IFS boss warns of shock and awe

The Institute of Fiscal Studies released its Green Budget this week. I looks pretty grim. Two and a half years on from its 2010 spending review, the government’s assumptions about deficit reduction have proved to be way wide of the mark. About £64 billion wide, say the IFS, which is the amount on top of his original estimates that George Osborne will be borrowing by the next election.

The reason for this is simple. There has been no economic growth, tax revenues have barely increased and benefit spending has continued to rise. Until both figures move in the opposite direction, the Chancellor will have to keep borrowing.

Even the more upbeat growth forecasts don’t give much comfort. In the periods after previous recessions, economic growth averaged about 3 percent per year, with the odd 4 or 5 percenter powering us out of the doldrums.

GDP GROWTH

Now, though, even the output-gap optimists such as NIESR and Oxford Economics don’t expect us to get to 3 percent, let alone average it.

Screen Shot 2013-02-07 at 14.41.42

This is not like previous recessions. It is very unlikely, at least in the near future, that we will see the big growth spurts which got us out of trouble in the past.

Given the continuing deficit and lack of growth, by the time of the next election, the IFS reckons public debt will be around 80 percent of GDP. This poisoned chalice will be handed to the next government.

It won’t get any better either as the rising costs of an ageing population put more pressure on the public finances. The result being that the next government will either have to raise taxes, increase borrowing or cut welfare and public services. The IFS estimates that, after the next election, taxes will either have to rise by the equivalent of 3p on the basic rate of income tax, or unprotected departments’ spending (those outside the NHS, Education and foreign aid) will have to reduce by a third from 2010 levels. This would bring the total public sector job losses to 1.2 million.

IFS director, Paul Johnson, said:

We shouldn’t lose our sense of shock and awe with some of these numbers, they are all of them pretty much historically unprecedented and particularly some of these spending cuts look very, very hard to deliver. If they are delivered, not only will they result in extraordinary levels of cuts across public services, they’ll also change very dramatically the shape of the state that is delivering them.

Which is pretty much what I have been saying for years.

It means that a few political sacred cows will have to be slaughtered. The left can’t have more welfare and public services. It won’t even be able to reverse the loathed Tory cuts. The right can’t have tax cuts; it will have to swallow tax increases instead. Whichever party wins the next election, most of its members won’t like what it has to do. Neither, for that matter, will the voters.

Whatever the politicians say, though, it is their duty manage the changing shape of the state, otherwise it will just fall apart of its own accord. The IFS is not usually given to hyperbole. When someone as measured and understated as Paul Johnson talks about unprecedented cuts, it’s serious. Cuts of 30 percent will see some services disappearing by default. Public bodies will continue to provide those services that were, at some point, defined as statutory obligations, plus the ones demanded by those who shout the loudest, and everything else will be quietly dropped.

At the moment, we still base our assumptions about the size and shape of the state on the high growth economy of the last half of the Twentieth Century. But what should the state look like in an ageing, low-growth society? What should its priorities be and what should it stop doing? We have barely started the debate.

Unless there is a radical re-think, or a miraculous discovery of some extra cash, by the end of this decade, some public services will just collapse, or be hastily scrapped without much thought. People, most of whom have grown up taking these services for granted, will be confused and outraged. Without a strategy for re-shaping the state we will just be left with the shock and awe.

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18 Responses to IFS boss warns of shock and awe

  1. Pingback: IFS boss warns of shock and awe - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Needs2Cash says:

    Man creates bubble for all to see 3 years before it bursts. Man strives to climb back on top of the bubble. Strange but true. Many of us continue to pray for house-price inflation, hunger for OPM or accept wages, pensions and dividends paid by badly led organizations.

    These days may return so the party in power can gorge itself on tax revenue to buy more voters.

    A better plan would be to invest in ourselves so our work and investment creates more successful customers. Imagine actually earning all that we are paid. Then, instead of pointless consumption, we use our true earnings to care for our families, our communities and ourselves.

    These actions should be encouraged, measured and celebrated so we are ready for the what the demographics clearly predict.

    Have we learned to focus on creating more successful citizens? Or are we trying to create another bubble with (or for) easy money?

  3. John D says:

    There is a relatively simple answer to all these future economic problems: support Scottish independence, provided they pay England and Wales back the money – with interest – they were given to pay off their national debt in 1707 as part of the Union Treaty agreement.

    Scotland received an amount of £398,000 in 1707 – paid in gold coinage – in order to pay off Scotland’s national debt. If Scotland chooses by the end of 2014 to withdraw from the Union then it is only right that they repay the £398,000 given to them in 1707, together with a reasonable amount of interest for having had use of the money for 307 years.

    If the £398,000 in 1707 had been invested at the Bank of England, it would have received an average rate of interest of 4.816135187% between the beginning of 1707 and today.

    Assuming the same average rate of interest had continued to be paid between the beginning of 1707 and the end of 2014, this results in an amount of £ 743,571,099,286.15 compound interest accruing which, combined with repayment of the original principal amount, adds up to £743,571,497,286.15 being payable today by Scotland.

    I do not imagine that the Scottish Government has £743,571,497,286.15 immediately available to repay the people of England and Wales what it owes them; nor, I imagine will Alex Salmond and his colleagues be able to find this amount of money among themselves to loan to the Scottish Government to discharge their indebtedness.

    It may be possible for a new Scottish Government to be able to issue bonds to an equivalent amount to pay off the Scottish debt to England and Wales. In which case, no further action will be needed, as long as the payment of the debt is included in any independence agreement, with it only coming into force once the debt has been repaid.

    The only other solution will be for the independence agreement to be modified to the effect that Scotland’s borders reach no further than their immediate shore line and Hadrian’s Wall until such time as the debt is paid off.

    The assets lying within Scottish waters will, therefore, be applied solely to paying off the Scottish debt out of any recorded surpluses accrued through operations in Scottish waters.

    Of course, added time adds additional interest to the original principal sum so it is difficult to know exactly when Scotland will finish paying off the debt owed to England and Wales.

    The Scottish administration will therefore have to rely solely upon revenues generated within its own internal borders in order to meet its own running costs.

    For the remainder of Britain, this should mean that our national debt will be considerably reduced, which is only fair as we originally had to shoulder the burden of the Scottish debt when the Scots originally failed in this undertaking themselves prior to 1707.

    • Er, not quite. The money “given” by England to Scotland was a bribe intended to secure votes for the Act of Union in the Scottish Parliament. It wasn’t a loan, so your suggestion that it be “paid back” is meaningless. The price was paid and the goods were delivered.

      The Act of Union actually combined the two national debts. It did not pay the Scottish one off. The amount of £398,085 and 10s was unrelated to the national debt, being compensation to the private investors in the ill-fated Darien trading project. It was a sweetner intended to square key commercial interests in Lowland Scotland. It is well known that others monies were deployed by more covert means to secure other votes.

      The broader context is that the Scottish economy had almost collapsed by the end of the 17th century. This was a consequence of the increasing monopolisation of trade by the English that started during the Commonwealth. This was exacerbated by anti-Jacobite discrimination following the final dethronement of the Stuarts in 1688, culminating in the massacre of Glencoe in 1692. To make matters even worse, a dreadful run of failed harvests in the 90s led to 5% of the Scots population dying from starvation. The Darien project of 1698/9 (to establish a lucrative colony in Panama) was the last throw of the dice, using up most of the available free capital in the country. It failed not just because it was poorly planned and risky, which it was, but because the fledgling colony was attacked and destroyed by the Spanish. They had been prompted to this by the English who sought to cripple Scotland as potential Jacobite threat. The Governor of Jamaica even issued a proclamation forbidding any English colonists from aiding the Scots.

      To turn the screw, England passed the Alien Act in 1705 which shut down cross-border trade and deemed all Scots resident in England to be foreign subjects without native rights to trade. Under such coercion, it was inevitable that enough Scots would cave in and agree to union in 1707, though the Jacobite refuseniks would revolt in 1715 and 1745.

      It may be hard to believe, but English “bullying” lives on in Scottish folk memory for a reason.

      • John D says:

        But the Scots had the choice to take – or not to take – the English money to bail them out, just like we have again bailed out the Royal Bank of Scotland today. The Scots took the money as part of an agreement to enter into an indefinite union with England and Wales (and, subsequently, Ireland – then Northern Ireland). If the Scots now want to dissolve the Union, they should pay the English money back with reasonable interest to end the Union.
        That is only fair and just.

        • guthrie says:

          So you support handing on debts to the children and grandchildren of debtors?
          Or maybe charging slaves for freedom?
          Or perhaps we should just demand the money from the top 0.1% of taxpayers in Scotland, since it was their monetary ancestors who took the King’s shilling, as it were.
          Also, treating the union as a simple business transaction and contract seems rather to fly in the face of the helpfully unwritten British Constitution.

          • John D says:

            I started work in 1960 and finally retired last year. During my working life, I paid income tax and other taxes to the UK Government. For most of that time, the UK government was paying off war-time debt to the USA and I can remember seeing Margaret Thatcher on TV signing the final cheque to pay off the US government. Debts are debts. They should be paid off, especially when – as in the case of Scotland – it is they who are seeking to terminate the relationship, not us.
            We have already paid off the slave owners for freeing the slaves. In the case of one former Church of England Bishop slave owner in the 19th Century, he was paid in today’s money more than £1 million for freeing the slaves on his Caribbean estate.
            I think you will find that more than just the top 0.1% of Scottish taxpayers benefited when we paid off the Scottish national debt in 1707. In truth, vast numbers of Scots invested in the bubble that became the disaster of the Panamanian colony. They also benefited from the new trading relationship with England and Wales, which resulted in an incredible economic boost to the Scottish economy.
            The British Constitution is a inter alia a contract between the constituent parts of the Union. If the Scots want to tear up the contract, then they should expect to pay us compensation in the form of paying us back our money with reasonable interest.
            It is the very least they can do.

          • guthrie says:

            John D, you obviously completely missed what our host wrote re. the railroading into the union that occurred. E.g. stopping the trade with England, which counts as economic warfare.
            You sound rather like an imperialist – “hey, we did them good”. Never mind the violence with which the country was conquered in the first place.
            And there’s still the point that you don’t have any evidence for it being refundable – this is just your own sick idea.

  4. Watcher says:

    No point supporting Scottish independence unless you are eligible to vote in the referendum. I don’t remember the referendum in 1707 that legitimised the Treaty of Union, do you?

    3p on income tax would merely take us back to the early 90s. I’m sure we’ll survive.

    • John D says:

      Clearly, the dissolution of the Union affects everyone, not just the Scots. Of course we should all have a vote on the subject. I strongly suspect a large number of English could well end up voting Scotland out of the Union to bring an end to some of them constantly whinging and whining about how hard done by they are at the hands of the English. Getting rid of these serial complainers would do us all a lot of good. Taken to the possible extremes – as outlined by Arse to Elbow above – a separate Scotland could well lead to England treating people in Scotland as migrants who would need separate passports and would have to undergo visa application and immigration processes before being allowed into our country. There is a possibility that the remaining United Kingdom of Britain and Northern Ireland could veto Scottish membership of the EU and of the United Nations.
      If they end up choosing to dissolve the Union without paying us back our money plus interest, why should we do them any favours? They will be – after all – a foreign country.

  5. Dave Hickey says:

    Rick,

    This is a really good post. Have you read Naomi Klein’s book The Shock Doctrine? It’s about the American (non-military) interventions in South America in the 60s and 70s led by the Chicago school of economists and the IMF (who I’m told were dominated by the Chicago school in those days). When South American governments faced collapse or had a serious crisis, for example the Americans support of Augosto Pinochet, they would take advantage of the crisis with financial shock and awe tactics.

    In most of these cases it involved a truly free-market overhaul of their economies. It’s not far fetched, and I know you’ve said it many times, that the Tory government has capitalised on the financial crisis and employed shock and awe tactics to radially overhaul the economy into a more neo-liberal shape as they’ve forced the unprecedented cuts and changes (e.g. NHS) to radically alter the state.

    Just a thought, the comparisons may be interesting to you. I really recommend Klein’s book.

    Dave

    • John D says:

      Dave: it is not only in South America that this has happened. A similar thing happened in the Far East back in the 1970s too. The main lesson I drew from that era was that bodies like the IMF and the World Bank existed to protect Westerner elites’ assets in those economies and that is why neo-liberal policies were forced on their struggling economies until such time as Western economic and financial interests were safeguarded and then withdrawn without loss, at which point those other economies were left to turn into basket cases. We may be witnessing something similar happening in Greece today.

  6. Strategist says:

    There’s not a single thing we can’t afford, of we stop the money flowing offshore into secrecy jurisdictions. The IFS don’t strike me as that impressive, they strike me as worthy numbercrunchers who don’t think outside their mental straitjacket.

    • John D says:

      Actually, it can be even simpler than that. Stronger control of in-flows of money in the UK economy would be even easier to arrange. The idea of spending £60 to £70 billion on a new fellt of nuclear submarines strikes me as way behind the times in a post Cold-War era. Some of the other billions being mis-spent on other military projects could well be saved too if we just agreed to stop trying to act as the PCSO to America’s policeman.

  7. Strategist says:

    if we stop

  8. John D says:

    My response to guthrie above is that the English and Welsh did not force the Scots to enter the Union. The English and Welsh did not use violence against Scotland. The Scots were unfortunate in their attempts at trying to set up their own colonial adventures in Panama. It turned out to be an incredibly stupid idea, which large numbers of Scots bought into. It was they who ran up huge debts – no one else. As part of the agreement, we agreed to pay-off Scotland’s national debt. If the Scots now wish to welch on the deal, then they should pay back the money they were given by us with a reasonable amount of interest. A contract is a contract is a contract. If the present-day Scottish political elite wants to breach the contract then they must pay up to do so. Simple !!

  9. metatone says:

    I’d like to see more evidence of an actual transition to a low growth economy, as opposed to a transition to an agreement around post-Hayekian economic policies that destroy incentives for growth. Or alternatively, if you buy into the EROEI hypothesis, an actual reason we couldn’t create growth if we wanted to…

    All this defeatism gets my goat.

  10. John D says:

    I am sympathetic towards metatone above but I think if he studies the Japanese economy, he will find all the evidence he needs for a long-term low growth economy. To be honest, I think the simple application of the theory of dimishing marginal returns is absolutely key to understanding what is happening globally. While it is possible to sustain high growth rates in the early days of any economy, with the passage of time, achieving the same high growth rates as in the earlier years becomes literally impossible. It is rather like the old story about doubling the numbers of grains of rice on each successive square on a chess board, starting with just one grain of rice on the first square. Long before reaching square number 64, all the rice ever produced in the world will have been used up – and still there will be empty squares waiting. It is simply impossible to maintain growth rates like 10% or more on an indefinite basis. Over time, each economy will experience diminishing productivity levels and will reach the optimum levels of mass scale production. Unless brand new technologies and/or management practices emerge to enhance existing levels of productivity then the former growth rate levels must become a thing of the past. This – even with new emerging forms of technology – is what has happened in Japan and it may well be what is happening to our own mature economy. The fact is that we will all have to get used to economies which generate lower levels of growth but that is not necessarily any bad thing. We – nationally and globally – already have sufficient societal wealth for everyone on the planet to be able to enjoy a good standard of living. A steady and modest rate of growth will help in providing for a growing population and/or achieving modest improvements in the quality of life for all on the planet. What else do we really need – unless it is to stop a few greedy and selfish individuals from hogging all the benefits the Earth has to offer? Is that “shock and awe” enough for IFS Director Paul Johnson?

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