Austerity, supply-side - great context material:

Read this article from The Times carefully; feel sorry for Greece - or is the Troika right, and pain now will lead to gain later?

What if we had to take the Greek medicine?

Ed Conway

 

 

Last updated at 12:01AM, February 24 2015

 

The troika prescribing Greece a bitter economic cure might have some radical treatments for Britain’s public finances.

 

Strange as this might sound to the average Greek, bailouts sometimes have happy endings. Look no further than the last major developed country to receive help from the International Monetary Fund: the United Kingdom.

 

In the 1970s, Britain appeared to be in terminal decline. Inflation and interest rates were both in double figures; around half of all young people were out of work. Between 1950 and 1976, Britain’s per-capita national income had been outpaced by every other leading economy. What was once the world’s economic powerhouse had diminished to the extent that it was smaller, on this basis, than the rest of western Europe, except for Finland and Italy.

As in Greece today, the $3.9billion loan offered by the IMF in 1976 was tied to unpleasant conditions, including £2 billion of spending cuts and some painful economic reforms.
Yet in retrospect, it’s clear this was the moment Britain’s economy took off again. Between 1976 and 2008, gross domestic product per head rose faster in the UK than in any other industrialised nation. Living standards rose faster than during the heyday of the industrial revolution.

However, since the 2008 financial crisis, productivity has slumped and real wages have fallen. For each hour put in, British workers generate 30 per cent less income than their American counterparts — the biggest shortfall since 1991. Many factors may be to blame: the growth in part-time jobs and stubbornly poor education standards (17 million adults in England have the numerical skills of a primary school pupil, according to the Bank of England’s chief economist, Andy Haldane). Whatever the reason, poor productivity is the biggest threat to the economy.
There have been plenty of attempts to fix it over the past five years: from Michael Gove’s school reforms to Iain Duncan Smith’s shake-up of unemployment benefits. But, rather like the British public, the government’s extra sweat isn’t transforming into extra output.
That raises the question: if the IMF, the EU and the European Central Bank, the bailout institutions that make up the so-called troika, were in London rather than Athens, what would they recommend to tackle Britain’s persistent economic problems? Today, the Organisation for Economic Co-operation and Development will be in the Treasury to unveil its own list, though if previous editions are anything to go by, the most controversial item on it will be road charging.

If the troika really had the run of the Treasury, they would go much farther than that.
No doubt they’d start by calling for deficit cuts that would make Mr Osborne’s austerity plan look namby-pamby. In Greece under the troika, the deficit has been slashed by 88 per cent over the past six years, compared with a mere 63 per cent in the UK. Matching that here would mean an extra £53 billion worth of deficit reduction next year. Were that to come purely through taxes, it would require a 5 percentage point increase in VAT and a 7 per cent rise in the basic rate of income tax.

Then again, Britain’s long-term spending figures look grim too: in the coming decades the cost of the National Health Service will grow exponentially. So the troika would undoubtedly remove the government’s ring-fence on health spending. It would probably introduce fees for better-off patients to see their GPs. The winter fuel allowance would be scrapped, or at least limited to the least well-off. It would be much the same story for child benefit. In fact, any inessential spending (including on culture, sport and, as far as the IMF is concerned, defence) would be slashed to shreds.

Though most of Britain’s industries were privatised in the 1980s and 1990s, anything remaining in public hands would soon be on the block, including the banks, the state broadcasters and the Royal Mint, which Mr Osborne had been protecting up until now.
The planning system — long Britain’s bête noire — would be the next victim. The chancellor’s softly-softly reforms would be replaced with ones instantly disempowering nimbyish local authorities. The green belt would meet its end — after all, Britain is still far from being the most urbanised or developed landmass in Europe.

The property taxation system would need a complete overhaul. Stamp duty would be cut or ditched, replaced with a proper annual tax on the value of homes — a cross between council tax and a mansion tax. The financial sector’s fangs would be ground down with a permanent banking tax, rather than an ad hoc one introduced each year.

Some of these reforms seem straightforwardly sensible. Some look like madness — especially the scale of deficit reduction which, in Greece’s case, was imposed so quickly that the troika precipitated the very social disaster it was supposed to prevent.

What they have in common is that they would never make it anywhere near a party manifesto this year. While none of them is likely to happen any time soon, trying to imagine what the IMF would do in Britain today is a useful thought exercise. It reminds us that there is still plenty of room for the kinds of reform that could boost productivity in the coming years. But, as Greece is learning, such reforms tend to happen only in the depths of an economic crisis — and no one is grateful for them until decades later.