day in which he argued that all of the main parties are being economical with the truth when it comes to the nation's finances.

The circle that has to be squared is how does UK PLC deliver economic growth while living within its means and paying down the mountain of debt that has built up over recent years?

Now as it turns out, there is not that much difference between the Westminster based parties and to a great extent they would all do the same thing which involves a mix of tax rises and cuts in public spending.

Except that everybody believes that the tax rises and cuts in spending should take place in someone else's back yard, preferably the rich and wealthy or the bankers or some other unpopular bogeyman who caused all the problems in the first place.

So that the rest of us don't feel any pain.

But this is exactly what politics is all about because all politicians and every political party emphasises and exaggerates things to suit their own point of view and attract potential voters.

In which case it's likely to come down to who do you trust or probably to be more accurate who do voters trust the least to do what they say they will do? 

And on that basis things are looking none too good for Ed Miliband and the Labour Party.


Party leaders are economical with the truth


By Robert Peston - The Times

Labour and the Conservatives have been less than honest about the hard financial choices we face at the next election

It was the conference season of forgetfulness. Ed Miliband’s omission of the government deficit — still running at too close to £100 billion a year for most people’s comfort — from his leader’s speech caused a frisson because of its implication that reducing the rate at which the national debt soars nearer to 100 per cent of national income is not necessarily a priority.

For those of you wondering what all the fuss is about, it is mainly that paying interest to lenders on a huge debt is not a desperately productive use of taxpayers’ money.

There is also evidence that long-term economic performance tends to suffer when debt as a proportion of GDP reaches the kind of ratio that we already have in the UK (and in extremis there is possible economic meltdown when debts become so big that they cannot be serviced — although the UK’s public finances are so far a world away from catastrophe).

So it was a bit odd that Mr Miliband didn’t nod to how a Labour government would be mean-ish with public spending, since this is what the shadow chancellor, Ed Balls, had been insisting on only a few hours earlier.

There is no simple choice between cutting and not cutting. Mr Miliband would never make that case, when he remembers that the UK has a deficit equivalent to about 6 per cent of GDP, the widest of any big rich western nation, including France and Italy which are generally seen as being in worse economic shape than the UK.

But there is an important debate to be had about how — and how fast — the deficit should be reduced.

For one thing, on the Bank of England’s analysis, investors are now literally donating money to the government: they are charging interest rates for loans with maturities from zero to 25 years that are lower than the expected rate of inflation; or to put it another way, the government can borrow not for free, but for better than free — for a negative real cost.

But if money for the government is so cheap, shouldn’t it simply go crazy and cover the walls of Whitehall in gold leaf? Why on earth is George Osborne bothering himself to shrink the public sector at a rate and to a size that Margaret Thatcher never contemplated when those who control the world’s great pots of cash have handed him the blingiest of platinum cards and are begging him to max it out?

Well it is never a good idea to pay for recurring public service costs such as the salaries of doctors and firefighters with debt, because if at some point in the future interest rates were to rise (and yes, that will happen one day, perhaps sooner than you may like) those salaries would suddenly become unaffordable.

Let us say bonjour here to the relatively new prime minister of France, Manuel Valls, who was in London yesterday and is talking the talk of at least some shrinkage of the magnificently appointed French state (which includes a cherished national right to free taxi rides for the sick to hospital and for some kids to school).

But here is something you should know. When investors want to give free money to governments like ours, it is in part because they don’t think the long-term prospects for the private sector are all that splendid, and they fear future economic malaise. They lend to the public sector cheaply because they have to park their cash somewhere and the rewards from the private sector just don’t look juicy enough.

That would lend weight to a so-called Keynesian notion, last fashionable when platform boots and loon pants were my uniform of choice, that it is reasonable for government to improve the long-term prospects of the economy by investing large amounts in infrastructure, roads, school buildings and railways. And arguably it should finance this investment by borrowing for 25 years at the negative real interest rates currently on offer.

Funnily enough this is Labour’s official policy, although it is rather coy about it — preferring to point out that it wants to balance the current budget — that is, spending on civil service salaries, welfare payments and so on — by 2020.

There is another argument, made by George Osborne, that the national debt has risen so far and so fast (on his watch, after the initial mess made by his Labour predecessors) that the UK’s creditors would fall out of love with the government if they could not be confident that the ratio of debt to GDP would start to fall in a few short years. That is why he would balance the budget on current and investment spending by 2018-19 and in the process would need to shrink the state by almost £30 billion more than Labour would do.

But perhaps as important to Mr Osborne’s claim to be the soundest steward of the exchequer has been his continual insistence that he would not cut taxes beyond what was affordable.

So it was a bit odd to hear David Cameron promising to raise the threshold for the 40p tax rate and boost the tax-free earnings band at a cost over the next parliament of £7.2 billion.

Quite where the money for this would be found has not been made clear, since so far Mr Osborne has made a down payment of only £3.2 billion a year by freezing many benefit payments for two years, compared with total cuts of more than ten times that which would be required to balance the books and cut those income taxes.

So perhaps Messrs Miliband and Cameron are suffering from an identical malady that seems to afflict party leaders late in a parliament: short-term, pre-election memory loss.

Robert Peston is the BBC economics editor

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