Enlightening as per usual Duncan

Watch Osborne blame it on the problems in the Eurozone, strangely the eurozone problems seem to hurt Britain more than they do the eurozone, with the eurozone with twice the growth of the uk.

http://ablog.typepad.com/keytrendsinglobalisation/2011/10/uk_worse_than_eurozone.html

Labour had won the last election we have seen brown flying round the world in his superman suit, sadly nobody told him how to land.

Yep the Tories have got it wrong but who was in power when it started.

A question about the “structural deficit” Osborne has pledged to eliminate:

The structural deficit is that portion of the current budget deficit we can’t expect to be eliminated by growth over time (right?). But growth forecasts are falling all the time, and so (presumably?) the portion of the deficit we can expect to be eliminated by growth is also falling all the time. So is the structural deficit not (ceteris paribus) rising all the time? And if it is, does that mean Osborne is going to have to cut spending and raise taxes even more than originally planned, in order to eliminate that deficit?

But growth forecasts are falling all the time, and so (presumably?) the portion of the deficit we can expect to be eliminated by growth is also falling all the time. So is the structural deficit not (ceteris paribus) rising all the time? And if it is, does that mean Osborne is going to have to cut spending and raise taxes even more than originally planned, in order to eliminate that deficit?

I don’t think so. The structural deficit is that proportion of the deficit that would be there even if the economy were at trend growth – i.e. a fundamental imbalance between income and expenditure. If we re-enter recession then the overall deficit might grow (because tax receipts will be lower, and expenditure on unemployment benefits etc will be higher) but those are the sort of figures that are excluded from structural deficit calculations.

TimJ

Thanks. Yes, that sort of makes sense – but isn’t it premised on the idea that after any period of low growth or recession, the economy will fairly soon ‘bounce back’ to where it would have been had growth stayed on trend (barring any permanent, structural damage done by exceptional crises)? If the economy just isn’t going to bounce back in that way – if it’s going to go back into recession and/or stagnate for a decade, say – surely we can’t just go on saying “ah, but this bigger-than-expected deficit is only cyclical – eventually we’ll make up for all that lost growth and it’ll disappear?” Don’t we reach a point where it becomes implausible that the economy can grow fast enough to catch up?

I suppose what I’m saying is: if the current budget deficit remains stubbornly high in 2015, because we’ve gone back into recession, surely Osborne can’t just turn round and say “well, I only said I was going to eliminate the *structural* deficit – and I’ve done that”?

If the economy just isn’t going to bounce back in that way – if it’s going to go back into recession and/or stagnate for a decade, say – surely we can’t just go on saying “ah, but this bigger-than-expected deficit is only cyclical – eventually we’ll make up for all that lost growth and it’ll disappear?” Don’t we reach a point where it becomes implausible that the economy can grow fast enough to catch up?

Yes, that’s right and if it’s decided that what UK long-term growth rate has actually been cut by the financial crisis/Eurozone crisis, then the structural element of the deficit will have increased. That makes everything harder, and may mean that deeper cuts are needed.

No-one said this was going to be easy or fun.

So basically the OBR forecasts, which have generally been seen as optimistic (even if I would have been happy for them to come true…), were optimistic?

Which presumably leads to the question of what to do – and I agree that Plan A as it stands is not viable. But Plan B of spending your way out does not appeal to anyone sane (since the more government spends, the higher the deadweight of debt on the economy). So presumably we have to expect Plan A+ – more cuts.

Personally I’d go for Plan C (or probably on the Internet Plan CFAB…) – reduce taxation (especially those that affect prices such as petrol tax) and let the economy grow more quickly that way – but the governing classes of all stripes are either smarter than me or too attached to having control over too much to let revenue go like that.

“Which presumably leads to the question of what to do ”

First of all you establish what the problem is – is this a debt crises or a growth crisis, and what are the causes of it?

G.O.

The Structural deficit is a load of bollocks.

http://bilbo.economicoutlook.net/blog/?p=2326

8. Watchman

Er, this:

But Plan B of spending your way out does not appeal to anyone sane (since the more government spends, the higher the deadweight of debt on the economy).

Is in essence the same as this:

Plan C (or probably on the Internet Plan CFAB…) – reduce taxation (especially those that affect prices such as petrol tax) and let the economy grow more quickly that way

The stock of debt will grow in both cases.

So why is Plan C more desirable – especially as it is less targetted – than Plan B?

Planeshift,

First of all you establish what the problem is – is this a debt crises or a growth crisis, and what are the causes of it?

Well obviously a debt crisis – as growth is continuing, but at a lesser rate than expected. The rate of growth is dropping, and there are explanations for that (I would even accept reduced government spending as a partial explanation – as it has not had a reduction in taxation alongside it).

However, even if growth stopped, I’d argue this is a debt crisis – how much of the money going to pay of debt would otherwise be fueling growth (however spent). This applies equally to the mountain of personal debt (mine included) as to the state – the problem is the economy needs to clear enough debt to be able to spend. I would further argue (and expect less agreement) that deferring the debt by increasing government spending now (which either increases government debt or effectively lowers taxpayers’ ability to clear their own debt) is not helping the problem, merely deferring it.

BenM,

Sorry – my Plan CFAB (now CFAB+ for clarity…) should have been stated to involve only paying for what taxation could afford (beyond the minimum services necessary). It might in the short term however involve more debt – but is predicated on the obvious gamble that more economic growth would lead to a larger tax take. If the economy is burdened by high levels of taxation, debt and increasing prices, there is going to be less spending, so domestic drivers of growth will be reduced. I would suggest that lowering taxation would likely increase growth and reduce debt, albeit classically it should also increase inflation – that’s why I would target the taxes which effectively raise prices anyway (petrol particuarly), as their reduction in the first instance would also reduce inflationary pressure.

The key difference with Plan B is that I do not believe government should spend, as government is not a good driver of the economy (and tends to distort markets, which is not healthy).

“deferring the debt by increasing government spending now”

I sort of agree, i don’t think the way out is to increase spending. But i think the way in which the government has reduced it has been seriously stupid, and has contributed to the problems we are having. the eurozone crisis has also undermined the strategy for growth, which was reliant on exports picking up the slack. Which means we are in a different situation to 18 months ago, when tackling the deficit was an issue (with disagreement on how to do it). Now focus has to be on getting growth back throughout europe, because without it we can’t even have a discussion on how to reduce national debts.

@13 – So what would you cut? The entire NHS? We’ll see be on that kind of position.

Planeshift,

I guess we are disagreeing about which of debt and growth is the horse and which is the cart then?

To be fair, more growth will clear debt, but that growth will be slowed by the debt.

As to Europe – perhaps some defaults (clearing debts from the books) would be good, even if they cause short-term chaos (if anyone other than Belgium has any excuse for their economy going under due to bank failure I’d be worried – the Belgians can at least claim the lack of government). It seems that the pride of the federalist project is such that it is prepared to allow debts to ruin lives and economies rather than deal with the problem.

Leon Wolfson,

I doubt you need to cut the NHS – maybe overseas military expenditure is less vital. My argument is that we might as well try to force growth through tax cuts, since the state did such a poor job (running up increasing debt – and perhaps a housing bubble – without producing true growth). I am not sure on whether more can be cut at the moment or whether we have to take a short-term debt increase whilst we gamble on the growth effects of lowering taxes.

It is a gamble, not a thought-out and costed set of policies – and it may be what we need, since no party seems to have got very far with the cautious approach. Cut the tax costs on the economy (note, this is not the same as just cutting income tax) and hopefully we should see growth, even if tax accountants start losing their jobs.

@17 – It’s a good idea of the order of magnitude of the cuts. And cutting the military also means cutting many UK manufacturing jobs and the jobs THEY support.

Most of the “cuts” we’ve seen are either ideological (such as the social cleansing), will cost the country considerably more down the line, or both.

What matters now is not the level of tax, but consumer confidence. Tax is only one way to improve that. And yet the government keeps it’s foot pressed firmly on it’s neck.

@17 “It is a gamble, not a thought-out and costed set of policies”

It’s been tried in the US and was (and is) a notable failure.

@19 – Because of skimming for pork-barrel projects and not doing *enough*, yes.

I love posts like these though I’m usually a mere lurker on these boards – where’s a good place to get the right wing view of what we see and discussed here, justifying all these steps Osborne isn’t taking???

No, the tax cuts leading to growth thingy.

@21 Look up Ricardian Equivalence in Google. Even Ricardo didn’t believe in it.

@22 – Oh that. Well, yes, been tried a lot of times.

Unfortunately, when policy is being made on the basis of what favours the few…

Leon,

If cutting the tax on petrol (which is not linked in any way to income) is favouring the few, I am quite surprised.

Gastro George,

I would actually point out that Leon’s answer at 19 actually would relate to my point as well – too many vested interests (I know an electorate is not a bad thing, but it is still a vested interest if it wants its barrel of pork at the cost of others). The US system is not a good model for changes to the British economy.

I seem to recall that in the 1980s, tax cutting and reducing government spending worked in the US and, to a much lesser extent, in the UK. More recently, in the US, under both parties, reducing spending has not really been an aim (President Clinton was the last person to really try to do this) – please do not make the mistake of assuming that President Bush (junior) was in any way representative of the school of thought I am advocating of clearing government out of the economy as much as possible to promote growth – he clearly believed in big and intrusive government even if he thought it was working in partnership with business – corporationist thinking if you like.

Richard W, if you are about … re: recent conversation about what happens if central bank makes losses, I found this very interesting set of slides from recent Nobel winner Chris Sims, which discusses that issue amongst others. Might interest you:

http://sims.princeton.edu/yftp/FiscalTheoryGreatInflation/Atlanta509

Duncan, you might get something out of them too. Puts together some familiar pieces in a way I hadn’t thought through before, in any case.

@25 – I was talking about *current government policy*

Also, I’d oppose fossil fuel tax cuts. Set up nuclear power stations, establish a hydrogen delivery network (using off-peak power) and then start cracking the fossil fuel taxes higher, indeed.

There seams to be plenty of rewriting of economic history going on.

Reagun and Bush Senior didn’t cut government spending, instead they oversaw a large increase in government borrowing whilst cutting taxes. Reagun was lucky in that the US economic slump that undid Carter was created by ratcheting up interest rates to cool inflation. When interest rates relaxed the economy boomed, a typical business cycle response. The economic success had little to do with Reaganomics.

Clinton actually managed better growth as president than the Reagun/Bush Snr and he achieved that whilst increasing taxes, and at the end of his presidency the US Gov was paying offing massive amounts of debt. So increasing taxes clearly isn’t the economic growth saviour it is claimed to be. Even though there was a tech bubble by the end of the Clinton presidency at least it was a bubble that was in a productive industry that was creating wealth.

Compare this to Bush Jnr, with the tax cuts for the rich producing anaemic growth based on a housing bubble. How I remember Krugman despairing at the time those tax cuts were introduced that a Keynsian knows that a Gov needs to save in the good times to have plenty of money to splash around when you get a slump.

That 1980s success in the UK that you refer to from Thatcher resulted in unemployment going up from 2 1/2 million to over 4 million. I’d call that a social disaster, not a success.

Kevin

@25

From a political point of view, I think you’ve got as much hope of introducing a Tea Party small government style agenda here as in the US. The Tories, Orange Book Liberals and New Labour may want a smaller public workforce, but they also want a nice line in government finance heading towards company profits. Probably the Liberals are your best advocates.

From an economic point of view, I think you’re barking. For all of Posh Dave’s rhetoric, “the Big Society” is embodied by a big government. Attempts to reduce the size of government are just steps towards reducing us to a third-(fourth? post-advanced?)world nation.