Today Programme interview on the global economy and the need for a plan B

James Naughtie: Ed Balls the shadow chancellor is with us. Good morning.

Ed Balls: Morning Jim.

JN: If there is a Plan B you’re supposed to come up with it as an opposition, what is it?

EB: I think the world needs a Plan B. We need a Plan B in the Eurozone and in America and in Britain too and I think that our Chancellor and Prime Minister are uniquely placed to make the argument for that Plan B…

JN: Why?

EB: Because what’s happening is three different forces happening together. First of all you have got a balance sheet recession, you’ve got consumers and businesses retrenching, reducing debts. That’s, a very difficult thing for them to do. On top of that, and this is I think a big mistake, simultaneously countries in Europe and in America and in Britain are also trying to cut their deficit too fast in too drastic a way and as the IMF has said, and the head of the Federal Reserve of America, in recent months, as Stephanie [Flanders] said, the argument’s changing: simply slamming on the brakes undermines recovery, you can’t have credibility without growth. The problem is, Jim, in the Eurozone politically they are completely stuck. They can’t reach a political agreement about what needs to be done. In America, tragically, with the election coming up, the Congress and President Obama are at loggerheads. They can’t politically resolve this. The irony is that the one country which has got the political strength to change course is Britain and to make that argument in the world. The problem is it’s almost the opposite problem… our Coalition has decided the cornerstone is sticking to a deficit reduction plan which isn’t working, has flatlined our economy. Our problem is we can’t argue for sanity in the Eurozone and America if we are sticking to a failing policy in Britain. That’s why George Osborne having a Plan B in Britain is necessary for him to make the global argument which we desperately need leadership in these times.

JN: Right, let’s be absolutely clear. You are still committed are you to halving the deficit over four years which is what you said? We know what Alistair Darling has said about the lack of credibility that you as a party had at the last election and he argues that that was in part because you were trying to run, you personally were trying to run an alternative economic policy…

EB: He doesn’t say that actually Jim.

JN:                  Well he says that there was a shadow operation going on which was taking a different view from his own. I mean do you dissent from that?

EB:                  Absolutely. I mean look…

JN:                  Because that’s what he says in the book?

EB:                  We are at a time of huge danger in the global economy and I want to talk about what needs to be done now in Europe and America…

JN:                  So do I but I was just putting that against the background…

EB:                  But going back to those times, look I had disagreements with Alistair, only with him face to face. Everybody knows I thought a VAT rise was not the right course for Britain. At the time I was worried the pace of deficit reduction was going to be too fast. In fact I think Alistair was right and we had a credible policy on the deficit at the election as he himself said earlier in the week. The fact is we then had a change of course, Alistair himself said on Monday it is George Osborne’s change from his policy that is so dangerous and reckless to our economy.

JN:                  Surely the point that…I mean you’ve made that point fully I think so forgive me for interrupting but what Alistair Darling was arguing was that what scuppered him and your party was that there was a credibility problem because there was a disagreement at the top. Credibility in these matters as you know very well is all important and if the coalition policy is going to deliver what they claim it will deliver and no one will know until 2014 whether it’s succeeded or not, the credibility of the policy is terribly important and if they start running away from it surely it is fair for them to argue that the danger is the whole thing will unravel?

EB:                  Well as the head of the IMF said only a few weeks ago you can’t have credibility without growth. The markets are looking at situations in the Eurozone, in America and Britain and they’re saying look there is an issue about getting deficits down, of course. There’s an issue about the level of interest rates of course. And there’s also an issue about the level about growth in the economy and if growth in the economy grinds to a halt whether you are Greece or Italy or America that makes your deficit position worse and that undermines your credibility. The issue is in the end not whether you’ve got a plan or even whether the plan’s got agreement, it’s whether the plan in the end works. And our problem is, look go back a year ago, George Osborne said he was cautiously optimistic, I said a year ago there is a hurricane building, this is not the time to rip out the foundations of the house. I have to say I am more worried now about Britain, Europe and America than a year ago. Our Chancellor is more worried but has he got an alternative? Has he got a change of view? Has he got anything really to say about what needs to be done? He just says I will plough on regardless. That is not credible.

JN:                  So let’s be clear as to what changes you would like to see. You want deficit reduction to be slowed down and you want VAT cut. What evidence is there that those two things would stimulate growth? As you heard Stephanie saying, the VAT thing in terms of what it would do for credibility and the way that markets behave is a very open question. It is not at all clear that that would produce the growth that you claim?

EB:                  In a global context first, I would like our Chancellor, as I think the Financial Times said two or three weeks ago, arguing for a change to a more balanced and growth-orientated medium-term fiscal consolidation around the world. I think our Chancellor should be arguing that if the Eurozone doesn’t face up to the need for political agreement on fiscal policy there is going to be a catastrophe. Our Chancellor needs to be urging, as the IMF has been doing, the American Congress to reach an agreement…

JN:                  OK that’s fair enough but it’s not a change of policy?

EB:                  Of course it’s a change of policy because in Europe austerity isn’t working but the German people are not going to face up to that unless they are led to do so. In America we could have, in a Presidential election year, a failure to reach political agreement which is disastrous for the world. Here in Britain we should be leading those debates and we should be also be saying in Britain here, look I want to have credible, medium term deficit reduction. Of course we need that. However it is very hard to reduce your deficit, impossible, if the economy isn’t growing and we have grown more slowly in the last year than any major economy than Japan, any European economy than Portugal and Romania. In those circumstances the right thing to do is not to rip up your deficit reduction plan but to say instead that we got it wrong. We tried to go too far and too fast…

JN:                  You made that point very clearly…

EB:                  But therefore we need a more steady approach to deficit reduction. In my view we should act now to support growth and jobs by boosting spending power now. The Bank of England cannot do this job on its own, A temporary VAT cut would work to boost spending and help get our deficit down.

JN:                  Well of course one of the other things that quite a few people argue is that the 50% top rate of tax for people earning over £150,000 first of all isn’t going to work in terms of bringing in the revenue, we don’t know – the Chancellor’s going to look at that – we don’t know what the figures are. But if that tax isn’t seen to be working in terms of what it does for the government will you still defend it as a sort of symbolic tax or from your point of view does it have to deliver the revenue in order to be justified?

EB:                  No I’m not in favour of any tax as a matter of principle…

JN:                  Because Alistair Darling said it should be temporary?

EB:                  And personally I would always rather reduce any tax if you possibly can…

JN:                  You wanted it to come in, in government, at £100,000 didn’t you, not £150,000?

EB:                  No. What I said last year in the leadership election was during the period we need to get the deficit down and we’re looking for fair ways to do it, I thought starting for that period for £100,000 would be fairer than £150,000…

JN:                  So the answer is yes.

EB:                  But let’s get back to your question. George Osborne, if he was on this programme, usually he boasts about his ‘independent Office of Budget Responsibility’. Why don’t they do the study to look at what revenue is raised? In any case even if they did we wouldn’t know this for one or two years. In the meantime do we really think when we need to get our economy moving, to get our deficit down, to get growth and jobs, do you really think the first priority is not to cut VAT for families or to find other ways to help people on middle incomes but to only cut taxes for people on incomes over £150,000? I think people watching these economists yesterday making this argument must think these people aren’t in the real world.

JN:                  Well, no, I can see the political argument you’re making and from your perspective it’s a very attractive one.

EB:                  But it also raises billions of pounds, Jim.

JN:                  Hang on, well that’s a question which will be decided by the…

EB:                  The OBR should investigate. Why don’t they?

JN:                  Well neither of us knows the answer to that question but let me put this to you. You were part of a government which systematically argued over a period of 12 years under two different Prime Ministers that broadly speaking getting taxes down as far as you can at the top and at the bottom stimulated economic recovery and you know I would suggest to you that in your argument on the 50p and the £150,000, it’s politically easy for you to say ‘oh these rich people, they just want a tax break’, but in fact your whole argument for years has been if you get taxes down as low as possible consistent with proper public service and all the rest of it, you will actually stimulate economic activity. Why do you think that is no longer true?

EB:                  ‘All that rest of it’ of course is quite important because you need to make sure that your taxes are not only fair and as low as you can but also that they keep the deficit under control – we got the national debt down – and support your public spending…

JN:                  So keep 50p at all costs?

EB:                  I was somebody who championed the cut in Capital Gains Tax to support entrepreneurship. I think the signals we send are very important. But we had a global financial crisis, every country saw their deficit go up. If we hadn’t had done…  This wasn’t caused by public spending in Britain. Lehman Brothers didn’t go bankrupt because of British public spending. It was a global crisis in banking, our deficits in every country had to go up. To get them down you ask everybody to make a contribution. That means some public spending cuts – of course it does – and we’ve set out the spending cuts we’d make. It means some tax rises but I have to say if you’re raising National Insurance for everybody – VAT I think is a terrible mistake – you also ask those at the very top to make a contribution. That was the top rate of tax. That’s the right policy in this global crisis and I have to say we need action now to get the economy moving. The idea that the first priority for a tax cut is the top rate of tax on people over £150,000, that’s not fair, it wouldn’t do the trick. George Osborne if he wants a Plan B should, I think, start listening to wiser advice than that.

JN:                  Ed Balls, Shadow Chancellor, thank you.


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Posted September 8th, 2011 by Ed