Countering the Coalition cuts: a myth-busting guide


10:30 am - October 20th 2010

by Sunny Hundal    


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This is the start of a simple FAQ guide to the current economic debate for people who want simple answers and stats on what is going on and why it is wrong.

I appreciate a lot of people are starting from scratch on economic issues but are still interested in the ongoing debates. So I’ve tried to be simple and straightforward, with links that explain more.

This is just a starting point: I hope to expand this and add more information (feel free to write suggestions below). Parts of this will also be used for a new website some of us are building, to defend public services.

* * * * * * * * *

What is the Deficit?
The deficit is the difference between government income and spending in a financial year. In the financial year 2009/10, the UK government had to borrow £159.8 billion to cover the shortfall, which was equivalent to 11.4% of our Gross Domestic Product (GDP: the size of the economy). That figure is the deficit.

How is that different to Debt?
Government debt is the total amount of money the government owes to lenders. Most countries around the world have debt, and this is considered fine as long as the debt ratio (to GDP) is at a manageable level. At the end of March 2010, government debt stood at £1000.4 billion, equivalent to 71.3% of GDP. The deficit contributes to overall government debt.

As you can see from the graph below, UK deficit and debt was very manageable before the recession that started in 2008. Then it took off.

Why did the deficit suddenly explode?
Some parts of government spending is difficult to control because ‘automatic stabilisers’ (e.g. welfare benefits) kick in automatically when people become unemployed. As a result, governments usually run deficits during a recession because tax revenue falls and its spending rises.

After the crash, tax revenues plummeted and unemployment rose faster than expected. As a result the deficit ballooned. The Labour government decided that it had to temporarily maintain spending in order to keep the economy afloat. Cutting spending when the economy was in the deepest post-war recession could make the recession even worse.

But as the financial crisis wore on, the deficit became a problem because tax revenues still have not recovered.

Do we need to reduce the deficit?
In short, yes. We are not in dire financial straits but we need to bring it down to a manageable level. Our national debt is also lower compared to other developed countries.

But isn’t the situation dire??
No. The debt, as a percentage of our national income (GDP) is at a historic low. Both indicators are within limits we can manage for now without bankrupting the economy. But tackling the budget deficit is more of a medium term priority than the national debt.

This graph shows that debt (as a % of GDP) was much higher in earlier decades.

This article explains that interest payments on our debt (as a % of GDP) were higher during Thatcher years.

How we do reduce the deficit?
There are two main ways of reducing the deficit: cutting spending and increasing tax revenues. Cutting spending does not necessarily reduce the deficit and can actually make it worse! More on this below.

A government can otherwise seek to increase tax revenues. This can be done by raising taxes or stimulating economic growth, or both. Economic growth can be stimulated through temporary spending, reducing interest rates (makes it cheaper for companies to borrow and invest), devaluing the currency (usually leads to more exports of goods) and cutting taxes on consumption (to stimulate more consumption spending).

Why are Coalition cuts so bad?
The Coalition is planning a ration of 80:20 – 80% cuts to 20% tax rises, over four years, to plug the deficit by 2014.

If you cut spending that drastically (as the Coalition is proposing to do) then it can lead to a rise in unemployment and a fall in consumer spending. A rise in unemployment would mean more spending as benefits are paid out, while a fall in spending depresses the economy even more. Furthermore, a drastic fall in government spending leads to knock-on effects in the private sector because many private companies also rely on the public sector or are dependent on consumer spending.

This is what happened in the 1930s – the last time the government tried to cut spending so drastically.

Do we need to reduce the debt?
We need to eventually bring debt back to less than 60% of GDP. That is the limit the EU applies to member countries and is considered a safe limit. But it’s worth noting that other countries have much higher debt ratios.

Is there evidence the cut are making things worse?
Yes, lots. These are just from the last few months:

So why are the cuts taking place?
The cuts are ideologically driven. The government wants to permanently reduce the level of public services: from the NHS and public transport to spending on developing alternative energy sources, housing an education.

What do you plan to do about it?
We plan to defend pur public services by: mapping where the cuts are taking place, encouraging people to take action and sharing information on where that action is taking place. A website with all this info is going to be launching within weeks.

* * * * * * * * *

Other good links
Red Pepper magazine: Countering the cuts myths

* * * * * * * * *

Obviously this is just a starting point.
If you have any questions you’d like to see added, or inaccuracies to point out or other info you think needs adding, please post it below.

Changes:
The comment that ‘debt and deficit are at a historic low’ has been clarified. The national debt is lower than in the past, the deficit is still an issue, but interest payments are lower than in the past.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Story Filed Under: Blog ,Economy ,Fight the cuts

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Reader comments


In terms of mapping where the cuts are taking place, you may want to check out richard pope’s ushahidi-based site at http://wherearethecuts.org/

2. Dick the Prick

Everyone’s got a sob story, everyone’s a victim – cue much wailing and gnashing of teeth. I’m worried George won’t go far enough.

“Both the deficit and the debt are at a historic low.”

This isn’t right! I think you mean the deficit and debt interest repayments (as a % of GDP) have been higher in the past.

“Both the deficit and the debt are at a historic low.”

This isn’t right! I think you mean the deficit and debt/debt interest repayments (as a % of GDP) have been higher in the past.

Another factual error, the deficit did not “suddenly come about” as a result of the financial crisis and the resulting recession. We have been in deficit for 9 years.

[deleted]

Sunny

..or inaccuracies to point out …

But isn’t the situation dire?
No. Both the deficit and the debt are at a historic low.

The phrase ‘at an historic low’ is normally understood to mean ‘lower than ever before’.

I think you will find this is not true of either the debt or the deficit.

I suspect you really mean ‘have been higher in the past’. But then, according to some reports, the deficit hasn’t been higher in peacetime. Worth checking.

Sunny,

good article …. but some things that need correcting imho.

But isn’t the situation dire??
No. Both the deficit and the debt are at a historic low.

This is just wrong! the deficit 11.4% of GDP is more like an historic high than an historic low.

But isn’t the situation dire??
that interest payments on our debt (as a % of GDP) were higher during Thatcher years.

the deficit is the rate (flow) at which we add to the stock of debt. Interest payments are stock of debt * interest rates. If we keep adding to the stock of debt at this rate (adding £150bn or so per year) then if interests rates rise, as you would expect them to medium term, the situation could become dire.

here is an excelling primer on debt dynamics, in the New York Times, written for a general audience. here is an IMF primer for the mathematically inclined. Here is a pretty readable paper (pdf) The Deficit Gamble which talks about the risk involved in running a deficit (but also how it can be sustainable).

There are two main ways of reducing the deficit: cutting spending and increasing tax revenues. Cutting spending does not necessarily reduce the deficit and can actually make it worse! More on this below.

A government can otherwise seek to increase tax revenues. This can be done by raising taxes or stimulating economic growth, or both. Economic growth can be stimulated through temporary spending, reducing interest rates (makes it cheaper for companies to borrow and invest), devaluing the currency (usually leads to more exports of goods) and cutting taxes on consumption (to stimulate more consumption spending).

I think there’s a lot of confusion about this.

Of course economic growth would reduce the deficit, as tax revenues would rise and expenditure fall (‘automatic stabilizers’) but the question is, what is the relationship between government expenditures and the deficit.

Many people on the left seem to talk as if the stimulative effects of government spending is so strong that it would actually be possible to reduce the deficit by spending more.

Some crude maths. Assume tax % of GDP at 0.4. Then £1 of additional government spending needs to increase GDP by £2.5 merely to be neutral with regard to the deficit. The same logic works in reverse – we talk about cuts making the situation worse, but if the cuts are actually going to increase the deficit, then you need every £1 cut from government expenditures to take more than £2.5 off GDP so it will reduce tax revenues by more than £1 and increase the deficit. The true numbers are likely somewhere in between*.

What does this mean? It means that to cut the deficit by spending cuts, you need to cut more than £1 for every £1 you want to reduce the deficit. There are some arguments that private enterprise is depressed by looming govt debt and cuts could actually stimulate growth – I don”t think they apply in the current situation.

On the “go for growth” side, this means what we are really looking at is not reducing the deficit by using government spending to stimulate growth it is more likely running a larger deficit for longer in order to reduce unemployment and public service cuts misery, so we would be “buying” these present benefits at the cost of future debt obligations. And because there is some stimulative effect the “price” of £1 of extra government spending is lower than £1, but it’s not a free lunch. Most of those economists who think the coalition is cutting to far too fast do so because they think it would be better to run a bigger deficit for longer to reduce suffering today, not because they think the government can spend its way out of a deficit. (Some think there is a free lunch – it’s an attractive idea, but consider the risks of getting that wrong!).

This is why I think it makes sense to say the cuts are ideologically driven – we could afford to do the above – run a somewhat bigger deficit for somewhat longer – but it’s also why I think lefties are wrong to pretend largish cuts in public expenditure aren’t necessary.

* a big question is whether there are non-linearities in the relationship. That 2.5 I mention is often called the “multiplier” – does the multiplier shrink or expand the deeper cuts are (or the higher spending rises ). The answer to the question “what level of govt spending should we choose” depends a lot on that relationship.

Sunny – one other way of cutting the debt problem is to monetize the deficit by having the BoE print money. That effectively pays off debt (so long as the BoE holds onto the bonds and does not sell them back, which is what it would do to reduce the money supply). Unfortunately our inflation is rather high for that to be comfortable, but I think we ought to indulge in it a bit.

Sunny

..If you cut spending that drastically (as the Coalition is proposing to do) then it can lead to a rise in unemployment and a fall in consumer spending.

Should you not make at least passing mention here of the OBR’s forecast that unemployment will in fact be falling throughout the period?

This is an excellent myth-busting article you could maybe pilfer from:

http://www.redpepper.org.uk/Countering-the-cuts-myths

“No. Both the deficit and the debt are at a historic low.

This graph shows that debt (as a % of GDP) was much higher in earlier decades.”

Indeed the debt was much higher in certain previous decades. Almost all of which was the result of trying to finance two world wars. What’s the excuse today?

“This is what happened in the 1930s – the last time the government tried to cut spending so drastically. ”

No, you’re getting confused. That article relates to the 1920s…..the effect of trying to deal with the immediate post WWI debts.

“This article explains that interest payments on our debt (as a % of GDP) were higher during Thatcher years. ”

Yes, because interest rates were higher. As interest rates will indeed rise once (when…the argument is about when, not whether) the economy recovers. Having debt at 80%, 90% of GDP AND having Thatcher era interest rates is a very scary prospect indeed.

“The cuts are ideologically driven. The government wants to permanently reduce the level of public services: from the NHS and public transport to spending on developing alternative energy sources, housing an education.”

Yes, as those above point out, all the way back to the levels of 2006.

This just ain’t the end of civilisation as we know it. It’s rather a rough and ready return to the post war norm.

Good analysis Sunny except the bit about the overall debt and deficits being at an all time low which is obviously wrong.

Have you seen today’s Yougov poll in the Sun?

http://www.thesun.co.uk/sol/homepage/news/3186326/Most-people-think-Osborne-cuts-are-unavoidable.html

Key stats:

60% of the population think the cuts are unavoidable.

25% believe Labour have a serious alternative for cutting the deficit.

Labour have to take a very large share of the blame for not getting their act together and projecting a coherent narrative about alternatives to cutting.

However the media are also responsible for a large part of this. You don’t expect any more from the Murdoch/Desmond/Barclay brothers but the BBC has completely failed to feature alternative perspectives on how the deficit could be cut.

I have lost count of the number of proposals put forward by left-wing academics, economists and the Trade Unions.

None of these has received any real airtime on the BBC.

This is despite the fact that their proposals which involve raising the tax burden on the rich have overwhelming public support as demonstrated from numerous YouGov polls and Lord Ashcroft’s own research.

People’s attitudes and the decisions they make are based on their knowledge they have of the alternative choices that are on offer. If there is no debate in the media it is unsurprising that the public see no alternatives.

#13, that’s a good point about BBC coverage – I remember throwing things at the telly a couple of months ago when they finally let David Blanchflower on to Newsnight only to cut across him and put him up as a figure of fun against 2 extremely rude opponents that they didn’t try to bring into line at all…

Wasn’t there an Ofcom ruling recently that the BBC has to be more “balanced” in reporting about climate change? Meaning it needs to give equal time to deyners? Could we not start a campaign to lodge the same complaint with regard to balance in finacial reporting?

Sunny, what do you think? Is this something LC could help give exposure to?

“Good analysis Sunny except the bit about the overall debt and deficits being at an all time low which is obviously wrong.”

So, a good analysis apart from all of it!

16. Luis Enrique

Debt is reasonably low, in comparison with past years and with other countries. The deficit is very high – the data are linked to @7, this is not a matter of debate.

17. Chaise Guevara

“Wasn’t there an Ofcom ruling recently that the BBC has to be more “balanced” in reporting about climate change? Meaning it needs to give equal time to deyners? Could we not start a campaign to lodge the same complaint with regard to balance in finacial reporting?”

Balance isn’t necessarily the same thing as equal time. I’m pretty sure, for example, that the BBC doesn’t have to follow up every show that mentions evolution with a documentary presenting creationism as fact.

Forcing the Beeb to be more ‘balanced’ over financial reporting would require that you could demonstrate bias existed in the first place. This would probably involve demonstrating that one view was generally given more credence than another one with similar expert and public support.

Many ponits well made above about Sunny not understanding the historical differences in debt, deficit and interest payments and why they have come about…

For example, interest payments are only so low because of super low interest rates. If we use Sunny’s comparison of the Thatcher era, we would currently be paying about 10% of GDP in interest rather than the 3% we currently see. It’s not a valid comparison, as I explained the other day.

Just to add though, that our true national debt is not 71% of GDP. That is the *secured* national debt (i.e. Gilts). True liabilities are roughly 250% of GDP, as the government keeps PFI and pension liabilities off balance sheet. The true comparison takes us up to Japanese levels of national debt, given they keep (most of) their liabilities on the balance sheet. You have to compare like with like. Add private debt in as well and you are looking at a number somewhere over 400% of GDP.

The long and short of it is that the UK *is* heavily indebted, total government debt has climbed at an increased rate since the early 2000’s and exponentially in the last few years. Interest payments have remained manageable but only because of ultra low interest rates. The deficit is a serious problem; given the massive nature of UK debts and the increasing servicing costs of that debt, any increase in interest rates (cause by a loss of investor confidence, for example) would dramatically increase said interest payments at a time when the UK is poorly able to cope through higher taxes (not least because taxes in the UK are already fairly high, leaving little room for increases).

Forcing the Beeb to be more ‘balanced’ over financial reporting would require that you could demonstrate bias existed in the first place. This would probably involve demonstrating that one view was generally given more credence than another one with similar expert and public support.

Yes of course. This is not particularly hard to do. In fact it is mainstream social science. There are usually a range of explanations relating to social, economic or political issues. These are usually linked to particular material interests. What you need to do is sytematically analyse and show which explanations recieve airtime and which are marginalised.

People often say that you can’t say that the BBC is slanted to the left or right or that if they are getting flack from both sides then they must be doing it right.

But this is bollocks.

You can quite easily map the range of explanations offered in the media.

@flowerpower, “according to some reports, the deficit hasn’t been higher in peacetime.”

Is this really peacetime?

21. Chaise Guevara

“Is this really peacetime?”

Sorta!

Basically, the at-peace/at-war distinction is far too inexact. It seems to assume we’re either living in the best of all possible worlds or in a state of total war with the most powerful nation in Europe.

22. Shatterface

‘Basically, the at-peace/at-war distinction is far too inexact. It seems to assume we’re either living in the best of all possible worlds or in a state of total war with the most powerful nation in Europe.’

Generally speaking, if your troops are coming home limbless or in body bags, or if they are leaving devestation behind them, it’s not peace time.

23. Shatterface

‘You can quite easily map the range of explanations offered in the media.’

Unless you have an objective point of origin the map will tell you fuck all other than your own desire to control the media.

24. Chaise Guevara

@ 22

“Generally speaking, if your troops are coming home limbless or in body bags, or if they are leaving devestation behind them, it’s not peace time.”

The point I’m making, which I thought was clear, is that it’s unrealistic to claim that British involvement in Afghanistan can be considered to have the same effect on the economy as WW2 (or genuine peace). Wars come in varying forms and scales. Do you actually disagree with that?

Chaise,

Fair enough, but when people are saying “largest deficit in peacetime” they are using the term to imply the deficit has been run up in normal times. Wheras these are not normal times, we are recovering from the largest financial crisis in living memory – something that could be considered an equivelant to a major war (without the body bags obviously).

Have not seen anything like the 40% cuts in depatment budgets that Pip Squeak said he would look for.

Silly Sally, he is a tory, and so lying comes as standard……..Pip Squeak is spinning like a top.

27. Shatterface

‘The point I’m making, which I thought was clear, is that it’s unrealistic to claim that British involvement in Afghanistan can be considered to have the same effect on the economy as WW2 (or genuine peace). Wars come in varying forms and scales. Do you actually disagree with that?’

We’re closer to the state of war we had in WW2 than we were to the ‘peace’ we had during the Troubles.

Unless you have an objective point of origin the map will tell you fuck all other than your own desire to control the media.

That’s not true.

Let’s take the deficit.

There are lots of solutions that have been mooted. These include cutting public spending, raising taxes on different groups & trying to grow your way out of debt.

The question then becomes which of these alternatives does the media feature and how does this narrow the range of alternatives that the public believe are available or possible.

This becomes a function of who the broadcasters see as credible voices on the economy. Usually a government minster, opposition MP, city analyst or a thinktank with a high profile.

But this is not the whole spectrum of opinion by any means.

29. Shatterface

‘Wheras these are not normal times, we are recovering from the largest financial crisis in living memory – something that could be considered an equivelant to a major war (without the body bags obviously).’

I think a few body bags from the financial sector might actually boost morale.

“I think a few body bags from the financial sector might actually boost morale.”

That probably would get them to leave the country 😉

@ 22

War is difficult to define from an economics position as many ‘wars’ can more easily be described as ‘internal security’ Northern Ireland is the best example I can think of.

However, when we start looking at the true ongoing costs for either, it becomes even more complex – over to the experts for that one as it involves ‘Nation Building’ and I simply don’t understand it or, the costs involved ?

“Cutting spending does not necessarily reduce the deficit and can actually make it worse! More on this below.”

Sunny, I think this point is the most important one and needs to be the focus of any campaign. Emphasizing that the cuts will not deliver the deficit reduction allows us to take the tories on at their own game – if we can explain that cuts now are at most short term savings that will run up massive (unavoidable) bills in the future then we can explain how this isn’t really a credible plan to reduce the deficit.

Eg:

– Cutting police officers now means we spend far more in the future dealing with higher rates of crime.
– Cutting housing benefits now means more homelessness and substance abuse which again means more spending on prisons, courts etc.
– Firing half a million public sector workers not only means a worse service (which will cost business money), but means half a million people who used to pay taxes now getting the dole.

etc etc.

What we need to do is argue for “real cuts and savings, not gimmicks that lead to crime and disorder. Real savings can only be made through increased employment and fewer social problems”

33. Luis Enrique

If Labour claims “these cuts will make the deficit worse” in about 4 year’s time there’s a pretty good chance (i.e. according to consensus forecasts) they will be proved wrong. This is not a wise tactic.

It’s messier, but you have to claim that the cuts are excessive, reducing the deficit at too great a social cost, hurting the poor whilst sheltering the rich, and that the alternative was to run a bigger deficit for longer, more aggressive stimulus to prop up the economy, raise employment, and do the taxing/cutting to hit the rich harder and go easier on the majority.

although of course because we’ll never know otherwise, Labour can probably get away with exaggerating the likely extent to which more spending (i.e. fewer cuts) would have stimulated growth and raised tax revenues.

34. Chaise Guevara

@ 25 Planeshift

Absolutely. In fact, there’s so many variables that I doubt the usefulness of year-to-year comparisons.

We’re closer to the state of war we had in WW2 than we were to the ‘peace’ we had during the Troubles.

The peak number of troops deployed in Northern Ireland during the Troubles was about 30,000. We currently have 9,500 deployed in Afghanistan. There have been 320 odd British deaths in Afghanistan since 2001. There were between 700-1000 troop deaths in the Troubles depending on how it’s calculated.

The British engagement in Afghanistan is far closer in scale and import to Northern Ireland than it is the WW2.

36. Chaise Guevara

@ 33

“It’s messier, but you have to claim that the cuts are excessive, reducing the deficit at too great a social cost, hurting the poor whilst sheltering the rich, and that the alternative was to run a bigger deficit for longer, more aggressive stimulus to prop up the economy, raise employment, and do the taxing/cutting to hit the rich harder and go easier on the majority. ”

I’d back that, seeing as that’s my problem with the coalition anyway. It annoys me how much the debate centres on which approach would cut the deficit quicker: I don’t mind it taking longer to return to business as usual if it means a lower human cost.

“s “these cuts will make the deficit worse” in about 4 year’s time there’s a pretty good chance (i.e. according to consensus forecasts) they will be proved wrong. This is not a wise tactic. ”

Yes but thats 4 years, the strategy needs to be based upon the idea that these are false savings because of the massive social cost. So you can campaign on the idea that “cut now, pay later” is what is going on, with in 10 years time a government going to have to spend massively to deal with these consequences.

Thanks for the comments – I’ve updated it to reword the ‘deficit being at a historic low’ – that could have been phrased better.

39. Chaise Guevara

“We’re closer to the state of war we had in WW2 than we were to the ‘peace’ we had during the Troubles.”

What has that got to do with the usefulness of using ‘wartime’ and ‘peacetime’ as categories for judging economic policy?

36

“I don’t mind it taking longer to return to business as usual if it means a lower human cost.”

Hear, hear! I think most people would if it had been phrased in those terms. Why does it have to be done in 4 years not 5, or 7 or 10? What are the risks of cutting too fast too deeply making things worse not better…. none of this seems to have been properly debated.

Sunny (38), thanks for the correction, but you’ve amended it to “The debt, as a percentage of our national income (GDP) is at a historic low”.
No it isn’t.

What Tim and Tyler said. Interest rates were high in the Thatcher years until the dragon of inflation was slain (now Mervyn King wants to revive it). So interest payments were higher.

And we haven’t just had a World War, as previously when debt/GDP ratio was high, instead we’ve had over 10 years of “the longest uninterrupted period of economic growth in the history of our country” as Gordon said in his 2007 conference speech – years when the government should have been running a surplus.

I’ll say one thing for Sunny. Some people would take a look at their knowledge base on a particular subject – and then consider very carefully before putting digit to keyboard. No coward soul is his.

It’s messier, but you have to claim that the cuts are excessive, reducing the deficit at too great a social cost, hurting the poor whilst sheltering the rich, and that the alternative was to run a bigger deficit for longer, more aggressive stimulus to prop up the economy, raise employment, and do the taxing/cutting to hit the rich harder and go easier on the majority.

This is half of it but it needs to be a much bigger plan that involves restructuring our economy away from an overeliance on city spivvery and more towards productive industry that is not concentrated in the SE. It has to growth based. Labour screwed up royally by accepting Tory arguments regarding cutting the deficit.

This bloke has the right idea but no one from the main parties is able to articulate this kind of broad vision.

http://www.guardian.co.uk/commentisfree/2010/oct/19/spending-cuts-deficit-growth

44. astateofdenmark

7- UKliberty

Thanks for that link. So the best performing economies in the OECD are also those with the lowest debts and deficits.

Sunny

Thanks for supplying the difference between debt and deficit. Its a shame that Brown and Balls spent so much time confusing the two.

Sunny here are two topics you need to cover

1) “the debt is owned by foreigners” the Debt Management Office (the official organisation managing the debt) say that 28% is owned overseas

2) “not doing what we are doing will push up interest rates” Osborne always gives the impression that he goes cap-in-hand to the money markets and accepts the interest rates they offer, when it is actually the other way around. And even under Brown/Darling the sales of gilts were always over-subscribed and hence there was no chance of the govt having to offer higher coupon rates.

What Tim and Tyler said. Interest rates were high in the Thatcher years until the dragon of inflation was slain (now Mervyn King wants to revive it). So interest payments were higher.

So the graph is true. And on top of that, since interest rates are low, we have even less to worry about because debt payments won’t get out of control.

You guys are just reinforcing my point.

#41 – yes it is, taken over the last 50 yrs

“So the graph is true. And on top of that, since interest rates are low, we have even less to worry about because debt payments won’t get out of control.”

Of course the graph is correct. All I’m pointing to is *why* it’s correct. Total debt then was lower but interests were higher. We’d just had quite a lot of inflation, remember (some years in the 70s over 20%).

And I’m similarly pointing to why we shouldn’t be complacent. Sure, interest rates are low now (and by the way, no, the government doesn’t control them, not at the long end. Only at the very shortest end) but what happens if they rise?

If we had our current national debt and Thatcher era interest rates then we would indeed be stuffed. And, please note, it’s the current interest rates which are lower than normal, barely 1% real.

The debt, as a percentage of our national income (GDP) is at a historic low.

#41 – yes it is, taken over the last 50 yrs

It really can’t be simultaneously at a historic low and higher than it has been for 40 years. You’d have a much better argument if you said that the debt was not unduly high when viewed in a historic context.

@46, er no …..

According to your graph, the debt as a % of GDP is much higher than it was in the previous 3 years. It is therefore not an historic low. Do you mean something different??

50. Flowerpower

Sunny

I’m afraid your re-working of the “Is it dire?” bit doesn’t quite do the trick.

The debt, as a percentage of our national income (GDP) is at a historic low.

Your own graph shows it as higher than at any time since the early 1970s. So it’s not “at an historic low” in the normal sense: i.e. it’s never been so low before, nor even in any looser sense.

You should also mention that running a deficit for a country is unlike running a deficit for a company – as the government can always borrow more. And in fact many economists recommend running a deficit.

@ bubby and others

Murdoch is the one to be confronted, not the BBC. 38 Degrees have been looking at his influence and working on strategies to oppose him. (http://38degrees.org.uk/)

Any progressive government (or any government with sense) should be concerned about the power Murdoch has in Britain. It needs to be curtailed.

53. Luis Enrique

Indeed the debt was much higher in certain previous decades. Almost all of which was the result of trying to finance two world wars. What’s the excuse today?

A recession that matches the extent of the 1930s great depression.

Some pretty absurd revisionist history going on here with regards to the Thatcher years. Inflation was 13.4% when Mrs Thatcher took power and rose to 18.0% the following year. It was 9.5% when she, err, left to follow other interests.
http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-020.pdf

It fell in the mid 1980s because there was a global collapse in commodity prices. For example, see this oil price chart. All the governments since have better inflation fighting credibility that the Mrs Thatcher myth believes.
http://www.wtrg.com/oil_graphs/oilprice1947.gif

If we look at a chart of GDP per capita for evidence of this time of ‘ economic miracle ‘ we find we started the period at the bottom of the G7 and ended the Thatcher years at the bottom of the G7. We are now up to third place behind the US.
http://www.ambrosini.us/wordpress/wp-content/uploads/2010/08/rel_japan1.png

Thanks to RichardW for exploding some of the more ludicrous Thatcher myths.

We are really dealing with the long run effects of her government’s so-called “reforms”

Thanks to RichardW for exploding some of the more ludicrous Thatcher myths.

We are really dealing with the long run effects of her government’s so-called “reforms”

Erm, so what’s that then? You talking about a couple of decades of growth without inflation then?

58. snagglepuss

wow…what is it with this myth that governments can always borrow more? When will leftie thinkers move into the 20th century when many many governments found that they could not, actually, keep on borrowing….?: Surely reality must hit the Left at some point?

“A government can otherwise seek to increase tax revenues. This can be done by raising taxes or stimulating economic growth, or both”

Laffer curve Sunny – lowering taxes can increase revenues too. (Note: CAN and not WILL, I’m just pointing out that you missed an alternative).

“This is what happened in the 1930s – the last time the government tried to cut spending so drastically.”

It’s a 3.6% real terms cut over 4 years Sunny – the numbers you showed about the 1930s show spending being cut in half. You can’t point to the 1930s as say “look, this’ll happen again” because it’s nothing like the same thing that happening.

The most recent similar case was between 1984-85 and 1988-89 when spending fell by 3.1% over four years. Unemployment fell from 3.1m to 2.1m and the economy grew by an average of 4.3%pa so I would hardly say that the cuts of those years were an economic disaster.

If you’re going to try to have an objective looking piece about economics, don’t spoil it with your prejudices. You had a good idea but because you can’t bear the thought that you might be wrong, you’ve loaded it with ideological nonsense that distracts from the actual economics you’re trying to show.

“A recession that matches the extent of the 1930s great depression.”

Sunny, please, do try and catch up with your economic history. The figures you’ve been pointing to come from the recession of the early 1920s.

Have a look here:

http://measuringworth.com/ukgdp/

The 1930s in the UK were very different indeed. GDP dropped about 5% in 1930. Then in 1931 we came off the gold standard. We had economic growth for the rest of the 1930s.

Then have a look here:

http://measuringworth.com/usgdp/

The US recession of 1920/1 was very sharp and very short. They did, essentially, nothing at all about it and it was over very quickly. It was the US that had that Great Depression in the 1930s.

Now this is important I’m afraid. Because if you point to the UK 1930s, then you’ll see that Keynesian expansion wasn’t the cure for the economic ills: for the UK recovered without such Keynesian expansion. It recovered by lowering the value of the currency. Something we’ve done over the past couple of years, by about 25%.

Another way of putting this is that if you want to start pointing to history to back up your macroeconomic ideas you’d better actually know your economic history. And the truth is that the UK did not suffer badly in the Great Depression of the 1930s. Nowhere near as badly as the US did at least. And there’s a good body of evidence to show that it was currency devaluation that meant the UK didn’t.


Reactions: Twitter, blogs
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  24. V

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  111. Chris Challis

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  117. Ross Lawson

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  118. Mosca

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  119. Ben Werdmuller v.E.

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  120. M M Wallis

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