General Election 2017 - The Budget: Progressive optimism vs Tory pessimism

In the general election campaign so far, there's a determination on the Right to spread the idea that their own plans are sensible and that their opponent's are chaotic and don't add up. But that's a crudely simplistic narrative and it comes with a couple of main assumptions that need to be broken through.

On the first assumption: none of the six main parties in England, Wales and Scotland are calling for a drastic overhaul to Britain's economic system. On the second: most economic systems work on their own terms. The sums will add up, whoever is in government. The biggest difference between progressive and conservative versions is their contrasting optimism and pessimism.

While conservatives, and progressives, will try to make the management of the budget a question of competence, or a question of right and wrong answers, those are not the primary questions facing voters. The real question to consider first, is: what are you trying to achieve?

How Ideology affects Economics

All approaches to the economy are ideological: they propose a set of steps to follow, with an intended outcome - an intentional attempt at shaping society to maximise certain behaviours and to minimise others.

When looking at the pitches made by progressives and conservatives, there are two elements you should consider, one for each of the two main categories of public spending - Current and Capital.

For clarity: Current spending is the day-to-day spending on the departmental budgets, historically offset against government revenue. Capital spending is long term infrastructure investment, usually funded by government borrowing.

On Current spending, you need to consider the question of intervention vs laissez faire: do you consider government action in any given policy area to be helping or interfering?

On Capital spending, you need to consider whether to invest in the future or tackle public debt: do you consider public debt or out-of-date technology and buildings for schools, hospitals, or roads and rails for businesses, the bigger burden on the future?

These two questions are deeply connected.

How entwined they are can be illustrated by the long term plan pursued by the Tories. Planning to 'balance' the budget by having both Current and Capital spending offset by revenue, severely limits how much the government can do in the present and for the future. Even more so as they pursue a huge reduction in the proportion of Britain's GDP, the country's gross wealth, the government is spending.

Now, borrowing to fund Current spending, on the day to day department costs, would theoretically be adding to the public debt at the expense of the future (hence the Tories popular refrain about not burdening our children). But Labour - whether you take the vision for the treasury as assembled by Brown, Balls or McDonnell - has not and does not intend to do that.

Under Labour and the Liberal Democrats, the intention has been - from at least the leaderships of John Smith and Paddy Ashdown - to follow a Keynesian approach: to balance just Current spending against tax revenues, thereby not accumulating public debt to pay for the needs of the present.

This approach does, however, leave Capital spending to be funded by borrowing.

The reasoning behind this is that the longer term Capital spending behaves much differently to Current spending. For a government, borrowing is cheap and the added value created by using it for long term investment is huge - so much so that the actual cost of borrowing is ultimately offset by the increased economic growth that results, and the rise in tax revenue that follows.

How to fund investment

The progressive view of these budget questions has a particular focus on Capital spending, refusing the simplistic calculation that public debt equals a burden on the future. Public debts, within reason and where they result from investment in the future, are largely harmless.

But the negative impact of poor infrastructure, on every area of society, could be disastrous. Just look at the mess that resulted from outdated operating systems on NHS computers. But the same point extends to more mundane situations: old and crumbling school buildings, potholed and traffic strewn roads, ports with insufficient capacity, a telecommunications network that doesn't keep up with the needs of people and businesses.

There are, of course, always attempts at being clever in order to reduce borrowing for Capital projects, even when they aren't covered by tax revenues. New Labour tried something new, expanding on plans they inherited to seek out private investors for its controversial and now infamous 'Private Finance Initiatives', as a way to fund Capital spending without adding to the public debt.

The New Labour plan for private-funded public investment built hospitals - but the private sector expects returns. The PFIs left those institutions with the expectation to deliver astronomical returns on those investments - some £300bn all told - and private benefactors continue to receive interest payments from hospital trusts in the hundreds of millions.

In a way, New Labour's approach resembles the Coalition plan for funding higher education - shifting a public debt, weighing on the Current budget, onto citizens as private debt. In a stroke, a chunk of Current spending and public debt was privatised.

But like the burdens that were shifted onto the backs of hospital trusts, the treasury saw a clever accounting trick,  not the social impact of burdensome debt - though at least more limitations were put in place to protect students than the hospital trusts received with PFIs. In either case, the financial burden ends up on the public books anyway.

The Conservatives plan was to oppose borrowing and fund both Current and Capital only with tax revenues. From a progressive view this was reckless, as it would result in one of two outcomes: it would mean slashing spending on people's wellbeing in the present, while still having them pay tax to fund Capital projects that will never bear fruit for them, or it would mean slashing both to endlessly pay off mostly harmless debt.

The underlying motivations for conservatives to pursue this path is as simple as 'faith' in the market. A belief that private schemes are better than public action - seeing public action as interference that just distorts outcomes. Instead of taking the advantage of scale provided by the collective public option, where resources are pooled to maximise their use, conservatives prefer personal private schemes of insurance to pay for services.

How the government finances stand

The overriding aim of this privatising conservative mentality is to fight against 'dependence'. But to pursue that low tax, low interference, approach, that promotes private action, is not compatible with maintaining well funded public services. At some point, something will have to give. To emphasise the point, consider how the public finances stand after seven years of Tory government.

Current spending stands this past year at around £720 billion to £740 billion in revenue, while Capital spending sits at around £80 billion. As the Tories combine Current and Capital spending to calculate the deficit, the public debt increased by about £59 billion.

That will mean, in the coming years - helped perhaps if revenues rise due to economic recovery or growth - 'balancing' the budget will still require a combination of tax rises and budget cuts, to both Capital and Current spending, amounting to over £60 billion a year - and perhaps more, if the aim is to produce a surplus with which to pay down the public debt.

We know that some £22 billion is to come from the NHS, through the finding of 'savings'. Another £3 billion is coming from schools, thanks to recent funding changes. More will come from the welfare freeze. There is clearly an intention to clear some of the cost of social care off the public books by making middle class homeowners pay with their assets. But that still leaves a lot of cuts.

As for the Liberal Democrat and Labour plans, both are actually fairly similar and neither are that tremendously radical. In fact, they're downright sensibly Keynesian. Both intend to balance the Current, day-to-day departmental, spending against tax revenues - with modest tax rises, mostly on the rich, making more room for manoeuvre.

And here is something interesting. On the measure of balancing the Current budget: it's already balanced. In fact it's in surplus. By some £20 billion. It is projected to be in surplus by about the same amount next year. The previous year the Current budget was only £3 billion in deficit. If the job was to rebalance government spending and revenue, the job is nearly three years done.

With their commitments fully costed, either Labour or the Lib Dems would come into government with a very positive outlook on the public finances - seeing the public books as being in a healthy state. The positivity of either of these parties would alone be a drastic turn around from the doomsaying Tories, who promise nothing but ever more cuts.

It is remarkable the affect that optimism and positivity alone can have in economics, particularly in contrast to the Tories doom and gloom and neverending warnings. But the renewed public investment, called for by all progressive parties, could provide a huge long term boost to Britain. From the mass building of new homes to long term support for innovative new industries - particularly in green energy - there would be a lot to be optimistic about.

How we frame debt matters

As for the deficit and debt? Well, how these are drawn up may have to change when the Tories are eventually ousted, because the way we frame these matters. Conservatives have been very successful at getting into circulation the idea that fiscal credibility means opposing public debt. Progressives must counter that narrative by reframing the ideas.

If the value added by Capital spending vastly outweighs its cost - thus removing it as a factor in balancing a budget - it might well be worth starting to calculate it separately from the deficit and debt which results from the Current budget. That means separating out public debt into two categories: productive Capital debt and unproductive deficit debt.

The progressive aim will be responsibility with productive Capital debt and credibility in tackling and avoiding the unproductive Current deficits and debt. Consider: In the three years between 2015 and 2018, there will have been a Current budget surplus of £47bn. The deficit in that period, that Tories use to justify austerity, is the result of £233bn in Capital spending - investment in long term projects.

That means, at the end of that three year period, around 12% of our total public debt is just from that productive long term investment. When you consider the long term, positive impact of that Capital spending, it makes the public debt a lot less intimidating. It also resets priorities.

How we move forward

To be a progressive is to be an optimist - to be believe that people have the power to change things for the better. While government spending is not the be-all-end-all mechanism for that, progressives argue that it has an important role to play and is currently being poorly utilised.

There are huge challenges to face and most them require sturdy long term commitment. Poverty needs to be addressed with affordable housing and energy, and with compassionate welfare that gets people back on their own feet.

Britain's imbalanced economy needs restructuring around innovative new industries and businesses, spread out across the regions, with green energy power them and the technical skills to run them.

The public sector is able to deliver that long term investment in a way private finance has not yet been able to match. It is part of the solution. The next step is to grasp that idea and to pursue it with positivity and energy. Progress is possible and austerity not inevitable.

Basic Income is the first step to a more fair, just and free society, where all can enjoy the benefits of technological progress without the fear of dispossession and poverty

Thousands of protesters march the streets surrounding the Conservative Party Conference in support of trade unionists, and against austerity, in Manchester, 4 October 2015.

The basic income took a huge step towards being a reality in the UK last Tuesday night when John McDonnell mentioned that the Labour Party where considering a basic income policy (Sheffield, 2016). During a speech, at the latest stop on his New Economics tour (Sheffield, 2016{2}), in which McDonnell spoke of Labour's commitment to a more decentralised and democratic economy, the Shadow Chancellor acknowledged the interest Labour had taken in the policy - heretofore, only advocated for by the Greens (Wintour, 2015).

The basic income will be one step towards making society more fair, the economy more just, and giving individuals more liberty. Right now, with the European business community readjusting to technology, as well as competition from businesses employing workers for virtually no pay in other parts of the world, a defined shift towards fairness, justice and liberty is needed.

Certain principles, like the value of work in exchange for the means to live, continue to be imposed despite the possibility of a secure job, that pays a fair wage for a fair day's work, threatening to disappear (Foster, 2016). Zero-hours contracts are taking security away from the most vulnerable, eating into their lives in ways that leave them filled with stress and anxiety (Fleming, 2016).

Right now the advances in technology are very much in the favour of business and those in positions of established wealth, enriching some few while most see their livelihoods taken away and their lives made more precarious. There seems to be a coalition, one part fearing for workers and the other an elite fearing a form of socialism that eat into their status, that takes the rather unflattering opinion that this third industrial revolution should be avoided for fear of "mass unemployment and psychological aimlessness" (Mason, 2016).

Discussing the earlier and more famous industrial revolution, which saw the rise of the machines in Europe, Oscar Wilde argued that it was not a matter of the emergence of the technology itself that was the problem, but rather the way it was being controlled (Wilde, 1891).

"Up to the present, man has been, to a certain extent, the slave of machinery, and there is something tragic in the fact that as soon as man had invented a machine to do his work he began to starve. This, however, is, of course, the result of our property system and our system of competition. One man owns a machine which does the work of five hundred men. Five hundred men are, in consequence, thrown out of employment, and, having no work to do, become hungry and take to thieving. The one man secures the produce of the machine and keeps it, and has five hundred times as much as he should have, and probably, which is of much more importance, a great deal more than he really wants. Were that machine the property of all, every one would benefit by it. It would be an immense advantage to the community."

To avoid this kind of dispossession, may mean accepting that it is time to reconsider social values relating to work (Srnicek et al, 2016), and to contemplate the possibility of a post-work society - where all could benefit from the technological automation of our age (Mason, 2016). That shift would begin with reductions in the length of the working day, embracing job sharing and introducing the basic income. In all, loosening the connections between work and the right to life.

British Liberals in the 1920s argued (Yellow Book, 1928), under the strong influence of David Lloyd George and John Maynard Keynes, that the aim of "political and economic action", wasn't to perfect or perpetuate machines and social orders, but so that individuals "may have life, and that they might have it more abundantly". Their methods were popular share-ownership and progressive taxation - in essence, cooperation.

Rising public interest in the Basic Income presents a chance to pursue those aims in earnest. Along with more economic cooperation and a better work-life balance, it is possible to use these ideas to build a more humane economy. An economy that is fair and just, that protects and promotes liberty, within which progress will be wired in to the general benefit.

Osborne's Fiscal Charter: Keynes argued both a surplus and deficit should have a clear purpose in a balanced economy

George Osborne has succeeded in getting his charter of fiscal responsibility through Parliament, though it has faced opposition. Photograph: The Chancellor with guests at Port of Tilbury on 1 April 2014 by HM Treasury (License) (Cropped)

On Wednesday night, George Osborne succeeded in passing his Fiscal Charter through the Commons - in theory committing governments to achieving a fiscal surplus in 'good times' (BBC, 2015). Labour, after some twists and turns and with some abstentions, opposed the charter alongside other opposition parties as simply being a parliamentary tactic rather than a commitment to the principles under discussion (BBC, 2015{2}).

The move to introduce the charter has faced criticism, in particular from Green MP Caroline Lucas. Lucas has argued that a surplus simply siphons money out of the economy, that is then patched over with private debt, and that borrowing to invest could stabilise an economy by increasing jobs and tax revenues (CarolineLucas.com, 2015; Sparrow, 2015).

As for the economic theory behind the move? Well, John Maynard Keynes may have had something to say about that.

Keynes clearly agreed with the idea that a national debt was a major obstacle to a healthy economy, with an impact so wide that creditor countries aught to think very carefully about the level of repayments they insist upon (Miller & Skidelsky, 2012). However, he also believed that creditors, as well as debtors, aught to settle their accounts (Inman, 2012).

While not wanting to weaken the commitment of debtors to honouring their debts, Keynes believed that pressure needed to be applied to creditor countries to not build up excessively 'positively' imbalanced trading accounts - even going so far as to suggest large interest payments be paid, into an international investment bank, on a trade surplus.

Keynes' ideas have implications for the broader economy beyond the fiscal, and the obscure world of international trade relations.

The OECD has stressed that income inequality damages an economy, strangling growth by vampirically draining wealth from circulation in the broader economy (OECD, 2014). The money extracted in the accumulation of wealth needs to be replaced. That can lead to the ever accelerating pursuit of economic growth and to an obsession with making an economy 'competitive'. It can also lead to escalating private debt.

When looking to build an economy, the key word to take from Keynes is balance. For Keynes, both a surplus and a deficit should have a clear purpose and an idle commitment to either would be a reckless course to take. Keynes would have agreed with the idea of budgetary and fiscal responsibility, but he would have included within that remit a government using deficit spending to rebuild or improve the economy - rather than the strictly austere contraction of government that the Chancellor is pursuing.

Election 2015: Economics - Austerity, Austerity Lite or an Alternative

The big question facing voters on 7th May is how should the UK's fiscal policy and public debt be managed over the next five years. That is to say: how much tax should be raised, and from who? And, how much of the deficit and debt should be paid off, and when?

As of April, the deficit - the amount of government spending in excess of revenue from taxation - was at around £90bn. Over the last five years the deficit has been reduced from £154bn. However, because there is still a deficit, the overall debt has continued to climb - from around £1 trillion up to around £1.5 trillion (Ashworth-Hayes, 2015).

Those are, admittedly, pretty scary numbers. But what is the reality behind them?

What are the parties offering?

There are two main groups of parties taking opposing positions: the Conservatives and UKIP on one side (BBC, 2015), Labour and the SNP on the other (Phelps, 2015). While the Conservative side is focussing heavily on bringing down the deficit and the debt substantially through further cuts to public spending, the Labour side has focussed instead on much shallower cuts, ostensibly to protect the economy from the shock of further public sector cuts (Peston, 2015).

In order to achieve their deficit reduction, the Conservatives will have to make massive cuts to public services (Robinson, 2015). They will need to cut as much as a third from the budget of each of the unprotected areas of public spending, plus £12bn from non-pensions welfare spending - of which jobseekers allowance only makes up £3bn of £74bn, with housing benefit taking up £18bn (Elliott & Wintour, 2015).

All of these Conservative efforts are aimed squarely at tackling, and eliminating, sovereign debt. By contrast, Labour believe that the way to cut the deficit is to improve the economy - encouraging growth and so increasing government revenues (Robinson, 2015).

With two potentially viable means to achieve the same end, the judgement as to who is right would seem to depend on outside factors (Peston, 2015{2}).

"...your judgement about who is right depends on your assessment of how big you want the public sector to be, and how likely you think it is that there is another economic crisis around the corner - because the more imminent such a shock may be, the more haste is appropriate for debt reduction."

That brings us to the question: how much of a risk is sovereign debt?

Keynes and cyclically balanced budgets

To answer that question it is worth revisiting the work of John Maynard Keynes. Keynes was an Eton and Cambridge educated economist and member of the old Liberal Party. He had worked for the treasury, but his experiences during negotiations over German reparations at the end of the First World War led to his resignation.

He then wrote The Economic Consequences of the Peace, which roundly criticised, on economic grounds, the process by which the German people were being punished with reparations for the actions of the German State and warned of the dangers inherent to that course. The work established his credentials as an economist.

In later works - such as the The Means to Prosperity and The General Theory of Employment, Interest and Money - Keynes' ideas went on to focus on the important economic role played by demand. Economics, of all stripes, is centred on the relationship between supply and demand. In a change from classical economic attitudes, Keynes saw demand as the one that drives the other - and so saw it as necessary for something to be done about making up for the slump in demand that occurred during contraction periods in the economic cycle.

The means to achieving that would be government debt and deficit spending. By borrowing and sending more on public services and public works, the government could keep people employed, thus keeping money in their pockets and so keep demand at a level that can support supply until the economy recovers. In a failure to do this, Keynes saw potentially catastrophic problems caused by the collapse of demand, as unemployment led to recession which led to more unemployment (The Independent Report, 2012).

However, the role that sovereign debt and deficit spending played was only intended by Keynes to be part of a more comprehensive fiscal strategy of cyclically balanced budgets - with surpluses created during the good times to allow for the deficit spending needed during the slumps.

Yet public debts have, over the past seven years, gone a long way beyond that. Sovereign debt has piled up thanks to governments taking private capitalist debts into their own hands to save the private business, and particularly banks, from catastrophe (Filger, 2010) - although the IMF estimates that only 40% of the total debt is the result of stimulus efforts and bail-outs, with 60% coming simply from lower tax revenues due to higher unemployment and lower profits (The Economist, 2013).

Further, the IMF has suggested that while public debt isn't helpful - compounding problems by questioning solvency, so driving up interest rates which makes borrowing and repayments more expensive, and undermining the freedom for governments to spend to stimulate the economy - austerity cuts aimed at tackling the debt have actually hindered growth (The Economist, 2013).

What may seem a fairly cavalier attitude towards public debt seem to be justified by analysis. Historically, it appears, sovereign default - where a country is unable to meet its debts and so is forced to restructure repayments - does not come with the risks generally associated with it. The effects on economic growth of default are a drop of around 2.5% in the short term, but are quickly overcome and recovering is relatively fast (Panizza & Borensztein, 2010).

The real dangers appear to be the political effects.

Back during Great War reparations negotiations, Keynes had argued that there was a limit to the capacity of a state to manage its debts. To pressure a state into pursuing repayments it could not afford could have dangerous ramifications (Miller & Skidelsky, 2012). Policies by creditor countries regarding debts would have to be handled in a way sensitive to both economic and political outcomes. The failure to do so would be expressed in the rise of extremism - as people turn to simplistic and drastic solutions in the face of the powerlessness of the centre.

So how does all of this answer our key questions: how much tax should be raised and from who? How much of the deficit and debt should be paid off, and when? How much of a risk is sovereign debt?

Conclusions with reservations

For Keynes, the moment for austerity cuts was during the good times, not during the bad. If debts became unmanageable, then it would eventually be better simply to cancel those debts and have everyone benefit from the renewed growth. However, debts and deficit spendings should be purposeful, with deliberate productive outcomes that will ultimately help balance out spending when the economy returns to expansion.

Taking all of these things into account, it should not be a huge surprise that Keynes would be unlikely to agree outright with either the Labour or Conservative side of the argument, but rather with the Liberal Democrats - the heirs of the old Liberal Party of which he was a member.

Of the mainstream parties, the Lib Dems are the most openly committed to what they call a middle course - to cyclically balanced budgets, tax rises rather than increasingly deep cuts to tackle the deficit more immediately than Labour and then keeping spending increases in line with revenue increases to spend more than the Conservatives (Crawford et al, 2014).

However, all of this analysis presumes the continued validity of the mainstream economic system - something about which questions have been raised in the last five years. Therein lies deeper questions of values that are much harder to answer: does the mainstream system still reflect what we expect from our lives? And, is anyone actually offering a real alternative system?

Anti-austerity parties, from the more mainstream Greens to more fringe groups like Socialist Labour, offer alternatives consisting of higher taxes and more public spending. But they not do not offer a comprehensively different system (Whale, 2015; BBC, 2015{2}).

There is the choice. Do we look now to the alternatives, that may not be ready or fully realised, or do we try to make the best of the present system, with as much fairness as possible, according to our best understanding of how it functions?

Yanis Varoufakis, Greek radical left economist and Finance Minister under the Syriza government, addressed that choice by stressing the need for progressives to be pragmatic during these times of crisis (Varoufakis, 2015). From his perspective the Revolutionary Marxists were wrong - crisis would not benefit the Left, but rather the Right. For Varoufakis, the priority is a 'modest agenda for stabilising a system that I criticise', in order to 'minimise the unnecessary human toll from this crisis'.

The rising cost of servicing debt, along with austerity applied during tough times, can damage the general wellbeing and lead to rising extremism. Progressives need to decide on which course they believe to be best able to protect the common good in the present, and will set us up for moving towards greater prosperity in the future.