Economic policy is always a mixture of fiscal, monetary and political policy.
“Nick, George has come up with another of his jolly good wheezes. You remember that Plan A malarkey ..?”
Well, dear reader, you do remember Plan A, don’t you?
Eliminate the deficit by 2015; keep fingers crossed Expansionary Fiscal Contraction (EFC) works; use a 20:80 ratio of tax increases to spending cuts; provide monetary stimulus; flush out the Labour Party, and keep Vince and the ‘SDPers’ in their box.
Well, it put a spanner in the recovery-works and, with no sign of EFC or King’s stimulus working, it was pretty soon shelved – with the deficit horizon pushed back, and back, and back.
Although an economic failure, Plan A was a political success: the majority of the public did sign up to the moral position that debt was bad. Labour were discomforted, especially when the 16a Recovery Bus finally turned up. Ditto Vince and the ‘SDP/Social Liberal Alliance’.
So why not bring forth Son of Plan A, fifteen months before the election?
The politics, with its £25 billion of cuts or tax hikes, seems already to be working: Labour daring not to challenge the scale and the speed of the deficit reductions; the Prime Minister getting ready to welcome back his UKIP defectors, once they’ve used the Euros to give him a ritual kicking, and Nick Clegg playing his differentiation card with the Tories over the tax to cuts ratio with the added attraction that the New-Nick routine (‘feared by the rich, loved by the poor’) will bring a few of his own Labour defectors back into the fold, silencing Nick Harvey.
But it is a high risk policy. The Coalition needs contrary reactions; both the feel good factor of a strong recovery and an acceptance that ‘the job’s not over’. That is quite a difficult trick. And then there’s the effect on confidence. The downbeat talk around Plan A knocked business and consumer confidence, seriously delaying recovery.
However, there is an alternative. There always is.
The main plank of the Fiscal Compact is more moral than economic. It is the decision to get the budget deficit down to 0 by 2019/20 and thereafter to run a budget surplus of 1%, in the hope of reducing the National Debt.
The OBR has provided a graph showing the effects on Public Sector Net Debt of this strategy and also, usefully, the path of a strategy which reduces the deficit to 2% and then runs on at that level.
The range of options are infinite but a 1% deficit level path, mid way between the two plotted above, has advantages for the country and the Liberal Democrats. It provides a turn round (from 1% surplus to 1% deficit) of £20 billion: more than enough to expose Osborne’s £25b cuts for the political play it is. And, if outturn nominal growth over the five years, beats the anaemic OBR estimates, which are based on a pessimistic view of the output gap, the tax take will be even healthier. (See Professor Wren-Lewis’ view on that.)
These alternatives, which do not exclude one another, would create or sustain more life chances, increase the projected tax take, reduce the benefit bill, significantly reduce the level of cuts/tax hikes required and still seriously improve the deficit to GDP ratio. What’s not to like?
So, why are Liberal Democrats supporting Son of Plan A?
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams