Thursday 12th January 2012 | 20:39

Dialogue: Matthew Hancock and John Healey debate the economy

Is the coalition’s deficit-reduction strategy working? In an exchange of emails MPs John Healey, a Treasury minister from 2002 to 2007, and Matthew Hancock, a former adviser to George Osborne and now a member of the Public Accounts Committee, discuss the central question of the economy

 

John Healey < @parliament.uk

Wed 04/01/2012 20:48

 

Dear Matthew

I hope you’ve had a restful recess. It’s going to be a tough year.

In your Christmas message to Conservatives you acclaimed the “success of our economic argument”. You may be ahead for now on the politics of the argument but you’re falling back on the economy, as Britain loses ground on jobs, growth and debt.

You have done a good job on the politics, and you should take some personal credit for this as the chancellor’s former adviser. You changed the political debate from economic recovery to deficit reduction, not in the days after the 2010 election but in the days after the 2009 Budget – a strong, simple political message which we failed to counter. What we were doing then in government to lift Britain out of recession concerned us more than what we were saying.

But economics is more complex than politics. We don’t just have a debt crisis, we also have a jobs and growth crisis. The UK economy grew by three per cent in the 12 months before the chancellor’s spending review in 2010, then by just 0.5 per cent in the year since. He choked off recovery with spending cuts and tax rises that go too far and too fast. The Autumn Statement was a checklist of fiscal failure – with government borrowing now set to be £158bn more than planned to pay for the costs of failing on jobs and economic growth.

Britain needs a more balanced economic plan for 2012 – above all, a ‘jobs first’ plan. As Keynes said, “Look after unemployment and the budget will look after itself.”

You don’t want to call it ‘plan B’, after Ed Balls. So let’s call it ‘plan C’ for Common Sense.

First, temporary tax cuts to boost economic activity and confidence, and to relieve hard-pressed families. You could cut the 50p rate of income tax. I prefer VAT. It helps everyone, especially those on low incomes, and it worked in the face of the 2008-9 global financial crisis and recession.

Second, many of your spending cuts are short-sighted and counterproductive; made where it’s been easiest, not where it’s best to cutback. The UK Film Council produced £24 for every taxpayer pound of funding, the RDAs a 4.5:1 economic return. You axed them all. So as necessary future cuts are made, let’s apply a tough economic as well as a social test.

Above all, let’s all look harder at what we earn, not just what we spend. Our UK GDP last year was still nearly four per cent below its pre-crash level in 2007/8 – so our economy is smaller, and our national earnings lower. The longer we spend with no or slow growth, the longer the road to recovery and getting the deficit down.

Yours ever

John

 

 

Matthew Hancock < @parliament.uk

Thu 05/01/2012 14:55

 

Dear John

Thank for your email. It is a pleasure to discuss the central question of the economy with you, as it is vitally important we get the answers right as a country.

I am grateful for your characteristic honesty when you say that the coalition is winning the political argument on the economy. I agree. The public are very engaged with this debate. They can suss out when a plan makes sense. So especially in these troubled times, good economics makes good politics. You concede that Labour have failed to counter the government’s proposals with a viable alternative. This makes the politics yet more difficult.

I also think people know that no-one would choose to push through a deficit reduction on this scale unless it was absolutely necessary in the national interest. It’s not credible to claim that this is being done out of choice when you agree cuts are necessary.

In your email you flirt with the absurd claims that Labour left the coalition a rosy economic inheritance. With no plan to tackle the largest deficit in the OECD, youth unemployment rising since 2004, and no progress on bank reform? Surely you don’t really believe that was a golden legacy?

Since the election the challenges have been compounded by the sharp rise in oil and food prices in 2010 and the eurozone crisis. Would they not have happened if Labour had been re-elected?! Of course they would.

And yet the deficit is coming down, and Britain has thankfully avoided the worst of the economic storm in on our doorstep, because the people all this money was borrowed from – the bond markets – believe the new government has a credible plan to pay it back, and the political will to deliver on it, so keep our market interest rates low. In a debt crisis, that’s a precondition for jobs and growth.

You say “too far, too fast”. But if we went slower, the debt interest would be higher, so the cuts deeper. “Too far too fast” really means “further, slower”. Do you want to leave your debts for our children? Really?

I do agree that a vigorous debate is healthy on how best to make the necessary savings. For example, I’d argue LEPs are much more cost-effective than RDAs, that the Work Programme is many times more cost-effective than previous jobs measures, and that the role of the Film Council will continue more cost-effectively within the British Film Institute.

So on this question of where to cut, do you agree, for example, that the government is right to protect health spending? Do you welcome the pupil premium? Do you think Labour would be doing better if the front bench, like you, accepted the necessity of the cuts, and concentrated instead on how we make them?

 

 

John Healey < @parliament.uk

Fri 06/01/2012 14:59

 

Dear Matthew

Your problem – and the big risk for Britain – is that clever politics hides stupid economics.

Betting all the chips on public spending cuts is a policy that is both too far, too fast and too inflexible.

You may be ahead on the politics for now but you can’t keep blaming Labour in the past for your present policy failings. Every government builds up a record and responsibility for what happens on their watch.

The economy has flat-lined for the last year since George Osborne’s spending review launched such rapid tax rises and spending cuts. If it does not recover much more strongly this year, then the Labour case for a better balance between spending cuts and investment for jobs and growth will gain greater and greater force. Even the IMF now says “slamming on the brakes too quickly will hurt the recovery and worsen job prospects”, and that “growth is necessary for fiscal credibility”.

Why not adopt the deficit-reduction plan Labour had at the election – call it ‘plan D’ for Alistair Darling? The challenge has always been ‘how’ this is done, never ‘if’, as Jim Murphy is saying today.

A credible economic plan to deal with the deficit also requires alongside it successful plans for jobs and growth. At present, you’re making Britain a one-legged man in a three-legged race. To use the household analogy that Tories love, if you cut your family’s earnings as you pay down debts, then cuts in family spending must be more savage and for longer to do the job. The Autumn Statement confirmed the failure of this strategy for the nation.

Finally, on Labour’s economic record. By 2007 Britain’s debt, deficit and borrowing were lower than our legacy from the Tories in 1997. Oh, and two million more were in work, hundreds of new schools and hospitals had been built, and we’d had a decade of low, stable interest rates and inflation. Before, of course, the reckless irresponsibility of bankers brought the global financial system close to collapse and drove a worldwide downturn. That required urgent and unprecedented action by governments in every major country, borrowing and spending to save the banking system and to stop recession becoming a much deeper depression.

Borrowing is what governments do to help their countries through tough times. I was the Treasury’s financial secretary and signed off Britain’s last repayment on our loans to fight World War Two – in December 2006.

Yours

John

 

 

Matthew Hancock < @parliament.uk

Sat 07/01/2012 09:31

 

John,

As governments across Europe put in place measures to themselves live within their means, doesn't it make you feel even a bit uncomfortable to argue Britain should abandon ours?

Can you name a single mainstream European political party arguing for their country to borrow more to cut taxes and increase spending?

Your argument seems to be to be based on two flawed arguments. First, that Labour left a golden economic legacy. Yet even the Bank of England governor, who you appointed, said your policy was not credible.

Second, that the slow recovery is entirely due to the deficit reduction. Of course, recovering from a debt crisis is difficult. But do you watch the news coming from our nearest trading partner in the eurozone? Have you filled up your car recently? Are you really saying that these things have no impact?

You mention the IMF. But the IMF support our plans, as do the OECD, European Commission, the CBI and the Bank. They say that without credibility, you lose the biggest stimulus the economy has in the historic low interest rates. That is the central economic case.

I think the politics follow the economics: people know we are in a debt crisis, and we must deal with that to get jobs and growth.

Perhaps you can answer the question I've been struggling to get an answer to: how does borrowing more lead to lower borrowing?

 

John Healey < @parliament.uk

Sat 07/01/2012 11:02

 

Dear Matthew

Let me repeat, the central challenge is not whether to reduce the deficit but how best to do so.

By strangling growth and pushing up unemployment, your government is getting in less tax revenue and paying out more benefits than planned, so Britain is also borrowing more than planned to cover the costs of this economic failure. The flaws of this inflexible and one-dimensional approach were confirmed in the Autumn Statement figures.

2011 was a lost year for the British economy. I fear 2012 will be another lost year without a readiness to rethink Tory-led economic policy, which is hurting but not working.

Nothing in your emails to me suggests you accept my argument. So perhaps you will take this warning from Winston Churchill – and feel free to pass it on to the prime minister and chancellor – “We shall not be judged by the criticisms of our opponents, but by the consequences of our acts”.

In the meantime, I’m certain we can at least agree that this debate will run and run.

Yours

John

 

 

Matthew Hancock < @parliament.uk

Mon 09/01/2012 17:19

 

Dear John,

It has been refreshing to debate with a Labour MP who understands that the central challenge is to reduce the deficit. I hope you can persuade some more of your colleagues of that... Given that, you must be as disappointed as I am at the lack of proposals for how to reduce the deficit from the Labour side.

Reducing such a huge deficit is not easy. But I think the consequences of our acts have been to start getting the deficit down, and keep interest rates low. Given the evident consequences for our near neighbours in Europe when they do not face up to their deficits, I think the case for this approach is stronger, not weaker, than a year ago.

I hope, in time, that the rest of the Labour Party starts to come round to your view on the centrality of deficit reduction, and starts to contribute to the debate about how to get our country out of this mess.

 

Yours

Matthew