Budget Statement — House of Lords, 2015-07-21
Topic: Macroeconomics
Dick Taverne (Liberal Democrats, Centre to centre-left): My Lords, there were good bits in the Budget, such as measures against tax avoidance and the policy of increasing real wages. The latter is particularly welcome because it will increase demand after years of severe austerity, which caused real wages to decline, reduced demand, prolonged the recession, substantially shrank our GDP and lowered productivity. It was in fact only after some relaxation of austerity, through some loosening of tight fiscal policy in 2012, that the economy began to grow again. However, this growth happened mainly because after a slump all economies rebound in time, but how far and how fast the economy rebounds depends on government policy In the election campaign, the Conservatives scored a major triumph, and I do not just mean their election victory. Through brilliant propaganda, they persuaded the public that they were the party of economic competence, that Labour had caused the crisis by borrowing and that the key to recovery from deep recession is a return to balancing the books. Time after time Mr Cameron taunted Mr Miliband, "You caused the crisis by borrowing. How can you propose policies that mean more borrowing, or oppose our policies, which will reduce borrowing?" This successful campaign—putting all the blame on borrowing—was based on a number of fallacies. Reckless borrowing was not the cause of the crash in 2008; it was the failure of the financial institutions and reckless deregulation, based on the blind belief in the efficiency of markets and the doctrine of rational expectations. The crash was caused by the bubble in the mortgage market, securitisation, gambling with derivatives and the banks ignoring risks in the drive for ever bigger and faster profits Furthermore, the doctrine that we must eliminate deficits and balance the books, with the substantial deep cuts in public spending that that entails, is not the basic cure for economic decline. That is going back to the 1930s and the pre-Keynesian conventional wisdom preached by Montagu Norman, the all-powerful Governor of the Bank of England at the time Unfortunately, the obsession with balanced budgets has spread far and wide in the European Union. I have always admired Germany, which has been one of the best-governed and best-managed countries and the least nationalistic in the European Union. It has been much more compassionate towards the Syrian refugees than we have. However, at this time its belief that borrowing is a sin and its insistence on deficit reduction by ferocious austerity threaten the survival of the eurozone and possibly even the future of the European Union itself. The reforms that countries such as Greece need cannot possibly be achieved by ruinous austerity. Indeed, we seem to have forgotten the lessons from history. The extreme, ruinous regime of austerity imposed on Germany by the Versailles Treaty led to the rise of Hitler. Keynes predicted disaster in his famous book, The Economic Consequences of the Peace The post-Second World War picture, by contrast, was very different. Germany’s recovery after 1953 would not have been possible without massive debt relief and other measures to revive the German economy. In Britain, reducing debt by cutting public spending was not a priority for the Attlee Government. That Government launched the welfare state and the National Health Service at a time when the ratio of debt to GDP was over 200%, and they achieved a growth rate of over 3%. Indeed, after 25 years of economic growth between 1945 and 1970, the national debt shrank from 240% of GDP to 64%. History shows that the best way to reduce deficits and achieve structural reform at the same time is through growth, not austerity I find it deeply depressing that the Labour leadership has swallowed the mantra about balancing the books. That is why they dare not challenge head-on the Osborne doctrine of shrinking the state by further devastating cuts in public spending and welfare, making some of the poorest poorer still. They give the game away by accepting the need for balanced budgets. I am afraid that the media, including the supposedly left-wing, anti-Conservative BBC, have swallowed the mantra of balancing the books uncritically. Most of the economic pundits on current affairs programmes on television are City economists, who take a City view. No wonder the new conventional wisdom has convinced the public It is time that we heard more frequently in the media from those who do not subscribe to deficit fetishism. More, please, from Nobel prize winners such as Amartya Sen, Paul Krugman and Joseph Stiglitz, or, for that matter, from our own colleague, the noble Lord, Lord Skidelsky.