Why the debate on the deficit is dumb


1:28 pm - October 8th 2009

by Chris Dillow    


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The debate about government borrowing shows how backward our political class and media are. It's being conducted within the wrong framework. It’s about what the parties will or will not do, when in fact it should be about the range of policies they are considering.

To see what I mean, here is my view of the deficit, which I suspect is reasonably mainstream among economists.

* * * * *

We haven’t a hope of cutting the deficit significantly by policy measures alone; Osborne‘s proposed measures aren’t just a tiny fraction of borrowing, but are a tiny fraction of the forecast errors for the deficit. Our only chance of getting the deficit down seriously is to grow our way out of it.

This requires that the  private sector start borrowing again, which means that policies that “encourage saving”, such as the raising of the pension age, might actually raise the deficit.

If the economy does grow nicely, the deficit will take care of itself. And if it doesn’t, we’ll need a deficit to support the economy, and the chances are that global investors’ demand for government bonds will stay high, so we can continue to finance the deficit easily.

Either way, there’s no point jeopardizing people’s jobs through spending cuts that might be unnecessary or perhaps even counter-productive.

This view, though, is just a probability. There’s a risk to it. There’s a danger that bond markets might take fright at borrowing in future, even though they are relaxed about it now. This could happen if we get decent economic growth – which would cause bonds to sell off anyway – which reveals that the structural budget deficit is bigger than thought.

Should this happen, we might need an emergency fiscal tightening – though as this could well be needed only as the economy grows, it might be justified in terms of ordinary counter-cyclical policy anyway.

Plan A, then, should be to relax about borrowing. But we need, as a plan B, a set of fiscal measures that might be necessary to placate the bond markets.

* * * * *

However, our political parties – not just the Tories – are not offering us this. They seem to operate in a world of certainty, where all that matters is what will or will not be needed.

But a world of certainty is a purely imaginary place. In our world, uncertainty is a central fact about the economy. And this requires that policy-makers have a range of possible economic policies.

The question is: why do politicians present a public image which is so moronic? Is it that they really believe managerialist claptrap about being in control? Or do they think the public aren’t ready for an acknowledgement of risk and uncertainty? Or could it simply be that our media  are so economically illiterate that it would be impossible for any politician to get such a message across?

In a week in which a speech that was predicated upon a downright falsehood has been acclaimed as “honest” by the BBC, I fear the last possibility cannot be discounted.

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About the author
Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Reader comments


Great piece, Chris.

Do you think we can continue to spend 6% more than we take in in tax, on the assumption that wi’ll grow out way out of it?

I’ve been arguing we can’t, but I’m no economist and am open to the possibility I’ve just been conned by the conventional wisdom.

2. Ken McKenzie

To be honest, Chris, I do actually think that your final option is the real one. The media are not mature or trustworthy enough to be able to get across a complex, controversial argument. We live in an era where everyone is hungry for ‘controversy’, yet overreact like teenagers when any politician has any ideas.

Governments cannot discuss their policies internally without leaked documents of discarded ideas appearing in the Press as if they were about to be enacted tomorrow, and any politician who actually tries to ask ‘is this a good idea’ is immediately the subject of ‘gaffe’ and ‘rift’ headlines.

Our Press won’t let us have a mature politics, and they don’t want us to have one. They’re happy that we have politicians as panto villians, because if we didn’t we might choose some others. Like people who really do lie to us all the time. In print. And then pretend they never did it.

We’re bound to grow out of it – the recession always reduces tax revenues and inflates welfare payments.

The thing is Osborne got caught out on this only a few weeks ago – when he rubbished some Treasury projection by saying, in effect, that he did not expect the situation to change at all. That was followed by a humiliating interview by Adam Boulton on Sky.

The economy won’t fizz in the way it did in the past thanks to the inflated financial sector – but it will recover eventually. Then tax revenues will be matched. But if you start cutting drastically and laying people off – then consumer spending decreases and the recovery is further delayed.

In fact the Tories are cutting their own throat because if the recession becomes deep then sooner or later they’ll start getting blamed for it.

Anyway, Chris is completely right. The only problem is that Labour never had a clear narrative on this that they stuck to. And so they got out-manoeuvred by the Tories, who have managed to shift it on to their terms..

Managers/politicians like to express certainty. People/voters like simple messages. Shrugs shoulders.

I should have thought that the idea that debt-based booms are illusory would have sunk in by now even amongst left-wing economists. As far back as 2003/4 it was clear that unsustainable growth in consumer and corporate debt was the only thing that prevented us going into a recession. Re-inflating that souffle will only end in tears.

Not to mention that at a time when many foreign banks have packed up and gone home measures to stimulate borrowing are easier said than done.

In terms of growth I would focus on measures that increase productive capacity and use of that capacity. Basically, the opposite of everything Labour has done I would suggest.

Let’s be clear, Sunny. The blame for the UK’s relatively weak economic performance lies with Labour and Labour alone.

@5 “Relatively weak”? What the hell are you talking about? We boomed for nearly fifteen years, we had far stronger growth than msot of Europe, and the only reason we’re taking very slightly longer to come out of recession is because we’re too dependent on financial services.

Describing the UK’s economic performance as weak under Labour is so delusional that even Osborne wouldn’t do it.

The blame for the UK’s relatively weak economic performance lies with Labour and Labour alone.

Nothing whatsoever to do with a global financial crises at all!

Or do you mean the policies that the Tories are going to market as their own – I’m a bit confused.

NULab have a lot to be blamed for, but that one is a global problem not just Brown’s.

If Darling and Brown had any bollox left (or in the first place) and been left-wing they would have twatted the Tories this week. They would also have had the argument Chris spoke of in the OP, but we are left with a dithering set of NeoTories who just don’t have the fight in them.

“. The blame for the UK’s relatively weak economic performance lies with Labour and Labour alone.”

Relative to whom? Spain? Iceland? Latvia? Hungary? Ireland?

One of those countries was held up by G. Osborne as an example for the UK to follow. Are you really claiming with a straight face that Mr. Osborne is a better judge of economics than Alistair Darling, praguetory?

9. Ken McKenzie

@5

If by ‘relatively weak’, you mean, ‘avoided a recession in 2001/2 that hit the US and Europe’, then true.

Could you explain how a supposedly economically incompetent Government managed to dodge a recession – and actual, honest to goodness recession – that lasted nearly a year in the US, and the EU?

Fairies? Having one and not telling anyone? Actually not being too bad at running the economy?

10. Praguetory

Darling is a provincial solicitor. He’s been making it up as he goes along.

11. Praguetory

UK Personal Lending 2003 – Published December 2002 by Datamonitor

With the UK’s troubled manufacturing sector continuing to underperform, a full blown recession is only being avoided by exceptionally strong consumer credit and soaring house prices, which, in turn, are only possible due to low interest rates and low inflation. However, if consumer confidence fails there is a distinct possibility that the UK economy could slip into recession once again.

UK Personal Lending 2004 – Published December 2003 by Datamonitor

The consumer credit market has defied expectations and produced another record year in 2003, helped on by low base rates, low levels of unemployment and a strong housing market… leaving many to wonder whether the current levels of personal debt are sustainable.

Didn’t Hannan worship at the mantel of Iceland at some point – I do seem to forget, and they now have a left-wing government, no?

Odd dat.

You’re a mindless troll PragueTory – with nothing to back up that lame rhetoric. Relatively weak economic performance indeed.

What model should we have followed? Iceland? Like your idol Dan Hannan advocated?

14. Praguetory

Even in the so-called boom years our growth was anaemic. Brown didn’t abolish boom and bust he abolished boom. We’re on course for per capita GDP contraction of 5% this year – we never managed annual economic growth of anything like that unedr Labour.

Astonishing that you would attempt to compare the UK favourably with Ireland. They have gone from 2/3rds of our GDP to 4/3rds over recent years.

Here in the UK, unemployment is already a million higher than 1998 and althought I don’t have the figures to hand I imagine that real disposable income has fallen too.

I don’t much care about Spain, Italy and France as I’m not interested in comparing us to the worst in class.

Any bunch of buffoons can take a set of benign economic circumstances and turn it into a bubble which is exactly what Labour have achieved.

Funny you never cross-posted Chris Dillow’s call for the size of the state to shrink!

Here it is in case you missed it:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/04/shrink-the-state-a-leftist-aim.html

He links to the Brittan article which asserts (but does not show) that the problem will sort itself out – and I’m sure the deficit will shrink
But at some point we have to run a surplus, otherwise debt will simply continue to rise.
And I believe that the consensus/IFS guessimate is that, given the permanent shrinkage in the financial sector, we are running a structural deficit of 6% of GDP, ie even if output returns to full capacity we will still have a deficit.

This is a problem.

There is a debate to be had about timing, but please don’t pretend the structural problem isn’t there.

“Even in the so-called boom years our growth was anaemic.”

If only we were more like China, eh?

17. Praguetory

“If only we were more like China, eh?”

If you mean low payroll and business taxes, yes. Without the type of measures Cameron set out today to create jobs, incentivise enteprise and pare back the size of the state, Dillow’s call to expand lending is lunacy, but fortunately probably impossible.

Any bunch of buffoons can take a set of benign economic circumstances and turn it into a bubble which is exactly what Labour have achieved.

Remind us when the Tories were also talking about there being a bubble and calling for more measures to sort it out?

In fact, they were calling for even less regulation so the asset boom could carry on.

Even in the so-called boom years our growth was anaemic. Brown didn’t abolish boom and bust he abolished boom. We’re on course for per capita GDP contraction of 5% this year – we never managed annual economic growth of anything like that unedr Labour.

Yet they were growth years as opposed to non-growth! Brown may have been out on his 40% mark, but he used that as a marker to bring about stability to growth rather than boom and bust – stability is much, much better. Again, we have to reiterate that this financial breakdown is not, nor ever has been because of Brown – it is a global situation.

Look at Germany they are pouring cash left, right and centre into the economy to get it ticking over and ready for when the recovery takes place. Osbourne and Cameron will lead the UK into further recession and possibly depression while others are making strides forward – leaving the UK to suffer once again.

You cannot, cannot run a country the same way as you balance your cheque book – I have no fucking idea how many times I have said that – a national economy is not akin to a household one no matter how much thick Tories want it to be.

If anything the stimulus should be higher – a lot higher and spent in areas where the economy can grow again once the recovery comes – but NuLab are too shit scared to come out and say so. Whether you believe job created with stimulus cash are permanent or not is nether here not there – they will still bring in tax revenue because people are working.

Fuck, go the whole hog and have the government employ them all to build factories, build wind farms, build social housing. The last thing needed is to slash spending. When that happens the tax take will fall more unemployed less tax, more cuts etc.

When the growth and recovery comes then you can increase taxes and cut spending – certainly not now.

“If you mean low payroll and business taxes, yes.”

You really think that’s the secret of China’s success?

Wow. I mean, I knew you lot were prone to believing just-so stories but that takes the biscuit.

Neil –

“If you mean low payroll and business taxes, yes.”

You really think that’s the secret of China’s success? Wow. I mean, I knew you lot were prone to believing just-so stories but that takes the biscuit.

Yep – like business never just add their costs to the end product. Wages and taxes plus other cost are separate and have to be paid. Tisk, and just imagine all that profit they would make if no one produced anything and business never paid any taxes.

Now I can see why Tories vote Tory.

Again, another idiot who knows nothing about China.

We might have stronger companies if circa 70% of employees had been underpaid – or not paid at all – in the last 12 months, like in China. How they going to draw payroll taxes when people aren’t even paid?

What about China’s interests rates? The ones where the state directs them towards potentially bankrupt state owned enterprises at preferential rates.

What about the commercial property bubble which has seen a vacancy rate in Shanghai of around 22% and Beijing of 17%?

Will people ever stop using China as a political football?!

Leftie –

Will people ever stop using China as a political football?!

They will as soon as the UK starts doing the exact same thing as China – fuck, make it better, get UK workers to pay business for giving them a job!

Some links to instructive stuff:

Try Sam Brittan on: A cool look at the current deficit hysteria
http://www.ft.com/cms/s/0/4679c2be-aed0-11de-96d7-00144feabdc0.html?catid=113&SID=google&nclick_check=1

“Scarcely any rich country has stable public finances. America’s public debt is expected to double as a fraction of GDP by 2018. Britain faces many years of budget deficits and a rising debt burden. There is no end in sight for deficits in the rest of Europe either.”
http://www.economist.com/opinion/displaystory.cfm?story_id=14419200

The fact is that in 2007, before the financial crisis developed, the burden of taxation in Britain – meaning: total tax revenues as a percentage of national GDP – was lower than in most European countries: the most notable exception being Germany, where the burden was marginally lower. Try this OECD source:
http://lysander.sourceoecd.org/pdf/factbook2009/302009011e-10-04-01.pdf

According to this OECD source, annual growth of percapita GDP during 2001-2007 was better in Britain than in France, Germany or Italy:
http://oberon.sourceoecd.org/vl=4371788/cl=51/nw=1/rpsv/factbook2009/02/03/02/02-03-02-f1.htm

“Darling is a provincial solicitor. He’s been making it up as he goes along.”

An odd criticism given that his shadow has never had a proper job in his life.

I’m impressed by this:

“The Tories have asked civil servants to draw up plans to cut Ministry of Defence costs by 25% without reducing front-line troops.”
http://news.bbc.co.uk/1/hi/uk_politics/8296575.stm

Government insiders have known for decades that MOD procurement is shambolic and sometimes corrupt. IMO taxpayers have been regularly taken for rides by arms suppliers.

“Darling is a provincial solicitor”

The comparison may not be flattering but Lloyd George was also a provincial solicitor before embarking on a career in politics.

According the OECD Factbook, the employment rate in 2007 for the age group 15-24 was higher in Britain than in France, Germany or Italty:
http://puck.sourceoecd.org/vl=1328852/cl=33/nw=1/rpsv/factbook2009/06/01/02/06-01-02-g1.htm

The employment rate for the age-group 25-54 was higher in Britain than in Germany or Italy – France was marginally better:
http://puck.sourceoecd.org/vl=1328852/cl=33/nw=1/rpsv/factbook2009/06/01/02/06-01-02-g2.htm

Britain’s average unemployment rate for 2005-2007 was lower than in France, Germany or Italy but then, as we know, unemployment rates are affected by the numbers not in employment who are moved on to incapacity benefit or the equivalent in other countries.
http://puck.sourceoecd.org/vl=1328852/cl=33/nw=1/rpsv/factbook2009/06/02/01/06-02-01-g1.htm

17 – cjcjc:

“Funny you never cross-posted Chris Dillow’s call for the size of the state to shrink!”

Except when we, um, did:

http://www.liberalconspiracy.org/2009/04/17/why-the-left-should-argue-for-a-small-state/

“This requires that the private sector start borrowing again [….] chances are that global investors’ demand for government bonds will stay high”

Well that’s exactly why we need to reduce the deficit. There is only a finite amount of money available to borrow and the more the government borrows, the less there is for the private sector to borrow. It no wonder the private sector is struggling to borrow when the government is hogging a vast amount of the money available.

And saving more is a good thing because it allows banks money to lend. If I put £1,000 in a bank, they can then lend that out to other customers. The money doesn’t just sit there inactive.

You’re right that we need growth to get the economy and public finances back on track – but the public sector needs reducing or else it will be a massive drag on any future growth.

To return to Chris’s questions:

“Is it that they really believe managerialist claptrap about being in control? Or do they think the public aren’t ready for an acknowledgement of risk and uncertainty? Or could it simply be that our media are so economically illiterate that it would be impossible for any politician to get such a message across?”

“Yes” to all three.

And on the ‘other’ debate, we may have been relatively stable, doing ok, etc, but what about the long-term effects of the whole PFI, ‘off-balance-sheet’ nonsense?

Oh, and PragueTory, I think you’ll find Darling was a ‘provincial’ (what a quaint and pathetically London-centric term) *advocate*, not just a solicitor. If you’re going to insult someone who’s probably been promoted beyond the point of his own competence, at least get your facts right first, eh?

🙂

“Either way, there’s no point jeopardizing people’s jobs through spending cuts that might be unnecessary or perhaps even counter-productive.”

Cutting people’s benefits isn’t wise, either.

As that arch-lefty Simon Jenkins pointed out about 6 months ago, those on benefit occupy the bottom quintile. They are our poorest, and being poor, they spend what little money they have. They don’t save it. They can’t afford to.

Jenkins therefore advocated actually increasing benefits for the unemployed as a way to stimulate growth. Rather than, y’know, cutting 500,000 IB claimants’ already pitiful income by 30%.

All the money that was poured into the banks is being clung to tightly; they aren’t lending. The money isn’t going into the economy. So the economy can’t grow.

People need to be spending, which means they need income, which means that cutting millions of people’s income (either by job losses, pay freezes or benefit cuts) is suffocating recovery.

Making the argument that cuts cause poverty and misery – it won’t register. The Cut Now and Cut Hard brigade don’t care about that.

But tell them that helping people rather than shafting them can increase profits for their business – well, they would listen to that.

But that dispassionate and purely economic argument should have been made long ago – by a bloody Labour Party.

@34 “It no wonder the private sector is struggling to borrow when the government is hogging a vast amount of the money available.”

If you think that explains the current crash in private sector investment and non-availability of credit then I suggest you think again.

35. Luis Enrique

Martin Wolf writes on this topic today

@38

It certainly doesn’t help. The government is printing money but none of it is going to the private sector. Oh yeah, and at the same time they are telling banks to hoard cash (the instruction to strengthen their balance sheets) rather than lend. So in fact that’s two government policies that go a massive way to explaining why there is so little money available to lend to private enterprise.

Try Sam Brittan on: A cool look at the current deficit hysteria, at:
http://www.samuelbrittan.co.uk/text347_p.html

And the link Luis posted at #39 to Martin Wolf’s piece in Friday’s FT.


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