I assume you realise why the Coalition is adding to the National Debt? It’s because they aren’t reducing the deficit quickly enough. The IEA’s analysis is that tax is already much too high, and that it should be reduced, and that this must be paid for by reducing public spending by 40%.

There’s more joy in heaven over one sinner who repenteth and all that, but are you really endorsing the IEA at Lib Con? Did you bother to read their conclusion?

“The UK needs radically lower public spending at less than 30% of national income (instead currently around half) so that we can have very much lower tax rates. The economic growth that would result would ensure that we were all better off.”

Oh no, wait a minute.

Looks like right-wingers might finally be picking up on Osborne’s gift to British households: ballooning debt.

You think this is about the increase in personal indebtedness don’t you? Never, in the field of left-wing blogging, was so little economic literacy purveyed by so few, to so few.

“It’s laughable they still claim cutting the tax-rate at the top would increase revenue. Given that raising the rate to 50p actually increased revenue,”

I presume this is actually referring to the increased amount of money brought in by people bringing earnings forward in order to avoid the 50% rate? There is no evidence so far that the 50p rate will increase revenue and there is some indication, (the income brought forward), that it will reduce it.

@1, Sunny is not “endorsing” anything: he is merely making an observation.

I find it always helps to read the article first.

And, as to being snarky about “economic literacy” alongside talking of a 40% cut in public spending …

The point to bear in mind is that the absolute size of the defecit is irrelevant. It is its size relative to the size of the economy that matters. If we can grow the economy the deficit problem recedes and maybe diminishes in absolute terms too. Shame Osborne is hellbent on reducing the size of the economy.

By the way, Tim J, I think Sunny is deliberately saying that personal debt is just as important as the govt deficit – its not a misunderstanding.

And, as to being snarky about “economic literacy” alongside talking of a 40% cut in public spending …

Is it reading or maths that you find hard?

The UK needs radically lower public spending at less than 30% of national income (instead currently around half)

So, the IEA advocate a fall in public spending from 50% of GDP to 30%. How big a cut in public spending (as a proportion of GDP) would that be? (Hint: 40%).

If we can grow the economy the deficit problem recedes and maybe diminishes in absolute terms too.

The argument currently is about the structural deficit, ie: that part of our total deficit that will not be affected by an increase on GDP. Both Labour and the Tories acknowledge this.

Um, Sunny?

The truth is that the coalition government will add nearly £500bn to our national debt over this Parliament,

You’re the one opposing all cuts. This is making the point that despite all the cuts, and the tax increases, and the closing of loopholes, the level of debt is still expanding quickly.

Not sure what point you’re trying to make here, but you appear to be trying to quote Littlewood to attack Osborne despite it being Brown/s debt and policies that are the cause of this.

“Where the government can help households is to think again on tax. Tax rates are so high that government revenue could be increased by cutting them.”

Even on right-wingers’ own terms, I don’t follow this logic.

If you think higher tax rates suppress revenue (because they incentivise tax avoidance and evasion), surely you must think people typically pay *less* tax when tax rates are higher?

If it’s true that cutting tax rates would increase government revenue, this must be because it would increase the amount of tax paid by households. So how do the IEA think lower tax rates would ‘help households’, if not by leaving more money in their pocket? (They surely can’t believe it ‘helps households’ to pay more in tax so as to enjoy better public services.)

I suppose the right-wing answer would have to be: cut tax rates and people have more of an incentive to earn more money; and though they pay a lower *proportion* of that money to the government, government revenue still goes up. But that claim is not consistent with the claim that by incentivising tax avoidance, high tax rates reduce the proportion of people’s income collected by the government in taxes.

2000-2010

Nominal GDP up 17%
Public spending up 53%

Says it all really doesn’t it.

…and as for that section Tim J quotes:

“The UK needs radically lower public spending at less than 30% of national income (instead currently around half) so that we can have very much lower tax rates.”

Why (by their logic) should we assume that we need lower public spending in order to have very much lower tax rates? Mightn’t it turn out that there’s a ‘very much lower tax rate’ that’s at least as close to the peak of the Laffer Curve as the ‘high’ tax rates we have now, meaning public spending could stay at its current levels?

It’s pure drivel. ‘Cut tax rates and you increase the amount of money the government has available to spend. So in order to cut tax rates, let’s reduce the amount of money the government spends.’ Huh?

“Even on right-wingers’ own terms, I don’t follow this logic.”

The Laffer Curve comes from the interaction of two different things, the income and substitution effects.

All people some of the time and some people all of the time have two conflicting reactions to tax changes on their income.

1) They have a target amount of post tax income they want to earn. A lifestyle to support if you like. So if taxes rise they’ll work more in order to gain that lifestyle they desire. If they fall they’ll work less hard.

2) There’s a choice between work and leisure. If taxes rise then the difference between what you get from working and what you don’t get from loafing about falls. So therefore a tax rise makes leisure cheaper relative to working. Thus people take more leisure rather than working when tax rates rise.

It’s the interplay of these two things which gives us the curve. We don’t know exactly where the peak is. In fact, we’re currently conducting a lovely experiment and we’re going to find out in a year or two whether 50% is over it or not.

But we do know some things about it: the income effect is stronger for the lower paid than it is for the high paid. The income effect is much stronger for men than it is for women (in direct opposition to the assumption that Murphy made a couple of years back). The income effect is stronger in the short term and weakens over time. Subsitution for leisure gets stronger over time.

In the long term the effects are quite noticeable. France in the 60s had similar to the US tax rates and similar to the US hours worked. France now has much higher tax rates, much shorter hours worked, and manages to collect in taxes less than the US per head of population.

I wouldn’t be surprised to find that the 50% rate is over the short term peak of the Laffer Curve but equally wouldn’t be all that surprised to find out that it wasn’t. But I’m absolutely certain that it’s over the long term peak…..as is 40%.

There is as yet zero evidence for the effectiveness (or not) of the 50p rate. Hopefully HMRC don’t take too long doing its study. Until it does all claims (from both sides) on the subject are little more than assertions.

On topic. The government will be pleased that it is being attacked by the “hard-right” as you describe them and the “hard-left” as they no doubt describe you.

THat the 50% tax rate rasied money intially is absoutely no surprise. It takes time for people to organise their affairs, in tax terms or lifestyle choice (i’ll work less hard). If the 50% tax is making anything for the treasury it’s effect will be massively front-loaded.

Sunny,

Right-wingers have been criticising the government since their first (emergency) budget, generally for not cutting fast enough, and not really actually cutting spending (the general complaint is only that the rate of spending increase is going down, not the actual amount spent).

So yet another attack along these lines is hardly notable. Or in fact surprising – just as left-wing governments will always have people standing off to the left calling for higher taxes to fund this or that, right-wing governments will always have people standing off to the right calling for lower spending to fund this or that. Such is life.

…and we’re back to the fictitious (as in Mr. Laffer made it up on the back of a napkin, and threw in poorly-argued economic factors to ack up his pre-determined conclusion) Laffer Curve are we?

You’d have better luck trying to derive a mathematical formula consistently predicting winning strategies for Find-The-Lady.

And yes, Laffer and his supporters were as much conmen as any Find-The Lady huckster on the street,

14 – The Laffer is trivially true. 0% tax rates will bring in zero revenue, as will 100% rates in anything but the very short term. The problem with the Laffer curve as policy-driver is that no-one really knows for sure where the peak is, either in the long or short terms.

@15

I dispute that strongly. I believe that it was designed to sound reasonably logical to the layman, but that it was in fact a ruse to set up the greatest transfer of wealth from the working stiff to the wealthy in living memory. Anyone using it as a policy maker is either wealthy and complicit, or a useful idiot and also complicit.

@ Tim Worstall:

Sure – if you dispense with the claim that raising taxes suppresses revenue almost immediately by incentivising tax avoidance and evasion, you can paint a logically consistent picture on which, over time, high tax rates mean some people choose to work less, earn less and pay less in tax. But the IEA presumably don’t want to dispense with that claim, since they think the 50p tax rate is *already* “almost certainly losing the Exchequer money.”

Erm, no, not even Art Laffer says that the Laffer Curve started with Art Laffer.

http://www.yorktownuniversity.com/documents/the_laffer_curve_past_present_and_future.pdf

Here’s JM Keynes making much the same point:

When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will
increase the national income and that a large proportion of any increase in the national income will accrue
to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are
unemployed and whose receipts are a proportion of the incomes of those who are occupied, I hope the
reader will feel, whether or not he thinks himself competent to criticize the argument in detail, that the
answer is just what he would expect—that it agrees with the instinctive promptings of his common sense.
Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given
sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of
balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a
loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the
rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who,
when at last his account is balanced with nought on both sides, is still found righteously declaring that it
would have been the act of a gambler to reduce the price when you were already making a loss.2

Worth reading the whole paper…..

bluepillnation,

If you believe that is true, why has no government set 99% tax rates for everybody?

It is clear that above a certain level, higher levels of taxation brings in less money. And since Laffer has never been claimed to be an accurate representation which can be used to determine levels of taxtion, but only a model of what will happen, then you have to show this is not the case (or, I suppose, you could show that up to a certain level increased taxation brings in less money, but that sounds tricky to prove). You cannot deny a model because it was first drawn on a napkin – people have inspiration you know. After all, there is the (apocryphal?) story of the discoverer of DNA being inspired by seeing a spiral staircase – the moment of inspiration can come at any point, not just whilst sitting in wherever it is you expect economists to make major discoveries (technically, Laffer was in the economists laboratory at the time, since they only have one – the world).

And it is worth asking why Laffer is any more a conman than someone who says, in defiance of repeated experiments, that government is the best and most efficient way of redistributing wealth?

@bluepillnation

*How* do you dispute it? I’m genuinely curious.

Don’t get me wrong – I think we should be highly suspicious of anyone using Laffer Curve arguments to justify lower taxes for the rich (because we don’t know where the curve peaks – it could be at a tax rate *higher* than 50%).

But it sounds more than ‘reasonably logical’ to me that with a tax rate of 0% you collect no revenue, and with a tax rate of 100% you also collect no revenue. That just seems inescapable, and if it’s true then there’s a Laffer Curve. It might be a very different shape from what the typical right-winger thinks – it might peak at 90% and then drop off – but it’s there. Isn’t it?

And even leaving the logic of the thing aside, do you really find it plausible that if you taxed earnings over £100,000 (say) at 95%, you’d collect more revenue? How? Why would wealthy people bother going out and earning an extra £20,000 if they only got to keep £1,000 of it?

GO, surely wrong question, it’s not always “why would they go out to earn more money”, in many cases it will be “why accept a salary rise”–there are many many other ways to reward employees that do well, “business trips” to conferences in the Bahamas, chaffeur driven company cars, etc all spring to mind.

Wasn’t there a study a few years back about executive washrooms and gold plated taps being popular when taxes were that high?

I think Sunny is seriously misunderstanding what the likes of the IEA and Daniel Hannan are saying. As a matter of interest Keynes believed that state spending above 25% of national income was undesirable. During the recession in the UK we reached 48% and the Coalition want to get spending back to just under 40%. The highest spending reached under the last government pre-recession was 41%. .If you are a Keynesian this is somewhat higher than the level recommended by Keynes. From the historical Keynes perspective the IEA suggesting state spending of 30% would bizarrely be seen as statists.

http://4.bp.blogspot.com/_tvshDVnXSLc/TCEv3wUZBDI/AAAAAAAAC8Q/yxIx22x-5io/s1600/balance+budget.jpg

Contrary to what some people believe there was no great expansion of the state in terms of public sector jobs growth during the last administration. So the increased spending must have been going on something other than employing extra public sector workers. They did push more income to people in the bottom of the income distribution through government transfers and should be applauded for that. However, they also pushed a lot of extra state spending to public sector workers who were nowhere near the bottom of the income distribution through higher wages with little sign of improved productivity.

http://4.bp.blogspot.com/_tvshDVnXSLc/TFkheQQTGYI/AAAAAAAADLc/ExadY7Fjh-I/s1600/OBR+jobs+growth.gif

Where the intersection of the Laffer curve is in terms of the whole UK economy is highly debatable and probably impossible to know for certain. However, conceptually everyone must have a personal Laffer curve. To imagine that they do not is to say workers would still work even if their incomes were taxed at 100%. Maybe the odd person who loved their job so much would work and pay 100% tax. However, it is reasonable to conclude that almost everyone will have a personal Laffer curve.

The IFS are generally considered by left, right, liberals, statists, whatever one wants to classify people as an impartial and credible source. The IFS explanation why they were sceptical that the 50% MTR would raise any revenue is below.

http://www.ifs.org.uk/economic_review/fp273.pdf

What one needs to remember with tax revenue is all taxes apart from LVT create distortions and lead to deadweight losses. Therefore, just pointing to increased revenues after a tax change can be misleading without taking account of the other drops in revenue, and loss of potential output that can be occurring in other parts of the macro system.

MatGB

Sure – still means tax revenues dropping because people choose not to earn taxable income, though.

*sigh*

ok a few responses: I’m quite aware of IEA loony-right bent. However there are nuanced differences that I guess I have to explain everytime I blog on them.

I assume you realise why the Coalition is adding to the National Debt? It’s because they aren’t reducing the deficit quickly enough.

Reducing the deficit doesn’t have to be just through cutting now. How many times do I have to explain this to you people?

This is what the IEA say:
The truth is that the coalition government will add nearly £500bn to our national debt over this Parliament, nearly £19,000 per household.

So basically, they want to attribute national debt to a per-household measurement, but don’t want to do that for personal debt.

So apparently, households will feel more worse off with national debt than they will with personal debt. This kind of loony-right thinking really is embarrassing.

Falco:
There is no evidence so far that the 50p rate will increase revenue and there is some indication,

Rubbish – why hasn’t Osborne cut it then, if he thinks it will bring in more revenue? And where is the evidence cutting it will bring in more?

Tim J:
The argument currently is about the structural deficit, ie: that part of our total deficit that will not be affected by an increase on GDP. Both Labour and the Tories acknowledge this.

If the economy was growing at full steam then the structural deficit wouldn’t be an issue. If it was – then Tories would not have agreed to match Labour spending plans. Try understand this… I know its hard.

MatGB: You’re the one opposing all cuts.

Oh Rly? You should tell the socialists that, who are baying for my bloody for not being so ideologically pure.

This is making the point that despite all the cuts, and the tax increases, and the closing of loopholes, the level of debt is still expanding quickly.

Its amazing you guys can’t get a simple point – the best way to reduce the deficit and the national debt is to grow the economy not cut spending when its already tanking.

The evidence from Portugal, Ireland and others should have woken some of you guys up but I’m amazed this ideological blindness is that strong.

Sunny

“If the economy was growing at full steam then the structural deficit wouldn’t be an issue. If it was – then Tories would not have agreed to match Labour spending plans. Try understand this… I know its hard.”

I’m on your side here, but I think you may be confusing the structural deficit with the deficit the government was running prior to the recession.

As I understand it, the structural deficit is supposed to be something new that’s there as the result of permanent damage done to the economy by the banking crisis (meaning that on-trend growth wouldn’t eliminate it). The 2002-2007 deficit wasn’t supposed to be structural – the idea was that on-trend growth *would* eliminate it over time.

In any case, the pre-recession deficit was around 3% of GDP, whereas the structural deficit now is supposed to be more than double that. And I don’t think anyone denies that a structural deficit that large is ‘not an issue’ as long as the economy’s growing at full steam.

“Rubbish – why hasn’t Osborne cut it then, if he thinks it will bring in more revenue? And where is the evidence cutting it will bring in more?”

More to the point Sunny, perhaps you could provide some evidence that it has brought in more? This is going to be a bit difficult for you because it does not, as yet, exist and yet you have made the claim anyway. As I said before, there are some indicators, (the earnings brought forward), that it will bring in less but I have not claimed that this is a certainty.

As to Osborne, the man is a politician. I’ll expand on that if you like but I don’t think it’s necessary.

@19

It is clear that above a certain level, higher levels of taxation brings in less money.

Is it? Has it ever been statistically proven by unbiased experimentation?

And it is worth asking why Laffer is any more a conman than someone who says, in defiance of repeated experiments, that government is the best and most efficient way of redistributing wealth?

I don’t think anyone here has argued that – I’d say it’s probably the least worst, but that’s something altogether different. The cynic in me believes that the Laffer Curve was defined in answer to the question “how can we convince people that cutting taxes for the rich is a good idea?” as opposed to “how can we plot a general model for return on taxation?”.

@20

And even leaving the logic of the thing aside, do you really find it plausible that if you taxed earnings over £100,000 (say) at 95%, you’d collect more revenue?

Depends how you enforced the collection of said taxation. I wouldn’t set the high band so low though – in my ideal world all personal assets above £1million would be taxed at 100% – that way you could still be a millionaire, but you could build the best national infrastructure in the world and probably be able to end global poverty in a very short time. Of course, no-one would buy that though – but I can dream.

@22

Keynes was working in a different time with very different financial variables – it is possible to be in favour of the general thrust of his economic theories without taking every number he put forward as golden. Remember he was dealing with a fully industrialised manufacturing and export economy, not the hobbled service economy at the mercy of the financial sector that we have in the UK today.

Sunny @ 24:

“So basically, they want to attribute national debt to a per-household measurement, but don’t want to do that for personal debt.

So apparently, households will feel more worse off with national debt than they will with personal debt. This kind of loony-right thinking really is embarrassing.”

That whole “£19,000 of debt” thing is just a way of personalising it for people. If people say that the national debt is £X billion, that figure’s a bit too large for most people to get their heads around. If you say that it’s £19,000 per household, that’s a lot easier to understand.

“Rubbish – why hasn’t Osborne cut it then, if he thinks it will bring in more revenue?”

Without being able to read the Chancellor’s mind, I’d guess that it’s a sop to the tax-the-rich Social Democrat wing of the Lib Dems.

“Its amazing you guys can’t get a simple point – the best way to reduce the deficit and the national debt is to grow the economy not cut spending when its already tanking.”

The example of history might tend to suggest otherwise: http://doctorhuw.wordpress.com/2011/01/22/ed-balls/

Well Bluepillnation that ‘ hobbled service economy ‘ produces more output in the manufacturing sector than the one Keynes was familiar with.. Moreover, exports manufacturing and otherwise are higher in volume terms and as a share of the economy than the Keynes economy. We also have a lot of imports hence a trade deficit. However, that is not a new situation in the UK, as we have only had five years since 1900 when we did not have a trade deficit.

@29

Either way we have a situation which is far more conducive to borrowing, both on a national and private level, than was the case in Keynes’s day. Trying to apply Keynes’s numbers to the modern situation would be like trying to apply 1930s fuel economy figures to a modern car.

@bluepillnation:

ME: And even leaving the logic of the thing aside, do you really find it plausible that if you taxed earnings over £100,000 (say) at 95%, you’d collect more revenue?

YOU: Depends how you enforced the collection of said taxation.

No it doesn’t. It wouldn’t matter if you could collect every last penny owed, because virtually nothing *would* be owed, because virtually no-one would have a taxable income over £100,000 any more. It wouldn’t be worth employers’ while paying more than £100,000, and it wouldn’t be worth employees’ while working for it.

Say you were on £150,000 a year and paying tax at 95% on £50,000 of that. In that case you’d only be £2,500 better off than somebody earning £100,000 a year. So why bother? Why not go part-time, or take a less stressful job on £100,000?

Or say you were an employer trying to recruit the best person for a high-pressure job. There’d be no point offering an extra £20,000, or £40,000, or £60,000, because the differences in people’s take home pay would be trivial – an extra £1,000, £2,000 or £3,000. You’d have to attract people by offering something either non-taxable or taxable at a lower rate instead. So jobs with high taxable pay would just cease to exist. Every job would be “£100,000 plus 35 days’ holiday, use of staff gym and company Ferrari.”

YOU: in my ideal world all personal assets above £1million would be taxed at 100% – that way you could still be a millionaire, but you could build the best national infrastructure in the world and probably be able to end global poverty in a very short time.

But that’s a windfall tax, not an income tax. It would be a one-off, because nobody would bother building up assets above £1 million again if they were just going to go to the taxman.

@31

Like I said, it’s my dream, not likely to become reality as long as a significant number of the most powerful place enriching themselves above making the whole world a better place (or simply equate the latter with the former). The fact is that anyone who has that kind of money doesn’t really need it to survive – once you start retaining personal wealth in the high millions and billions it simply becomes a way of keeping score. There are so many problems in the world that could be sorted if everyone, including the wealthy, made a concerted effort to do so.

Anyways, enough of the sub-hippie rambling from me – it’s just the way I feel.

@32

Well, I can’t argue with you about the way you feel. But you didn’t start out by saying you just felt like more tax could or should be collected from the rich; you started out by saying anyone who believes the Laffer Curve exists is a “useful idiot” who’s been taken in by a poorly-argued ruse devised by conmen. But you haven’t said anything to make it seem remotely plausible that no matter how high you set the tax rate – even if you were to take £950 of every £1000 someone earns – people would keep on putting in extra hours, chasing pay rises, competing for highly-paid jobs etc.

@33

But I’m not arguing that – I’m arguing that the Laffer Curve was dreamed up in order to push the notion that cutting raxes for the wealthy would eventually benefit everyone when it clearly is not and has never been the case. My antipathy is not towards the theory behind the Laffer Curve itself, but the way it has been abused to con people into believing “trickle-down”, “supply-side” or whatever you want to call it works for their benefit.

@ bluepillnation

I think what you are speaking about is a caricature of the Laffer curve. Whilst it is true in some situations and at some tax rates that cutting rates can raise more revenue. The GOP took the caricature as an article of faith that cutting taxes no matter the rate always raises more revenue. It was this article of faith that Bush the elder branded voodoo economics. He raised taxes and the GOP have hated him ever since because by then they had moved into their post rationalist phase where only faith in ideas count rather than evidence. Nowadays the whole GOP intuition is that there is no budgetary problem that can’t be solved by cutting taxes. Actual thinking has long been abolished from US conservative circles and only the cranks are left.

I’m on your side here, but I think you may be confusing the structural deficit with the deficit the government was running prior to the recession.

The structural deficit is the the deficit when the economy is growing strongly. Ergo, the deficit before the crash is referred to as structural. Right now that’s about the only way of estimating it.

@bluepillnation

“My antipathy is not towards the theory behind the Laffer Curve itself, but the way it has been abused to con people into believing “trickle-down”, “supply-side” or whatever you want to call it works for their benefit.”

So why say it’s ‘fictitious’ and anyone who believes in it is a ‘useful idiot’? You might as well argue that natural selection is ‘fictitious’ because some people used the concept it to argue for right-wing views of society. Any theory can be abused, and I agree with you about the way right-wingers use the notion of the Laffer Curve to argue for (say) cutting the 50% tax rate when for all we know 50%, or 60%, is the revenue maximising rate.

@ Sunny

“The structural deficit is the the deficit when the economy is growing strongly.”

How can it be? The size of the deficit changes every year, while the structural deficit stays the same size (which is why it’s called structural).

If the economy was growing strongly right now, the deficit might be £150bn this year, £125bn the next, £100bn the next etc. (depending on what was going on with tax & spending); but those figures wouldn’t represent the *structural* deficit.

“Ergo, the deficit before the crash is referred to as structural.”

I’ve genuinely never heard it referred to as such. I’m pretty sure non-one thought that deficit was structural at the time – the idea was that the extra investment spending would lead to growth that would eventually close the deficit. People might indeed now think that deficit has become structural, but they also think there’s a further structural element of the deficit that’s come about as a result of the crash.

“Right now that’s about the only way of estimating it.”

If you think so, fine, but it’s certainly not the consensus view that if you want to know how big the structural deficit is, you just look at the size of the deficit in 2007. Otherwise people would be arguing about how to eliminate a structural deficit of around £40 billion rather than one of around £100 billion.

@ Sunny

FWIW, my hunch is that the size of the structural deficit has been overestimated (because 1 – modest growth seems to have boosted tax revenues by more than we expected and 2 – it looks as if the manufacturing sector is in a much better position than we thought to fill the hole in the economy left by the crash in the financial sector). (I’d be very curious to hear an expert opinion on that.)

But as far as I know, no-one else who believes in the concept of a ‘structural deficit’ thinks ours is currently as low as you think it is. I’d be delighted to be proved wrong though – if there are good reasons to think the structural deficit is only £40bn or so, we really *don’t* need big spending cuts! – so if you have any relevant links, or felt like commissioning an article..?

The structural deficit is the the deficit when the economy is growing strongly. Ergo, the deficit before the crash is referred to as structural. Right now that’s about the only way of estimating it.

We’ve gone through this before. A structural deficit is one that derives from a fundamental imbalance between Govt expenditure and Govt revenue, i.e.: would exist even if the economy were at trend growth. The UK’s structural deficit is currently estimated (by the OBR) at being between 8-9% of GDP. While your method of arbitrarily picking a year in the past and calling it the structural deficit has the virtue of simplicity, I doubt it’ll replace more traditional methods of evaluation. Have a look here:

http://www.oecd.org/dataoecd/0/5/44477987.pdf

Here’s another way of thinking about it: a pretty hefty proportion of UK tax receipts were derived from the financial sector (in corporation and income tax) and from the property market (in stamp duty). Looking back it’s pretty clear that both these were the result of bubbles – i.e: not permanently sustainable at those levels. After the crash, therefore, tax revenues from these sources will be lower. We have just discovered an increase in the structural deficit.

Sunny -

“Right now that’s about the only way of estimating it.”

If you think so, fine”

On reflection, that doesn’t seem quite right. Even if you think the crash did no permanent harm to the capacity of the economy, so that we can fairly quickly get back to where we would have been if it had never happened (complete with deficit of 3% of GDP or so), you’d still have to add to that deficit the annual cost of interest payments on debt run up since 2007 – maybe £20-£30 billion, depending on how fast the deficit comes down.

Sunny, Tim J:

“Here’s another way of thinking about it: a pretty hefty proportion of UK tax receipts were derived from the financial sector (in corporation and income tax) and from the property market (in stamp duty). Looking back it’s pretty clear that both these were the result of bubbles – i.e: not permanently sustainable at those levels. After the crash, therefore, tax revenues from these sources will be lower. We have just discovered an increase in the structural deficit.”

This looks right to me, alas.

Although, as I’ve suggested, it also looks to me as if the manufacturing sector is more capable of filling the hole left by the damaged financial sector than anyone thought. So maybe we should now be thinking we’ve discovered a decrease in the structural deficit?

The Tories don’t care about the deficit, if they can destroy the welfare state a depression would be a “price worth paying”

G.O.

“Ergo, the deficit before the crash is referred to as structural.”

I’ve genuinely never heard it referred to as such. I’m pretty sure non-one thought that deficit was structural at the time

You must have missed it, and yes, they did and were.

There is a deficit, this is split into two parts, the cyclical deficit, and the structural deficit.

The cyclical deficit is what happens when the economy tanks, tax revenues fall, more people become unemplyoed, welfare and other spending rises. It will go away when the economy recovers.

The structural deficit is the rest of the deficit. Now, here’s the problem, and why Sunny’s way of calculating it is wrong and why his “it’ll go away with growth” argument is also wrong.

The Govt, despite all the cuts, is not actually reducing the amount spent this year compared to last year. Overall spending levels continue to rise. What is happening is that the rate of increase of spending is being reduced, but in order that some areas can remain protected or have minimal reductions (hospitals and schools), others are being cut heavily. In 2015, the Govt will be spending more money than it was in 2010, but some areas of Govt spending will be substantially reduced.

Here’s the other big problem. The previous Govt set out spending plans, and kept to them. It kept to them even when the economy was tanking. The spending plans assumed growth in the economy each year in order to pay for the plans. The level of the structural deficit before the crash was fairly small, as the economy was growing strongly–it was, actually, affordable, and there were disputes over whether it should have been there. Labour thought it did, the Tories said they’d keep to Govt plans, the Lib Dems, clearly, had stated it shouldn’t be there and should be reduced–check the 2005 manifesto (LDs tend to like Keynes, who makes it clear when you’re in a boom, pay off debts and run a surplus).

Problem. There was a crash. The economy shrank by about 6%.The govt at the time, correctly in my view, did not immediateley change spending plans to reduce spending. it even brought forward some spending plans in order to increase economic activily. Both these decisions were, given the circumstances, probably correct.

But that means Sunny’s estimate of the size of the structural deficit, of taking what it was pre crash, is wrong. Because Govt spending continued to increase during the crash, the structural defict thus became much much larger.

Unless we, suddenly, get record growth at some point within the next 18 months, and that growth is sustained for a long period of time, there is no way growth alone can reduce the structural deficit, as the structural deficit is now much larger than it was planned to be before the crash, larger than growth alone can deal with.

Ergo, the structural deficit needs to be dealt with in some way. Increasing taxes significantly would be a fiscal retraction, reduce economic activity and hurt growth. Cutting spending is a fiscal retraction, reduces economic acticivity and hurts growth. Growth Can’t do it on its own. Catch 22.

At the last GE, the Labour party were committed to reducing the deficit by half over this Parliament, the Tories wanted to remove it completely, the Lib Dems were somewhere in between. The actual resulting policy is somewhere between the LD preferred position and the Tory preferred position–exactly where depends on how much growth we’ll get.

It’s worth noting, again, that the actual amount of Govt spending continues to rise, much further than some headbangers think is justified, but it’s not rising anywhere close to as much as it was previously planned if there had not been a large recession.

Sunny’s right to say the structural deficit is the part of the deficit above and beyond the cyclical deficit caused by the recession. he’s wrong to say you can simply look at the size it was at in 2007 and say that’s the structural deficit, that doesn’t take ito account the increased spendign while the economy contracted.

Exactly where the line is is a matter of debate, and frankly it’s all very complex maths and senior economists disagree–but it’s definitely bigger than it was in 2007.

It doesn’t matter what anyone says or does. It doesn’t matter how much evidence that austerity is making it all worse, Gideon will literally use everything and anything as an excuse for ideologically driven slash and burn policy.

We are in a lot of trouble, perhaps more than even us on the left genuinely realise, and we’ve at least another few years of this before any hope of proper recovery.

Maybe when the foul blue beast dies this time, the people won’t so readily resurrect it again.

“If the economy was growing at full steam then the structural deficit wouldn’t be an issue.”

As several point out, the structural deficit is the deficit left over after growth returns. And if we’re to be good Keynesians there really shouldn’t be one at all. When we’re booming we should be running budget surpluses, in order to pay back the debt spent when we had a recession. That is, classic Keynesianism would say that there simply shouldn’t be a structural deficit, ever.

One of the problems with Keynesianism in the real world is that the politics of running such budget surpluses are so horrible. Don’t forget, 1992/3 to 2007 was possibly the longest boom this country has ever had and around 2004, 5, 6, we should have been running surpluses of perhaps 3%, maybe 5% of GDP. But go and look at the comment pages of the Guardian for those years. It was all about how there’s so much money that we can do this or that. Abolish child poverty, Sure Start centres…..it’s just not possible to run the sort of surpluses that that classic Keynesianism says we ought to.

“The fact is that anyone who has that kind of money doesn’t really need it to survive – once you start retaining personal wealth in the high millions and billions it simply becomes a way of keeping score. There are so many problems in the world that could be sorted if everyone, including the wealthy, made a concerted effort to do so.”

Absolutely agree with the second sentence. And people with money can, in fact do, contribute to solving problems. Like, you know, they save money and then invest it. Which leads to new products, new factories, new jobs, increased economic wealth in general, all of which goes a long way to solving those very real problems. You know, like so many of them (in the UK for example we’ve pretty much solved the “how can everyone have enough to eat?” problem) have already been solved by hte increased wealth this market/capitalism thing has produced.

Taxing away the wealth rather stops this process: first by stopping private investment as there’s no money to do it with and second by stopping private investment for why bother if you’ll not get the profits? Now you can argue that it should be the State making all the investment decisions but at least 40% of the country would be horrified by the idea of Osborne deciding upon all the new products to be made and another 40% would be horrified by Balls being asked to do it. Not really a flier that one: plus we’ve rather tested to destruction, in the Soviet block, that the State knows what to do next.

“But I’m not arguing that – I’m arguing that the Laffer Curve was dreamed up in order to push the notion that cutting raxes for the wealthy would eventually benefit everyone when it clearly is not and has never been the case. My antipathy is not towards the theory behind the Laffer Curve itself, but the way it has been abused to con people into believing “trickle-down”, “supply-side” or whatever you want to call it works for their benefit.”

I think it’s fair to say that I’m the most right wing person here…..at least, I’m the most economically liberal. And I don’t in fact use the Laffer Curve to argue that higher rate taxation should be lower. Or at least, not very much. My usual use of the Curve is to point out that the taxation of the poor is waaaaay too high. When you’ve tax and benefit withdrawal rates of 70% (there’s something like 2 million people…..or maybe it’s households?…..on such rates of over 60%) to 90% (there’s a couple of hundred thousand on over 90% would you believe?) then we’re pretty clearly into the territory where we’re on the wrong side of the Curve.

I use the Laffer Curve to argue that we’ve got to lift the personal allowance….hopefully to the level of the minimum wage…..and whether I’m right or wrong it’s certainly using the Curve to insist that the rich should benefit, is it?