A 1995 immigration target for a 2015 economy

2014 looks set to be a record-breaking year for immigration, according to the ONS estimates published yesterday.

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After a brief post recession dip, net immigration from the EU began to rise again in 2010 and last year, non-EU migration increased too.

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The gross migration figures in the next chart show the different patterns of EU and non-EU migration. Some of the sharp drop in net EU migration was due to people going back to their home countries whereas net non-EU migration fell because fewer people came in the first place. There is a higher churn among EU migrants because it’s not as far for them to go back home and it’s easier to come back again.

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The composition of EU migrants has changed as well. We tend to assume that most come from Eastern Europe but, in recent years, more people have been coming from the old EU15.

Screen Shot 2015-05-21 at 12.10.26 Some of this is due to the recession and unemployment in southern Europe but immigration from the EU15 has been rising since the mid 2000s. This chart from Migration Observatory tells an interesting story. Immigration from eastern Europe rose sharply after 2004 there was also an increase in net migration from the old EU at around the same time.

EU Migration

The story of EU migration, then, isn’t just an eastern European one. The UK is attracting people from all over Europe. This CityLab article explains some of the background. Europe’s population is shifting to its prosperous north-west, with London, the largest city in the EU, having by far the largest migrant population.



As Elli Thomas of Centre for Cities points out, based on figures for NI Number registrations, 43 percent of migrants and 48 percent of those with degrees go to London.

Having a big fashionable international city that dwarfs anywhere else in the EU and a language that much of the world speaks, makes the UK a favoured destination for workers from across Europe. Young people want to come to London and London seems to have no trouble creating lots of jobs for them to do. I have no data for this but most of the young EU workers I have spoken to say that having worked in London means they can then get better jobs when they return to their home countries. Working here becomes like an extension of university. As one cohort goes home to improved job prospects another group of freshers arrives to take their place.

Against this background, getting net migration down to the tens of thousands is not going to be easy. It would mean taking it back to where it was in the mid-1990s. Migration Observatory’s Madeleine Sumption is sceptical:

Today’s figures show how difficult it would be to reduce net migration to the ‘tens of thousands’. Net migration has risen even despite new restrictions on family, work and student visas that were introduced during the last parliament.

If the cap on skilled migration does start to prevent employers from accessing certain non-EU staff shortly, then the first people it will affect will be skilled migrants on relatively low wages – those with salaries just above the minimum threshold of £20,800. One of the largest groups of these is nurses.

Today’s data indicate that it is increasingly likely that some employers – including the public sector – may find themselves unable to recruit non-EU staff over the next year. If this happens, we may see some of them turning to EU workers instead.

In other words, there may be a balloon effect going on. If you clamp down on immigration in one area, it just increases somewhere else. The migration cap on non-EU workers may just lead to more migration from within the EU.

But what if the UK negotiated restrictions on EU migration or left the EU altogether? It’s difficult to say what would happen because no-one has ever done it but it would probably just squeeze the balloon in the opposite direction. A reduction in EU migrants would increase migration from outside the EU. Either that or companies which couldn’t fill their jobs here would simply relocate those jobs to somewhere else in Europe.

For at least the next five years, lots of people, especially the young, will want to come to the UK and this country’s employers will continue to find work for them. Any attempt to take the immigration level back to that of two decades ago, during the life of this parliament, would require drastic action. What that would do to our economy and our relationships with other countries is anybody’s guess but it would probably be very damaging. The UK’s economy has changed a lot in the last 20 years. Trying to wind the clock back is unlikely to do us much good.

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How different is Scotland?

Scotland is another country, according to the Evening Standard, the New York Times, the Guardian and half my Twitter stream. It is different from the rest of the UK and certainly different from England. When you look at the electoral map, it’s hard to argue with that.

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Then again, when you look at the electoral map, Scotland looks different from the rest of Europe too. In most of the world’s older democracies, the main political divide is between the conservative right and the liberal or social democratic left. The extent to which these parties dominate varies. In the US, no other parties get a look in but even in countries with more proportional systems and more parties, the two biggest ones are usually centre-left and centre-right. In the European Parliament, this pattern is replicated in the groupings of national parties. Regardless of their electoral systems, most countries in the developed world have a big red party and a big blue party. The Americans have the colours the other way round but the division is essentially the same.

So what happened in Scotland? It seems to have neither.

First to go was the big blue party. Scotland, more Conservative than the rest of the UK in the 1950s, had almost abandoned the party by the 2000s.


Is this because Scotland has become a socialist or social democratic country? Could it really be that a country which, within living memory, was largely Conservative, has shifted irretrievably to the left and no longer has a right wing? If so, it would be unlike almost anywhere else. Where have Scotland’s conservatives gone?

Some of Scottish Conservatism’s demise, says Nick Pearce, was due to a gradual decline in working class identification with Protestantism and the empire.

[A]s the foremost historian of modern Scotland, Tom Devine, argued in his magisterial work The Scottish Nation (1700- 2007) the Conservative Party began to lose support in Scotland when its role as a Protestant party of the Union and Empire waned in the early 1960s. In 1964, it dropped the title Unionist, in favour of the anglicised Conservative. As Devine recounts, it steadily lost the skilled Protestant working class, as Britishness and sectarianism lost their appeal, while its Clydeside industrial class leaders were replaced by anglicised lairds and aristocrats.

In other words, as Ian McWhirter says, the nature of Scottish patriotism has changed. Most countries have a patriotic right but in Scotland, Britishness and unionism have become less important to that sense of identity. At least some of the Scottish Tories, he says, turned into Scottish Nationalists.

But how can that be? Isn’t the SNP left-wing? Not really, or at least, its economic policies are not. As the IFS said, its policies on public spending cuts are, if anything, slightly to the right of Labour. Until 2 months ago, the SNP was proposing cuts to corporation tax and, since 2010, it has cut NHS spending in real-terms. It is, says John McDermott, a lot less radical than you might think. It has its socially conservative wing too. Some of its members were bitterly opposed to gay marriage and a few of its MSPs voted against it.

The SNP hasn’t moved that far to the left because, as Alex Massie says, a lot of its supporters are quite right-wing.

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This isn’t really surprising. Surveys of social attitudes keep showing that there is very little difference between Scotland and the rest of the UK. Like everywhere else, Scotland has its socialists, social democrats, economic and social liberals, fiscal and social conservatives, big staters and small staters. The only odd thing about Scotland is that all of these manage to co-exist within the SNP.

Notwithstanding what I said earlier, there are some democracies where there isn’t a big red party and a big blue party. In a few cases, there is democratic one party rule. This is usually where, due to a liberation struggle or other national trauma, one party has become identified with the nation. Japan’s Liberal Democrats, Mexico’s Institutional Revolutionary Party, South Africa’s ANC and, closer to home, Ireland’s almost ideology-free Fianna Fail, dominated their countries for decades.

Scotland now has the look of a liberation state. The SNP has pulled off that ‘we are the nation’ trick. As John McDermott says, “Scotland has become a democratic one-party state.” Like other national liberation parties, the SNP has subsumed divisions of class, religion and region into a sense of nationhood. This enables it to adopt an essentially centrist position while pulling in support from both left and right.

Will Hutton puts in succinctly:

The potency of Scottish nationalism is that it has combined a vision of Scotland’s alleged particularity (the besetting sin of all nationalisms) with a vision of deploying the co-dependency of private and public as the route to a fairer society and more dynamic economy.

The Nationalists have got away with this because the other parties have let them. The Conservatives had enough votes in England for their demise in Scotland not to matter and Labour didn’t believe the SNP could annex its turf. Now, though, in their exasperation, both parties are colluding with the myth of Scottish exceptionalism and considering changing their names north of the border. If Scotland had completely different party names from England and Wales, that would only further emphasise the difference.

Some Conservatives want to be shot of the whole place. Boris Johnson was talking about a federal state as the results of the election became clear. This is a formula for keeping the the flag, the submarine bases and the seat on the UN Security Council while limiting the influence the Scottish politics might have over the rest of the UK. Keeping the appearance of the Union while ring-fencing the Scots on their own reservation.

But, while Scotland’s map shows an almost clean sweep for the SNP, much of this is due to our first past the post electoral system. The party’s support is distributed in the optimum way to deliver the most seats. It took fewer votes to elect an SNP MP than it did for any other party. 50 percent of the vote was enough to turn the map yellow.

This map of second placed parties, produced by Crooked Timber, gives a glimpse of how Scotland used to vote.

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Peel away the SNP wallpaper and we see old Scotland, with its red central belt, Conservative south and north-east and Liberal highlands. While the SNP has conquered enough of Scotland’s political left, right and centre to give it the look of a one-party state, there is enough opposition left to suggest that it might be a bit early for the other parties to throw in their towels.

Just because people voted SNP, says Gideon Rachman, it still doesn’t mean they want independence.

Last week’s general election results, in which the SNP won all but three of Scotland’s 59 seats, has created the impression of an irresistible surge of support for independence. But, even now, only about half of Scots actually voted for the party.
Expressing nationalist sentiment in a general election is a risk-free way of venting emotion. Voting for independence would be quite another matter since it would raise — once again — difficult questions about currency unions and tax revenues.

It’s easy to emphasise difference. Talk to foreigners, though, and they will tell you how similar they think we all are. As Chris Deerin puts it, the same people but with different accentsThe political map makes things look more different than they really are. There is nothing to suggest that Scotland is a different country other than the electoral performance, under a skewed system, of a party that has promoted that exceptionalism almost unchallenged. If it isn’t challenged, though, it will become true. If Scotland believes it is different it will eventually become different. The other parties seem to be accepting this almost without question. If they carry on like this, Scotland really will become another country.


Jan Eichhorn of Edinburgh University shows that there has been no increase in feelings of an exclusively Scottish identity among people in Scotland. If anything, the reverse is true. The proportion of Scots rejecting the British identity and seeing themselves only as Scots is lower now than it was a decade ago.

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The SNP’s victory cannot, therefore, be attributed to a rising sense of Scottishness as defined in opposition to the rest of the UK.

To just make the point absolutely clear: Scottish identity or sentiment has not been increasing, but decreasing gradually since the advent of devolution. There has not been a higher relative level of emphasising Britishness in Scotland than in the year when the referendum on its independence was held.

[T]his tells us an important message about SNP support: The SNP has not gained voters because it could increase the feeling of national identity, but has done so for other reasons.

Crucially, commentators need to stop painting a picture in which the majority of Scotland predominantly base their political decision making mostly on their national identity. There has been no rise in nationalistic sentiment in Scotland. As we (amongst others) have repeatedly shown in our research, the strongest determinants of both independence and SNP support were pragmatic evaluations about economic prospects, trustworthiness and political personnel. For most people in Scotland the SNP is a normal party, that they like, hate or are indifferent to, but those evaluations for most are based on whether people agree with their policies and how they evaluate their representation.

If commentators want to understand why the SNP is successful, they need to make a greater effort at properly understanding how public attitudes are formed in Scotland. Suggesting that it is down to sentiment is lazy at best, but actually misrepresenting the majority of Scottish voters. For political parties trying to challenge the SNP, first and foremost Scottish Labour, a similar message applies: to have a chance of engaging them successfully, they need to stop focusing mostly on high-level questions about different types of nationality. Instead they need to challenge the SNP on concrete policy debates around issues that affect people’s lives and which voters in Scotland are much more likely to base their votes on than identity-driven arguments.

In other words, SNP support has very little to do with an increase in Scottish nationalism and a lot to do with the failure of the mainstream parties. If Scotland does become another country, it will not be because the SNP won it but because our political establishment lost it.

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Labour lost the economic argument 5 years ago

Pundits will be picking over the results of this election for years and there are many reasons why things turned out as they did. For Labour though, in one respect, this election was lost in the aftermath of the last one. The opposition parties kept repeating the story of Blair and Brown spending with gay abandon and running up a massive debt. In the months after the 2010 election Labour never managed to nail that story. By the time they tried, it was too late.

As Simon Wren-Lewis says, there wasn’t any evidence to support it. True, Labour ran a deficit in the last decade but that wasn’t what caused the big jump in the debt-to-GDP ratio. By the time of the recession, the deficit was falling and was almost yesterday’s news. As this chart from Economics Help shows, the highest borrowing came in the year before the 2005 general election, yet the deficit was barely mentioned during the election campaign.


This was because it wasn’t really seen as a big deal. People were asking for an improved NHS, more police and more teachers. You could argue that Gordon Brown should have funded this from taxes, rather than borrowing, especially during a period of growth. It was also true that most other advanced economies were reducing their deficits by the mid 2000s but they had more reason to do so because their debt was much higher. The UK had the lowest level of debt in the G7 before the recession.

As the OBR pointed out in its detailed analysis of the public finances over the last decade, some of the deficit was simply due to the sort of poor forecasting that afflicts governments from time to time.

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This pattern of unexpected surpluses followed by unexpectedly large deficits was similar to that seen under the previous Conservative Government from 1987 to 1993.

So, while it might have been better not to have funded so much spending with a deficit, at the time no-one thought it was a major problem. If spending really had been out of control, Michael Howard and David Cameron would have harangued Tony Blair and Gordon Brown at the despatch box every week, warning of the dire consequences and making as much political capital as they could. But they didn’t.

The deficit and, as a consequence, the debt only shot up with the financial crisis. And it shot up everywhere. The reason UK debt rose more quickly than that of other countries is because its tax revenues fell more sharply, largely due to its dependence on finance, the very industry that had caused the crash.

Major Economies Debt

If this was a Brown Debt, it must also have been a Bush Debt, a Sarkozy Debt and a Merkel Debt because most countries found themselves with a similar problem.

It was at this point that the government’s day-to-day spending came adrift from its tax revenues. It’s useful to look at this both in cash terms and as a percentage of GDP. Spending continued to rise, as is to be expected in a recession, but tax revenues fell. The fall is less pronounced on the 2nd chart because GDP was also falling but the first chart shows the big gap opening up between spending and receipts 2008.

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Source: ONS, Public Sector Finance, Longer-term trends

One could argue that the Labour government should have curbed spending in 2007 as a downturn was inevitable at some point. The OECD did give a nudge in that direction in one of its reports. But very few people saw the recession coming, let alone the extent of it. In March 2008, about half way between the collapse of Northern Rock and the demise of Lehman Brothers, the great and good of the economics world were forecasting continuing growth, albeit slightly slower than in the earlier part of the decade. No-one came close to predicting what really happened.

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Source: OBR, Crisis and consolidation in the public finances, October 2014

The Conservatives certainly weren’t sounding the alarm. In late 2007, George Osborne was still promising to increase public spending. It was over a year later, after Lehman had crashed and it was clear the economy was contracting, that the Conservatives abandoned their policy of matching labour spending plans and started warning about a ‘borrowing bombshell‘.

It was canny politics. In the mid 2000s, the Conservatives knew that public spending was popular which is why they agreed to match Labour’s plans. The recession and the associated jump in the public deficit, gave them something with which to beat Labour. Link this rise in debt to earlier spending and a generalised charge of profligacy and they could make the effects of a global catastrophe look like incompetence. There was just enough in the way of continued deficits (albeit low ones by later standards) and the odd comment from the IFS or OECD to give a plausible sounding back story, even if it was one that the Conservatives had failed to notice at the time.

It worked. Labour lost the election though not by enough to give the Conservatives a majority. But while Labour went into a bout of introspection, the Tories kept hammering home the message of Labour spending, debt and fiscal incompetence. Labour, pre-occupied with its leadership election, failed to challenge the narrative and so it became part of the accepted version of the financial crisis. Liam Byrne’s ‘no money left‘ note might have been a joke but it was incredibly naive and only helped his opponents. The image of an empty treasury was powerful and enduring.

By the time Labour challenged the Tories version of events it was too late. As John Hutton and Alan Milburn said earlier this year:

It is understandable that the Conservatives, under George Osborne, the guileful chancellor, and Lynton Crosby, his election guru, should make this their mantra. What is less understandable is that Labour, under Ed Miliband and Ed Balls, his shadow chancellor, has been hesitant to rebut this charge. They have worked harder to distance themselves from New Labour than to defend its record. This hands the Tories a needless advantage.

In one of the TV debates, when Ed Miliband tried to explain why the public debt wasn’t due to Labour’s overspending, no-one was listening. It was too late by then. Too many people had accepted the government’s version of events and saw any denial as a lie. Since then, a number of economists have backed Miliband up on the question of debt and spending. But they have been doing that since 2010. Lots of articles were written about this but it really didn’t matter what the economics said because Labour had already lost the politics. That Labour went on a spending spree and ran up a massive debt bill is one of those things that “everybody knows”.

James Bloodworth tweeted this earlier today:

He’s right. Whatever the economics of the Labour spending and debt story, the Conservatives handled the politics deftly and a stunned Labour Party let them get away with it.

If Gordon Brown had not run deficits in the early and mid 2000s, the public debt might now be a little less, but not much. Most of the sharp increase debt came about as a result of the recession. But politics is just as important as economics and the Conservatives won the politics hands down before Labour had realised what was going on. A lot of people are still convinced that the Blair and Brown governments were responsible for the rapid increase in debt in the late 2000s. It will take a long time for Labour to persuade them otherwise. If it ever does.

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The deficit: much tougher than it looked

A friend asked me, earlier this week, “If you’re saying David Cameron and George Osborne are not dedicated state shrinkers, and they’re not stupid either, why would they commit themselves to such a big reduction in public service spending?”

Because, when the Conservatives first promised to eliminate the deficit, they had no idea how big a task it was going to be.

To be fair, they weren’t alone. In 2010, most people assumed that the economy would eventually grow again in its usual post-recession pattern, starting with a big jump to counteract the big slump, then settling into steady growth. That would have boosted employment, increased wages, raised the tax take and lowered welfare costs.

In the event, that didn’t happen. The government’s growth forecasts in the early years of the Coalition turned out to be way too optimistic. Even after the ONS’s revised GDP estimates (black line on the graph), growth fell well short of expectations. As the OBR points out, the government projections were not that much different from those of most outside forecasters. In 2010, no-one expected the economy to perform so badly.

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Source: OBR Forecast evaluation report, October 2014.

The result of the poor growth was poor tax revenues and stubbornly high welfare costs. At each budget and autumn statement, the forecasts had to be revised, in the wrong direction.

The tax take was disappointing:

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Source: EY Item Club

While the welfare bill stayed high:

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Source: OBR Welfare trends, October 2014

If tax revenues are poor and welfare costs rise, more of the burden of deficit reduction has to fall on public services. As time went on, therefore, the level of public service cuts needed for the elimination of the deficit increased.

Giles Wilkes produced this chart a couple of weeks ago based on public service spending forecasts over the past five years. Each time, public services get squeezed that bit more to compensate for lower than expected taxes and higher than expected social security costs. By the end of 2014, the cuts needed to eliminate the deficit were about £80 billion more than George Osborne envisaged in 2010. Even to achieve Labour’s current (as in day-to-day) spending surplus will require Ed Miliband to spend less on public services than George Osborne originally thought he’d be spending.


The problem, then, is very straightforward. To get rid of the deficit, if the economy doesn’t grow by as much as you thought, the amount that has to be cut from public services must increase by more than you thought.

David Cameron and George Osborne had no intention of slashing public services by as much as the OBR projections now suggest. Eliminating the deficit looked difficult but do-able in 2010. The problem now is that the weak economy has left them with much more to do than most people predicted five years ago. It implies more public service cuts in the next three years than we saw in the whole of the last parliament.

It may come right, of course. Perhaps the OBR growth forecasts are now too pessimistic and we will see a boost in productivity and GDP. In which case, the deficit may disappear without the need for even bigger public service cuts. At the moment, though, the recovery is looking anaemic and a sudden pick up in growth seems unlikely. Unless a lot more of us start getting paid a lot more, welfare costs will stay high and tax revenues will stay low.  The IMF believes the UK will still have a deficit at the end of the decade. Whatever happens today, the deficit will be as big a headache for the next government as it was for the last one.

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Are the Conservatives ideologically driven state-shrinkers?

Are David Cameron and George Osborne small government ideologues hell-bent on shrinking the state? Simon Wren-Lewis thinks so:

The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end…. [W]e have a Chancellor that quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends.

He says something similar here:

[T]he real long-term plan was an initial two years of sharp cuts to public spending and the deficit, to be followed by budgets involving tax cuts that would allow growth to resume but rather less deficit reduction. If this combination was enough to win the subsequent election, the recipe could be repeated all over again. Indeed, this is what George Osborne’s post-2015 plans look like. All done in the name of deficit reduction, when the real aim is to reduce the size of the state.

Danny Alexander thinks so too, as do many of the left. This discussion comes up at every budget and autumn statement. The cuts to welfare and public services advocated by the Conservatives are so extreme, they must be motivated by an ideologically driven plan to dismantle the state. Or so the story goes.

It can be fun to depict George Osborne as a cartoon villain. I’ve done it myself on the odd occasion. But I still find it hard to believe that he, David Cameron and the leadership of the Conservative Party have a Machiavellian plan to shrink the state.

Chris Dillow has written a few pieces about this (here, here and here) pointing out that, if the Conservatives were planning to significantly shrink the state, they have done remarkably little groundwork.

Public attitudes to state spending have shifted slightly in recent years but only from favouring more spending to keeping it the same. There has never been much appetite for a big reduction in public spending and there still isn’t.key_findings_figure_0.3_499x317.jpg

Source: British Social Attitudes Survey

Allowing public services to collapse would therefore be electoral suicide, unless you could convince the voters that getting rid of them was a good thing. On this, says Chris, the Conservatives haven’t even made a start.

What would I do if I were a Chancellor wanting to shrink the state when there was little popular demand to do so?

What I’d do is create the demand – shift the Overton window. I’d get junior MPs to campaign to reduce government functions. I’d encourage sympathetic journalists – of which Osborne has many – to write about excessive or wasteful spending. I’d commission management consultants and civil servants to show how to improve the efficiency of each government department. And I’d find some economists to show that a smaller state tends to promote growth.

In short, there’d be a cacophony of voices calling for a smaller state. Economists such as Vito Tanzi would be as fashionable as Thomas Piketty. “The Chancellor has done well so far, but must go further” would be the cry.

But this is not happening. Sure, the usual suspects are making the usual noises, but no more so than normal. The “shrink the state” amp hasn’t been turned up to 11. The Britannia Unchained mob are quiet, and one Tory advocate of limited government has buggered off to Ukip. Yes, there’s some (silly) welfare-bashing, but there isn’t the ideological clamour for a smaller state.

For a brief moment, around the time of the last election, it looked as though we were going to get a serious debate about the size, role and shape of the state in the next decade. The Labour government’s Total Place pilots had shown that central government, the NHS and councils working together to redesign local services could potentially deliver big savings. There was excitement about the Big Society, social innovation and social enterprise. Lots of people were talking about alternative ways of delivering public services. The long process of designing the state for the 2020s seemed to be getting underway.

Thee was a lot of excitement about this. Many people from across the political spectrum realised that, over the long term, the state couldn’t go on in its current size and shape. A debate on this, even one led by the right, was at least a good start.

As Chris says, an ideological state-shrinker would surely have seized the moment. Here was an opportunity to change the conversation and shift people’s expectations about what the state could provide.

But then it all went quiet. Total Place became Whole Place and then Community Budgets. Each time, we heard a bit less about it. Sure there is still some good work going on but it lacks the transformational vision and rhetoric of 2010. The only evidence of the heady optimism of five years ago is in defunct and no longer updated websites. It’s like looking at the ruins of a once-great civilisation.

The Guardian’s Jane Dudman was one of the first to rumble the government’s total lack of strategy, only a couple of months after the Coalition had formed. The penny dropped for me a few weeks later after noting some early fiascos and talking to some senior public sector managers. By early 2011 I was convinced. This lot were winging it.

I haven’t seen anything since to change my mind. The public debt targets imply a big reduction in public services and/or welfare spending but the specific cuts identified so far are tiny. Some of the planned austerity was shunted into the next parliament so the train crash many of us expected hasn’t happened yet but if these cuts are implemented, it will.

Those who think the Conservatives are ideological state-shrinkers reply that this is the strategy. The Tories, they say, despise the public sector so they will just keep cutting and let the state collapse in a totally random and unplanned way. But if they were to do that they would never be elected again. If local authorities and NHS trusts fell apart, would a Cameron-led government really stand by and watch it happen?

Past behaviour suggests not. Sure, there’s a lot of rhetoric about improving NHS efficiency by allowing failing hospitals to go bust but every time one looks like it might, the government bails it out. As soon as there is a bit of political pressure, more money is usually found. It’s the same with welfare. The options for finding £12 billion in social security cuts are already limited. David Cameron limited them even more last week when he promised to ring-fence child benefit. The Conservatives might talk tough but put them in front of  group of angry parents or NHS patients and they cave in almost immediately.

So I don’t believe that a Conservative government would cut spending to the bone, allow public services to collapse and the working poor to be evicted from their homes. As soon as they faced angry voters at the next photo opportunity, government ministers would magic up some more money, just as they have done in the past.

But if that’s the case, what is the strategy for eliminating the deficit? My guess is that Dave and George are hoping for a sudden boost in productivity after they are elected. Under the OBR’s most optimistic projections, increased productivity and economic growth would lead to higher tax revenues and lower welfare costs, meaning that the deficit would disappear without the need for any spending cuts at all.

There is much talk on left-wing blogs of secret plans for slashing welfare and dismantling the NHS but I don’t buy any of it. I just can’t see David Cameron and George Osborne as the Dick Dastardly and Hooded Claw of state shrinkage. They are not evil men and they are certainly not stupid. They probably dislike the big state in that visceral drive past the council offices and say ‘God knows what they all do in there’ sort of way but nothing in their past behaviour suggests that they are ideologically driven small staters. They have, though, set themselves an enormous task and they don’t seem much idea of how to go about it. Right now, their focus is on getting elected, after which they will work something out and hope that something good turns up. It is a strategy that owes more to Micawber than to Machiavelli.

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The Tories and welfare: Machiavellian or just muddling through?

This week, the IFS finished their painstaking task of trying to understand the parties’ tax and spending plans, based on what little they’ve said. There are gaps and inconsistencies in all of them.

At first sight, I couldn’t understand why the Conservatives’ public service spending plans in the first IFS analysis didn’t look as bad as those implied by the last budget. Then when I looked more closely I realised that the numbers assumed that £12 billion of the cuts would come from welfare, as the Conservatives claim.

This week, the IFS scrutinised the parties’ tax and benefit plans in more detail. They concluded that the Conservatives’ £12 billion welfare cuts are complete garbage. They didn’t actually say that, of course, because they are far too professional and polite but that was the gist of it.

The £1.2 billion of benefit cuts outlined in the Conservative manifesto are rather dwarfed by their commitment to find £12 billion of cuts to annual spending by 2017–18.

The Conservatives have been talking about saving £12 billion from the social security spending for a long time. It is disappointing that no further details have been spelled out in their manifesto.

They also pointed out that most of the welfare cuts during the last parliament were made by increasing benefits by less than inflation. This time, to achieve their £12 billion target, the Conservatives would have to cut the cash amounts paid to claimants.

We do not know the precise distributional consequences of the planned £12 billion of benefit cuts, nor their effect on the shape or coherence of the system, because the Conservatives have not outlined how the vast majority of that reduction would be achieved. Three things are clear, however. First, aiming to reduce annual spending by £12 billion by 2017–18 is ambitious, requiring an increase in the pace of cuts compared to the current parliament. Second, it is not possible for the Conservatives to meet this target by increasing benefits by less than inflation – large cuts to cash entitlements would be required. Third, those large cuts are likely to predominantly affect households towards the bottom of the income distribution.

Furthermore, because the Conservatives have promised to protect most pensioner benefits, around half the social security budget is off limits. The cuts would therefore fall almost entirely entirely on working age people. Although there are no specific plans, the distribution of the unprotected benefits gives some idea of who would lose out the most.

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Given that, with the improving employment situation, Job Seekers’ Allowance and Job Seekers’ Housing Benefit is projected to fall anyway (and wasn’t that much to start with) any significant social security costs would have to hit the working poor and the disabled.

The big lumps of social security spending are, in rough order, tax credits, housing benefit, disability allowance, incapacity benefits and child benefit. Cuts to anything else would make very little difference so any significant spending reduction would have to hit those five.

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Source: OBR Economic and fiscal outlook, March 2015

This leaves the Conservatives with a problem. To take £12 billion off welfare, they will have to hit the hardworking families they keep telling us about. Which, as Patrick Butler said, is why they are so unwilling to spell out the cuts in any detail.

Could a Tory government politically manage cuts on this scale? Their pre-election silence suggests they are not exactly supremely confident on this matter. Cuts were easy when “scroungers” were the apparent losers; they become much, much harder, politically, when they surprise and frighten potential and actual Tory voters.

Will the £12 billion cuts actually happen if the Tories are re-elected? I very much doubt it.

Going back to my opening comment, the main purpose of the £12 billion social security cuts is to make the public service cuts look less bad. To meet the deficit target without raising taxes, every pound that doesn’t come off welfare has to come off public services. Welfare claimants can be implicitly dismissed as idlers, so a vague promise to cut benefits doesn’t go down as badly as taking an axe to public services. By claiming to be able to cut £12 billion off welfare, George Osborne can call the OBR and IFS projections of public service cuts hyperbolic. Of course the public service budgets will look bad if the silly idiots don’t take account of my welfare cuts.

I don’t believe the Conservatives will make their £12 billion cuts. The so-called secret plan that Danny Alexander leaked yesterday pretty much proves it. It wasn’t a plan at all, just an unfocused brain storm of ideas for how such cuts might be made. Even with a bit of wacky blue sky thinking, they could still only get to £8 billion. And they dismissed most of the ideas as too difficult.

The Conservatives have denied that the cuts in the leaked document are part of their plans but in so doing have almost admitted that they have no idea how they will make their £12 billion.

To call this document a secret plan is to flatter the Conservatives. They haven’t a clue how to make £12 billion of welfare cuts. I don’t think they have a clue how to take another £40 billion off public service spending either. Their strategy, such as it is, is to get elected and then work out how to do it all afterwards. The same could be said of the other parties, of course, but their spending claims are nowhere near as wild.

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Recovery: Was that it?

Yesterday’s GDP figures were rubbish. The first quarter of 2015 saw the slowest growth since the economy spluttered in 2012. True, it may, as Chris Giles says, be revised up but even so, 0.3 percent is well below where it should be.

_82614598_gdpgraph This isn’t how recoveries usually work. We would normally expect a big spurt of growth after the recession which then settles into a steadier pattern afterwards. That’s how recessions have always ended in the past. The odd year of 4 or 5 percent growth to offset the recession losses, then a few solid 3 percenters to follow up.

GDP Growth since 1948

That hasn’t happened this time, though. We’ve got the last bit before we’ve had the first bit.

As the New Policy Institute (NPI) commented:

It’s like watching a programme on TV where you can’t work out whether or not you’ve missed an episode. It feels like we are too far along in the story and we’ve missed the good bits.

The NPI reckon the economy has some serious problems. Its recent report, Beneath the bonnet: how sound is Britain’s economic recovery? notes that earnings and productivity have flatlined and the public deficit has remained stubbornly high. Furthermore, last time we had a post-recession deficit of a similar size, the other parts of the economy were in better shape.

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In 1995, households had built up lots of savings while the corporate sector was borrowing to invest and our trade with the rest of the world was only slightly in deficit. It’s not like that now though:

2014/15 is very different. The household sector needs to save more not less. The balance of payments deficit (5.3%) is well above its long term average (1.8%). The corporate sector deficit (the first since 2002) is a relatively bright spot but (at -1.5%) is pulling the economy a lot less strongly than it was in 1995/96.

At the moment, though, households are spending not saving. As Robert Peston said, the last quarter’s growth was shopping led. If people stopped shopping, there wouldn’t be much recovery at all.

The NPI’s conclusion:

While on the surface the economy may seem to be doing OK, a glance beneath the bonnet of the British economy reveals a vehicle in urgent need of attention. The engine is straining – lots of employment but of questionable quality; negligible productivity growth – and the steering is awry – the public sector deficit is going in the right direction but the other sectors are out of line. Neglect the first problem and the car won’t go much further. Neglect the second and another crash is not if but when.

If you think that’s pessimistic, try John Aziz’s piece in Pieria:

[T]he falling growth rate is another factor — like low inflation, like zero productivity growth, like weak investment levels — illustrating that we have not outgrown the problems, even with interest rates at record lows. With yet more spending cuts to come after the election, recession beckons.

There was some slightly better news last week when the public finances showed some improvement on last year. The trouble is, a lot of this is due to low inflation, low-interest rates and the windfall of delayed taxes being held over to dodge the 50p tax rate. The short-term outlook for the public finances may have improved but the underlying weaknesses in the economy seem to be getting worse. It’s like having a big win at the races on the same day as being demoted at work. An unexpected wedge of cash helps to cover up the fact that your longer-term ability to earn has taken a hit. 

If the OBR forecasts are right, 2014 might be as good as things will get and, from now on, growth will slow down again. This week’s figures might be an early warning of that. As the NPI says, it does feel a bit end-of-the partyish. It’s already 3 in the morning but somehow things never really got going.

So it looks like that might be it. That was your recovery. I hope you were paying attention, otherwise you might have missed it.


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