Plan B or not Plan B – is that the question?

26th September 2011

His full speech to the Labour Party conference in Liverpool is posted here on the Daily Telegraph but the essence of his attack on the Coalition is contained in the following passage.

"Confronted with the biggest most urgent global challenge of our age, all they can do is urge other countries to pile austerity on austerity too… ignoring the lessons of history and the evidence here in Britain, and across the world, that austerity just isn't working. That is not just a failure of leadership – it is a complete abdication of responsibility too," he said.

However, for those who expect a policy of reversing those Coalition cuts, this clause may be of interest too.

"And no matter how much we dislike particular Tory spending cuts or tax rises, we cannot make promises now to reverse them. I won't do that and neither will any of my Shadow Cabinet colleagues."

Clearly Balls is treading a difficult line. While the economic context has changed and the Coalition has been confronted with bad news on domestic economy in recent months, Balls still cannot be seen to be promising too much.

He has however set an agenda for growth which some economists may welcome.

They are – Step one – repeat the bank bonus tax again this year – and use the money to build 25,000 affordable homes and guarantee a job for 100,000 young people – it can't be right to be cutting taxes on the banks when almost 1 in 5 young people are now out of work.

Step two – genuinely bring forward long-term investment projects – schools, roads and transport – to get people back to work and strengthen our economy for the future.

Step three – reverse January's damaging VAT rise now for a temporary period – a £450 boost for a family with two kids – immediate help for our high streets and for struggling families and pensioners too.

Step four – announce an immediate one year cut in VAT to 5% on home improvements, repairs and maintenance – to help homeowners and the many small businesses that are so dependent on the state of the housing market.

Step five – a one year national insurance tax break for every small firm which takes on extra workers, using the money left over from the government's failed national insurance rebate for new businesses – helping small businesses to grow and create jobs.

Balls' plan comes at an interesting time. For example Roger Bootle, writing in the Telegraph of all places, stuck the boot into David Cameron's continued advocacy of austerity and urged help for the private sector, so perhaps he would approve of the Balls' plan. He wrote: "There are some governments which have needed to reduce spending and raise taxes. I think that Britain is in this group because her public finances are in such a weak position. But this doesn't amount to an endorsement of a tight squeeze in all circumstances, and it doesn't apply to everybody.

"Ministers often give the impression that the mere act of governments putting their financial house in order will prompt increased private sector spending. They are in for a rude awakening. The private sector will probably need kicks, strokes and inducements from government to increase its spending."

However it is not as if Balls has been given a free run with its plans. The Independent's take on the speech is that the shadow cabinet has banned Balls from promising to reverse any Coalition cuts as the party bids to restore economic credibility post, which may lead to some to question how much difference there really is in the policies of the Coalition and the Opposition.

The Conservatives, of course, see plenty of blue water. They have issued a dossier labelled Plan B, the Balls Plan in which the B stands for bankruptcy and reported here on Conservative Home in suitably partisan fashion.

The Conservatives claim that Labour's plan would mean an ‘extra' £87bn of borrowing a year by 2015 suggesting that Labour would only cut the deficit by a third rather than halving it which is their stated position.

And yet will any Government really be able to deliver all the cuts? Here on his Economics Intelligence blog, Olaf Storbeck reports on a study of the success or otherwise of austerity measures by Paulo Mauro from the IMF fiscal operations division.

Among other things the study notes that historically EU governments have announced 66 austerity programs and pledged cuts of 1.7 percent of GDP on average. However, they were only able to deliver slightly more than half of this.

This might suggest that Osborne is more likely to deliver given that he plans to cut quickly.

Then again, the study notes that "in post-war Germany, for example, four different governments announced austerity programs. The success rate is mediocre. On two occasions (1981-85 and 2003-07), the governments were able to more or less live up to their promises, while they failed in the two other cases (1976-79 and 1991-95). Both times the targets were missed for the same reason: an unexpected recession thwarted the plan".

Does that suggest Balls' strategy could be more credible because austerity measures fail in the teeth of a recession.  Or is it out of both their hands?

More from Mindful Money:

UK austerity plans gets the thumbs-up from the IMF

Market crash: The secret to investment timing

No easy answers to our economic problems

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