UK Election – Costing Manifestos

I have a lot of sympathy with supporters’ frustrations with the simplification in the media of the Labour manifesto to a reductionist analysis of “costing”. Especially when the Conservatives do not even make an attempt to assess the costs of their own manifesto.

Simon Wren-Lewis does his best to articulate how this misses the key parts of the debate. https://mainlymacro.blogspot.co.uk/2017/05/but-do-numbers-add-up.html I also found this post by the IFS very clear. https://www.ifs.org.uk/publications/9218.

The Labour manifesto is a properly radical document and imagines a set of dramatic changes to the UK economy and the role of the government. No simplistic “costing” will come close to capturing what it is proposing.

However, I do not agree with some of the defences of the economic plan and so think it is worth writing down what I understood the manifesto to mean, and why some of the language used is not helpful.

Spending vs Investment

I find that both sides are guilty of being misleading here. The right calls all expenditure spending when it suits them and the left calls all spending investment. From what I can see Corbyn is in favour of expenditure of all kinds. Here are some guestimate numbers from the manifesto pledges (I am not claiming forensic accounting as I see that as pointless).

  1. Investment in infrastructure – £25bn
  2. Extra spending (NHS, tuition fees etc.) – £25bn
  3. Tax Rises – mainly on corporate earnings and high earners – £25bn
  4. Nationalisation – if done well can argue this is a balance sheet expansion but the amount paid equals the value and so no impact on the government’s fiscal health. It is neither investment nor spending.

If you want to examine the increase in “spending” – this figure of £25bn seems sensible.
Lumping in investment and nationalisation makes it scarier but is misleading.


Should we nationalise?

I agree with S W-L that the debate focuses on the wrong topic. The issue is not whether we can afford it. We should “ask Labour politicians why they think the industry would be more efficiently run under public ownership”. For natural monopolies, there is a legitimate debate to be had.


Should we increase investment
?

In general, there is a good case for higher investment, made by many economists. But I wish they would also acknowledge the actual problem is not with the economics. The obstacle is political from both the left and the right. Whenever the government is increasing investment, there is often an outcry saying we should prioritise “investment” in the NHS and education. But “investment” in the NHS and education is really spending. The right will perceive arguments for “investment” as a Trojan horse for increasing government spending and the left probably sees it the same way, they are just on the side of the Trojans. The ease with which the left talk about pay rises for NHS staff as “investment” always reinforces my perception that they are happily loose with the distinction.


Budget Deficit – does it get bigger?

What happens to this depends on

  1. How much tax is raised
  2. The dynamic effects of the economic changes

To think about this a bit more

  1. How much tax is raised from increases in higher rate tax rates and corporate tax rates is extremely hard to estimate. It is reasonable to assume that higher tax rates raise a lot less than hoped and so there would likely be a significant increase in the deficit. It is an important issue but also the only one generally mentioned and so I would prefer to park that issue for now.
  2. The dynamic effects of all the proposed changes are very complex – for example
  • Higher spending increases demand
  • Higher taxes reduce demand

If we assume for now that taxes raised roughly offset spending increases, then the net impact on demand and growth is, perhaps surprisingly, not zero. It represents a net increase in demand because the marginal propensity to consume of the rich people being taxed more is lower than the people the extra spending has gone to. This is called the balanced budget multiplier.

Simon Wren-Lewis says that this is clearly a good thing because “when interest rates are at their lowest bound – a tax funded spending increase would provide a much-needed boost to activity, which itself would raise taxes.” He castigates the IFS saying it is time for them “to learn a bit of macro”. He states his view as though it is self-evidently true but I do not follow his argument.

I think the above statement is true only if you assume that rates are at the zero bound and you would prefer them to be lower. He defines austerity as having fiscal policy too tight compared with where you would want to have it from a demand management perspective. While he may personally have that view, it is far from objectively true at the moment. For example, on 10th May the Bank of England Monetary Policy Committee met: 7 members voted to keep monetary policy and rates as they are, 1 member (Kristen Forbes) voted to increase rates by 25bp!

If the Bank of England do not wish to increase stimulus it is not clear why we should assume as obvious that increasing demand would lead to higher growth and higher tax yield. If the Bank of England are correct it would not lead to higher growth, more likely just higher inflation.

What really matters in the Labour manifesto

What is clear from the manifesto is that the current Labour Party have a radical agenda for the reshaping of the UK. Starting with an increase of government spending of around 5% and a similar sized increase in investment. This would be, at least partially, paid for by raising taxes. This is a vision of a country with a larger and more central role for the government and a view to intervene via the tax system to work against inequality by taxing the rich.

This is a set of policies around a vision to get everyone’s partisan spirits engaged. The left and the right will love/hate it on ideological grounds. Perhaps this is why most policy analysis is so misleading.

What is the cost of the Conservative manifesto?

This issue barely gets discussed, but from my quick analysis the Conservative manifesto has plans which damage the fiscal position significantly more than the Labour one. The big issue is Theresa May’s continuing pledge to reduce immigration to below 100k. Back in 2012 the OBR produced projections for national debt with different levels of net migration. http://budgetresponsibility.org.uk/fsr/fiscal-sustainability-report-july-2012/ The impact is stunning and hugely more important than relatively small changes to current NHS funding.

Conclusion

Understanding the impact of government policy on the deficit and debt profile is important. But the way it is done can be misleading and distract from more important economic ideas. Even more crucial is that we properly explore the economic consequences of all policies, not just the ones that directly affect spending and tax.

Will the GOP turn on Trump?

A simple yet reliable model for politicians can be just to consider what gets them re-elected. If we use that model for the GOP, it works very well for their relationship with Trump.

During the Presidential primaries last year, there were some vocal opponents of Trump from within the GOP but despite some major provocations they mostly moved to support him. Those expecting his behaviour and performance of the past months to lead to him losing the support of the GOP is based upon:

  1. He is doing a bad job
  2. He is at record levels of unpopularity for an incoming President

But if we use our simple model both of these arguments quickly disappear.

  1. They would prefer a better President but this is not their major concern
  2. The electoral rationale is compelling. Trump’s popularity with non-Republicans is already at record low levels and keeps declining rapidly. But he is still overwhelmingly popular with Republican voters. By contrast virtually no-one likes Congress, with just 27% of Americans having a favourable opinion of them. So, if these really unpopular members of Congress move against a Trump they are offending the vast majority of people who might vote for them. Until this week, the GOP quickly defended him irrespective of what he had done.

Can this change?

The way that this could change is if Trump starts to bleed support from within his own supporters. But this has been predicted so many times and has always been wrong that again I have a simple model that says that they will support him irrespective of what he does. I actually think that his popularity might be best modelled as chaotic – by which I mean it could be very stable but then change enormously with what seems a small incremental catalyst.

The other way that it could change is if my simple model of the GOP is not true. Senators such as John McCain are clearly loyal to the party but prize their loyalty to their country and its Constitution more highly. What if there are some ethical lines which cannot be crossed?

Vive La France!

I am excited about the election of Macron. Unlike the UK and the US, France has rejected the nationalist, isolationist Right and elected a centrist by a ratio of 2:1.

The rejection of Le Pen was critical of course. If she had been elected then the prospects for the EU would have been chaotic at best. He does of course face obstacles. His victory was primarily driven by negative cohesion i.e. people voted against Le Pen more than voted in support of his ideas. But that is true of most recent elections and certainly also true of Brexit and Trump. But with Macron –

  • After so many successes for the right we see a success for the centre. This is the area of politics that has been wiped out in the UK and US. Can he provide a template for a broader revival of the centre in politics in Europe? He is socially liberal, fiscally conservative, pro-market and pro-EU.
  • He has shown that a rejection of the status quo does not have to mean a move to the extremes.
  • He is a technocrat. Can a smart technocrat come up with a policy programme to deal with France’s problems such as unemployment?
  • He is pro-EU. Varoufakis cites him as one of the few who was sympathetic to negotiation with Greece on debt burden reduction.
  • He sees Brexit as an opportunity for France. He will likely do his best to attract financial services to migrate from London to Paris and move the border camps for refugees from Calais to Kent.

A day of French triumph over fascism is one to be celebrated.

https://www.youtube.com/watch?v=HM-E2H1ChJM