Rugby BC Cabinet – 11 Jan 2010 pt3: Town Centre

I wasn’t too surprised about the outcome of decisions by the Cabinet in my two previous posts – they may talk about inclusiveness, but appear to be unable or unwilling to do much about it, and when it comes to cuts, the vulnerable are an easy target for a Tory council.

But the mixed decisions on the assistance to the Town Centre economy was a bit unexpected (to me, at least). Basically, over the past year, the Council has been providing some help to local businesses to get through the recession. A report was presented tonight that recommended a slew of actions, including extensions to some of that assistance (primarily Moving In Grants and Shopfront Grants to encourage new businesses and renewal of existing ones). I had expected that there would be some commitment to carry these on, at least for the duration, but basically, any recommendation that cost any money was either rejected or to be deferred until the 2010-11 budget (which means that it can’t realistically happen until after April).

Thinking about it, it’s not that much of a surprise. I don’t think that the Tories understand the idea of spending a bit during a recession to reduce it’s effect and then hasten recovery. They certainly don’t get it at national level (with George Osborne demonstrating his economic vapidity at almost every turn), but I had hopes that the local brand of Tory were a bit more sensible. Seems that they are ready to stop assisting the economy at just the time when we are about to hopefully come out of recession – which is the time when we are at most risk of a relapse if assistance is stopped.

Council U-Turn on parking

The Rugby Observer (I can’t find the article on their website, so no link) reports that the Borough Council is likely to remove the 50p night-time parking charges for the town centre.

This is surely something that should be borne in mind – the charges were only imposed five months ago, and at the time there were considerable complaints that doing so would make the town centre less attractive to shoppers just at a time when it is suffering from a recession.

This was a policy put through by the Tory council, from a party that keeps telling us that they are knowledgeable when it comes to economics and finance. A measure that may well have brought in a bit of extra cash for the council (and so reducing any deficits) has a detrimental effect on the wider economy.

What they tried to do here, they are seeking to do at a national level.

Osborne caught out

Oh dear!

Yet more problems with the Tory would-be Chancellor of the Exchequer. He’s been caught out overstating the benefits of an increase in the pension age (and of course, this follows days of questions as to what he actually meant by it and how it would affect women).

What is more damning, however, is the view of David Blanchflower. He used to sit on the Bank Of England’s Monetary Policy Committee (which sets the base interest rate for the UK), and was one of the few people to predict the path of the downturn:

We are in the midst of the worst recession most people alive have ever experienced, or will probably ever experience. It is already worse than the 1980s and it isn’t over yet. The only comparison is to the 1930s (my parents, now in their 80s, can remember how bad it was). The monetary and fiscal authorities have so far managed to prevent a recession turning into a depression – but it still could, especially if David Cameron and George Osborne have their way…

…The simple lesson when you are deep in recession is that a serious policy error is to reverse stimulus too early, which then sends the economy crashing into a depression. This is what happened in the United States in the 30s. Monetary and fiscal policy were tightened before recovery was firmly established, which drove the country back into a deep recession at the end of 1937

…Lesson one in a deep recession is you don’t cut public spending until you are into the boom phase. Keynes taught us that. The consequence of cutting too soon is to drive the economy into a depression. That means rapidly rising unemployment, social disorder, rising poverty, falling living standards and even soup kitchens. The Tory economic proposals have the potential to push the British economy into a death spiral of decline that would be almost impossible to reverse for a generation.

The depressing thing is that the Tories will benefit from the recession, then likely make it worse, and then spend the next 4-5 years claiming that it’s all down to the previous government. Just like in 1979, when the economy was starting to recover, and the Tories came in and almost doubled VAT – killing off growth in retail sales driven activity, the party that believes in Capitalism doesn’t have the first idea of how it actually works.

Update: 17:45 on 10 October 2009 – seems that in recognition of their achievements, the Tories have won the ironic Nobel Prize for Economics 🙂

Government spending in context

Spending vs GDP

If government spending means we are ‘almost bankrupt’ now, how come it didn’t in the early 1980s? Looks to me like 40% with a variance of 5 or so points either way has been the norm since the end of WWII.

Each major peak in that post-war period appears to match with a recession (when GDP falls, so even constant spending would register as an uptick).

Spare us the cutter

The major parties are competing in earnest to see who can cut most from public spending. The Lib Dems have performed a massive volte-face and where a few years ago they positioned themselves as to the left of New Labour on some things, they now have a leadership who promise ‘savage cuts’. The Tories are trying very hard to conceal their glee at the prospect of being able to slash budgets, particularly where their favourite bugbears are concerned – benefits, social care, etc. Labour are also talking about savings that can be made.

Now, of course, there is always a good case for trimming fat in public services. Large organisations tend to ossify over time, leading to waste. Poor management (the British disease, and which afflicts the private sector too) needs to be challenged. Providers should be kept on their toes.

However, the media and a lot of politicians seem to assume that cuts (and drastic ones at that) are necessary. The right wing are selling the line that the country is ‘bankrupt’, or almost there, and that the sooner the knife is wielded, the better.

I disagree. What’s more quite a few others, who are more expert in economics than I am, disagree. Duncan Weldon, for example, points out in a recent post on George Osborne’s speech that demanding lower spending across the board appeared to make the 1930s depression far worse and last far longer.

The figure most often used is that we are facing a budget deficit of £175bn. Sure, that’s a lot of money for the government to be spending over its income. But this deficit is made up of four factors:

1) Because there’s a recession, tax intake is lower.

2) Because there’s a recession, spending on things like benefits is higher

3) In order to stabilise the economy, and with the hope of stimulating growth, the government has spent billions on on-off measures and cut some taxes temporarily.

4) There is an underlying deficit

(1) – (3) will all end soon. With a return to growth, tax revenues will increase. As that growth beds in, the stimulus spending can be reined back. When that growth starts to create new jobs, spending pressures will decrease.

What’s more, a large part of the extra spending was to buy bits of failing banks. The shares were priced very low when bought (because bank stocks were understandably pretty undesirable in late 2008, especially those of banks liable to go under), but of course a recovery – and particularly even a moderate one for banking – will see the value of those shares rise. Not only will loans be repaid, but the Government could end up making a pretty good profit.

Additionally, the problem with cutting public spending while the private sector has not fully recovered is that the two ‘sides’ are not unrelated. Public spending largely means people in jobs, who end up with some money to spend. They will use that money to buy stuff, from the private sector largely. Cut job, or freeze wages, and discretionary spending goes down. Not a problem if the private sector is healthy and has solid growth. Potentially disastrous if the private sector is at the bottom of a recessionary curve and any growth is weak.

Keynes is still relevant today. You borrow to spend in a recession, to limit and mitigate the effects. You don’t start trying to pay that back until you are in growth. The fact that during the last period of growth we did not draw down much of the debt (although it was about the same as a proportion of GDP in 2007 as it was in 1997) does not alter the principle – growth is the best way to curb public debt, but cuts in spending can negatively affect growth.