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Politicians get lost in search of the fabled Magic Money Tree

October 17, 2017 12:53 PM
By Vince Cable in City A.M.

Teresa May's Money TreeThe magic money tree has become an overused, hackneyed term of political abuse.

Worse, it seems to have lost its capacity to hurt.

It was, when first used, a rather witty way of making a serious point about political programmes which don't add up financially.

Throughout three decades of Tory, Labour and coalition rule, opposition as well as government spokespeople took the concept of financial responsibility seriously.

Receiving an accolade from the Institute of Fiscal Studies (IFS) was much prized, and it was axiomatic that voters valued fiscal seriousness.

Yet since the 2015 election, belief in financial magic appears to have grown. Brexit's biggest appeal was a treasure trove to finance the NHS. Labour has caught the new mood.

A few weeks ago, shadow chancellor John McDonnell added £200bn of PFI contracts to a lengthening list of Labour financial commitments, including the nationalisation of rail franchises, energy and water utilities, free universities, and much else.

The IFS was scathing at the June election about Labour's numbers, but it did little political harm, perhaps because the Conservatives had no numbers at all, and have since oscillated between preaching austerity and signing cheques when pressed. My own party, the Liberal Democrats, received an IFS Gold Medal in 2017, but it did us little good.

Magical money solutions are also acquiring an intellectual pedigree. I was recently given a hard time by a class of economic students who insisted that the magic tree really existed and that "austerity" - the alternative to money trees - was discredited.

Sir Vince CableAs I pushed them, it became clearer that three separate points were being made, each with a germ - but only a germ - of truth.

The first is that the preoccupation with public debt is overdone, even at 90 per cent of GDP (net). The Rogoff idea of a 90 per cent "trigger point" has been discredited. And the UK continues to enjoy negative interest rates on long term debt.

Unfortunately, the Treasury foolishly allowed the initial clarity of the coalition's fiscal objectives - to eliminate the structural element in the current budget - to become a generalised objection to all government borrowing.

As a result, an opportunity has been missed to finance a programme of productive investment in infrastructure and housing, which could have supported long term growth and even reduced the ratio of debt-to-GDP. But while austerity has been given a bad name, fiscal discipline does still matter.

Second, superficially plausible but flaky assumptions about tax revenues are being incorporated into "costed manifestos".

Labour's enthusiasm for a lucrative financial transaction tax belies the experience of other countries which have actually lost money in this way.

The undoubtedly popular idea of taxing bankers until their pips squeak ignores the fact that Brexit (let alone such a tax) will export the tax base. And while I see no merit in the current race-to-the-bottom in corporation tax, it is naive to expect that corporations will volunteer for more tax if they can avoid it.

And finally, there is "people's QE": directing the Bank of England to lend to the government.

The idea is not completely foolish; it was seriously considered in the aftermath of the financial crisis. And it may prove necessary in a future, deep, recession.

But harvesting this branch of the magic money tree is for emergencies only. It is not for helping politicians to make their numbers add up.

Magic is for magicians, not for serious policymakers.