Liam Fox is the last person Osborne should heed

Fox wants to take from the poor and give to the rich – it’s class war

David Blanchflower
Sunday 17 March 2013 14:51

The great experiment with austerity has failed and now is the time to bury it before it does any more harm.

Paul Krugman made that clear in masterful performances on a couple of television shows this week. What Krugman calls the confidence fairy hasn’t shown up, which was entirely predictable at the outset. There never was any evidence that austerity generates growth in a recession, and so it has proved. Poor old Matthew Hancock with his Masters degree in economics was sent out as the sacrificial lamb to face him, but didn’t stand a chance against the Nobel prize winner. His attempts to blame lack of growth on North Sea oil was laughable, and Krugman squashed him like a gnat.

Interesting, though, that George Osborne wasn’t prepared to face up to the music himself. I suspect he didn’t want to talk about the awful industrial production numbers.

David Cameron and Osborne continue to claim they have cut the deficit by 25 per cent despite the fact that over the last 12 months it has risen. They also trumpet that they have created one million private sector jobs even though 200,000 of those were simply fiddled – by reclassifying further education and sixth form college lecturers from public to private. The Economic Secretary to the Treasury, Sajid Javid, even went as far as claiming, falsely, in an oral answer in the House of Commons on 13 March that 1.2 million private sector jobs had been created over the previous two years. The official data, of course, says no such thing. One idea to get private-sector job creation up at one stroke of the pen would be to reclassify the 183,000 members of the armed forces from the public sector to private. It’s as dopey as that.

The attempts to blame Labour for everything that moves look increasingly desperate given the Coalition has now been in office for three years and the economy was growing under Labour when they inherited it. Moreover, Osborne backed Labour’s spending plans through 2008, and wanted even more deregulation. It is time for them to take responsibility for the mess they have created and apologise to the British people for their failure. Now is the time to act.

The question is how. One possibility would be to follow the admonitions of Liam Fox (but I wouldn’t) who as far as I can tell has no qualifications in economics, who made a controversial speech at the Institute for Economic Affairs that is worth examining in detail. It is the clearest statement yet from the right wing of the Tory party that they want to declare class war. Fox’s main (bad) idea is to do a reverse Robin Hood by taking from the poor and giving to the rich. This is exactly the same approach as in the most recent Paul Ryan budget plan in the US, also announced last week, which sets out to cut spending by over $4 trillion over 10 years and lowers tax rates at the top end even more than Romney proposed.

Fortunately both plans have absolutely no chance of being implemented, as they are completely idiotic, but I digress. Fox wants to abolish capital gains tax, which only applies to rich people who own assets that can appreciate in value, so this isn’t going to do much for the average council house tenant. This would be paid for by a further attack on the poor, the disabled, the needy and ordinary working people by slashing public spending by an astonishing £350bn. Fox said: “I believe that we should aim to freeze public spending for at least three years and probably more. Such a move would in three years see spending totals £70.4bn lower, and this would not just fund the tax cuts many would like to see but take chunks out of our deficit too.”

He added: “If we were to go further still and freeze public spending for five years at 2012/13 levels, annual spending would be £91.2bn lower in 2017/18 and the cumulative saving over five years would be an incredible £345bn.”

One thing is clear from this: it would raise inequality enormously and lower growth even further. What Fox’s proposal does is to remove the automatic stabilisers that have operated to prevent us slipping into a Great Depression. When the economy slows government spending dampens the scale of any shock, so Fox’s proposals would make the economy more cyclically volatile. Why Fox believes this would be popular to the majority of the electorate who would lose hugely under his proposals escapes me. Presumably he just assumes the electorate is totally dumb. It would almost certainly generate massive social unrest as living standards would collapse and unemployment would also rise massively, especially among the young. What is absolutely clear is that it would likely raise the deficit, to a much greater extent than we have seen so far. Fox has clearly learnt nothing from the last three years when cuts in public spending increased the deficit.

Fox also advocates another silly idea of limiting access to housing benefit for the under-25s. That’s not helpful when the young have been especially hard hit by recession and are finding it hard to strike out on their own. As a consequence a much higher proportion are still living with their parents, and this plan would raise that still further. This measure would make the UK labour force less flexible and raise the natural rate of unemployment.

Fox further claims that “we know that growth cannot come from government spending because higher public spending would only crowd out the private sector”. But all the evidence is to the contrary. If the Government spends money on infrastructure projects in a recession that crowds in the private sector, creating growth. So quite the reverse of Fox’s uninformed claim. This is bad economics.

I assume the Budget will contain some increase in capital spending, but likely too little and too late to have much of any effect on growth by 2015, given the long time lags involved. The Chancellor should announce a massive increase in capital spending on the infrastructure, along with an immediate cut in VAT of 5 per cent, along with reductions in national insurance and incentives to firms to invest and hire, but he won’t. Thankfully I assume he isn’t going to listen to Fox either. This “fiddling at the edges” Budget may well be Osborne’s last hurrah. Hopefully.

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