Why does Cameron want permanent austerity?

In the United Kingdom, there could well be austerity without end. In a recent bullish speech at the Lord Mayor’s Banquet, UK Prime Minister David Cameron offered up a glimpse of what the future might hold if the Conservatives are re-elected in 2015: a government of “austerity in perpetuity”.

Martin Kettle suggests in The Guardian that this speech may have been the moment of hubris that loses the Conservatives the next election.

For many people across the English-speaking world, “austerity” does not mean quite what it once meant — simplicity, restraint, beauty. In much the same way, “rationalism” in the Australian context no longer holds the same positive connotations when paired with the word “economic”.

It is not just in the English-speaking world that this has changed: if you happen to be a young Madrileño struggling to find work, one of the almost 26 per cent of the Spanish population still unemployed, austeridad is a curse.

In Greece, the Greek term for “austerity” can hardly now be separated from the growth-strangling measures imposed since 2010 at the behest of the IMF and European Union, measures that have at times seemed to threaten the very existence of the modern Greek state. As of October 2013, Greece’s annual GDP is still in decline (after five prior straight years of decline) and its debt as a percentage of annual GDP remains in the vicinity of a colossal 170 per cent.

The “austerity medicine” has been forced down Greek and Spanish throats since 2007 and plenty more besides. In Cyprus, the Ukraine, Portugal, Hungary, Iceland, Ireland and perhaps soon Slovenia, fiscal austerity programs have been administered under the instruction of the European Union and the IMF, in exchange for bailout funds to service national debt and/or shore up their domestic banks.

That growth in the European Union has subsequently flatlined since 2011 can hardly be viewed as mere coincidence, and the advisory role of the IMF has accordingly fallen under increased scrutiny in the last couple of years.

The response has been a truly spectacular feat of intellectual acrobatics. As reported by Alan Kohler in October last year, the IMF has since admitted to mathematical error in calculating the effect of austerity on growth estimates and in effect, executed “a full intellectual U-turn” on austerity.

IMF Managing Director Christine Lagarde has led the political damage limitation exercise. Further mea culpas have emerged this year, seemingly burying “fiscal austerity” permanently, at least in the brutish form it has taken in the aftermath of the GFC as a salve to national debt crises.

The truth is more complicated: as Australian economist John Quiggin observes in his book Zombie Economics, even when proven to be wrong and dangerous, ideas are very hard to kill and “expansionary austerity” now has its own chapter in the latest editions.

In France, President Francois Hollande finds himself and his Socialist Party in the ironic position of being criticised by the IMF for pushing austerity too far. The United Kingdom, once the IMF’s austerity poster child, provides a case in point: under the Chancellorship of George Osborne, fiscal austerity staggers relentlessly on even as it bleeds to death.

Since the Conservative-Liberal Democrat coalition was elected in 2010, the government has junked its touchy-feely “Big Society” moniker in favour of a program of cuts so deep they could well be labelled “Cruel Society”. They have resulted in the widespread closure of libraries, reductions to and closures of local government services supporting children, the disabled and the elderly, and a reduction in patient access to NHS specialist services across the country.

The Cameron government has also introduced the “spare room subsidy” or bedroom tax targeting public housing residents with more rooms than they need, and also instigated an intrusive and demeaning program of outsourced work capability assessments designed to force anyone who is plausibly capable of some kind of work (in the imagination of a bureaucrat) off welfare.

The UK economy has stagnated over the last few years, with annual GDP growth not touching 2 per cent since 2007, missing growth and debt reduction targets on consecutive occasions. Unemployment has remained high, over 7.5 per cent since 2009, and ratings agency Moody’s made the historic decision in February this year to downgrade the UK’s credit rating from AAA to Aa1.

Government debt as a proportion of GDP has also continued to increase steadily since 2010. Despite all this, Chancellor George Osborne remains determined as ever to stay the course — surely now for political reasons as much as empirical reasons — though boosted recently by recent economic figures for 2013 Q3 (growth up to 0.8 per cent, unemployment down to 7.6 per cent).

Despite the evidence, the immediate future of austerity as a response to debt is hard to predict. On the one hand, the IMF’s intellectual backflip seems likely to discourage governments from embracing austerity measures in the years ahead. On the other, for governments that are wedded politically to the doctrine, it seems that no amount of expert advice or economic analysis will convince them to alter their course.

Despite Australia having one of the lowest government debt to GDP ratios in the developed world, the effects of Tony Abbott’s appointment of Maurice Newman to his Prime Minister’s Business Advisory Council will be watched with interest in the months ahead, particularly given the lilt of some of Newman’s recent comments about the minimum wage.

At least – thanks to Cameron – it seems as though voters in the United Kingdom are going to have a clear decision to make at the 2015 election: you can vote for Keynes, or you can vote for “the Cruel Society”.

This piece was first published in this form at New Matilda.

The politics of the top income tax rate

Regardless of what the national fiscal situation looks like at any given point in time, few topics divide the commentariat right from the commentariat left as keenly as whether or not the top rate of income tax should be cut. The right will have you believe that cutting the top rate of income tax encourages the rich to spend more and the entrepreneurial to expand their businesses; that a heavy top tax rate discourages people from striving to earn more and encourages them to find ways to cheat the tax system. The left will have you believe that cutting the top income tax rate, explicitly (as it is) in aid of the affluent, cannot be morally justified when there are so many more worthy targets for government expenditure out there. Why put a few more dollars into the bulging pockets of society’s most fortunate, when you could put a few more dollars into schools, hospitals, or to help the needy or vulnerable? Ethically it just doesn’t add up.

As someone firmly on the “left” side of the argument, I do wonder whether there would be any circumstances under whether I would feel that a cut in the top rate of income tax could be justified. Society, I think, would have to be motoring along swimmingly, with a high median income and a high quality of public service provision for people from all walks of life. There would need to be a clear sense that people on high incomes were really being stifled by the tax system, or that the tax system was configured in such a way that the top tax rate was proving ineffective in delivering revenue.

Two of the giants of Western Europe have seen some of these philosophical issues rise to the forefront of public debate in recent weeks. In France, the Socialist presidential candidate François Hollande has proposed a bold tax rate of 75% on personal income earned over €1,000,000 per year. Contrastingly, in the UK, a furore has arisen in the lead-up to the Budget (to be delivered on Wednesday at 12:30PM UK time) after it emerged that the Conservative/Lib Dem Coalition are planning to cut the top income tax rate from 50% to 45%. Andrew Rawnsley at The Guardian has a ruminative piece summing up the machinations, and asks the question most LP readers are probably wondering:

Reducing the top rate will please a lot of Tories and it won’t have escaped Mr Osborne’s notice that these are the people who will ultimately select Mr Cameron’s successor. It will obviously go down well among the minority who earn enough to pay the top rate. No doubt it will be justified on the grounds that a 50p rate sends a negative signal to entrepreneurs and deters talented people from working in the UK. But the chancellor will struggle to explain why he has made a priority of cutting the top rate to the far greater number of less affluent voters who are suffering the worst squeeze on their living standards in decades.

In short, cutting the top tax rate (as Rawnsley quotes “senior Labour figures” as describing it) really does sound politically mad. It will literally benefit just the top 1% of tax-payers, leaving a sizable proportion of the remaining 99% feeling appalled at the government. It provides the struggling Labour Opposition with a stonking great club with which it can beat the Conservatives and condemn them as being out of touch.

This is an act that reeks of the Tories’ self-perceived need to touch up their own supporters, with scant regard for either the state of the economy or the vast majority of the British population. The next election is still a few years away – so there is a palpable sense of “now or never” for the blue-bloods, with a few years grace yet to patch up their image before the public gets to pass judgement on them again. What is ironic is that Hollande in France is taking a mirror-image approach; 75% is a hefty headline-grabbing number seemingly designed more to mobilise and appeal to his party’s base rather than to solve France’s economic woes or to aid the struggling.

When did the top income tax rate become little more than an intellectual chew-toy for the political classes?

Crossposted at Larvatus Prodeo.