How public opinion is moving towards Labour’s argument on cuts


8:30 am - December 6th 2011

by Leo Barasi    


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In his Times column last week(£), Daniel Finkelstein made a bold assertion:

Plan B is incomprehensible to most people. Ed Balls ended up yesterday arguing that we are borrowing too much and that the way to borrow less is to borrow more… I promise you, this is never going to work politically. Ever.

But this ignores the fact that public opinion is slowly moving in favour of Labour’s position.

Crudely, there are two broad visions of how the government can help the economy to recover.

The coalition’s view is that reducing government spending now will reassure the markets that we have a credible plan to pay off our debts, and the smaller state will also encourage private sector activity, stimulating growth.

An alternative view is that cutting government spending prevents growth, which not only means it will take longer to recover, but also risks scaring the markets about our ability to pay off our debts. Only more spending now, relying on more borrowing, can stimulate the growth that will allow Britain to turn the corner.

The polling is tricky to untangle because the alternative plans can be described in such a variety of ways. However, the general picture suggests that Labour’s approach may not in fact be politically impossible.

Lord Ashcroft’s recent poll found 60% support the government’s plan, and 40% an alternative. But that alternative approach is sold short in his poll. It’s described as slower cutting to reduce the pain, leaving out the argument that more spending could stimulate the economy and avoid worse problems induced by stagnation. The 40% figure is thus lower than a more balanced description would produce.

A more useful guide is a question periodically included in YouGov’s polls for the Sunday Times. Since July they have asked whether the government should continue with its strategy of reducing the deficit, or whether it should change strategy to concentrate on growth. It’s a fair summary even if it doesn’t cover the full arguments.

Tracking this question shows there has been a significant movement towards the ‘concentrate on growth’ argument, and this now has more supporters than the ‘tackle the deficit’ strategy:

Tory voters haven’t changed their view much, and Labour supporters have only slightly hardened their own view. But the danger for the coalition is that Lib Dem voters are now much less convinced about the government’s strategy:

But there is problem for Labour. Support for ‘concentrate on growth’ is highest where Labour is already stronger: the North, Midlands, Wales, and Scotland (where the SNP may fight on similar ground). But in the South, where Labour needs to gain ground, support is weaker. Similarly, there is low support in London, a barrier to changing media coverage:

It’s striking that more now think the government should go for a strategy that lowers the short-term priority of deficit reduction. This hasn’t translated into changed political or media interpretations of the task ahead.

But it may not stay that way. Finkelstein is probably right that Labour would be panned as deficit deniers if they came out clearly behind a policy of ‘borrow more to borrow less’. Yet, the mood of the country has shifted. If it continues to move, the economic options may prove to be wider than they seem.


A longer version of this post is at Noise of the Crowd

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About the author
Leo is a regular contributor to Liberal Conspiracy. He manages communications for a small policy organisation, and writes about polling and info from public opinion surveys at Noise of the Crowd
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Reader comments


1. Biffy Dunderdale

you say

“But it may not stay that way. Finkelstein is probably right that Labour would be panned as deficit deniers if they came out clearly behind a policy of ‘borrow more to borrow less’. Yet, the mood of the country has shifted. If it continues to move, the economic options may prove to be wider than they seem.”

This seems to indicate that as being open with the electorate about any plans to “borrow more to borrow less” would be electoral suicide, it would be better not to be open with them.

In addition to being perceived as profligate “tax and spenders” Labour can ill-afford to also be seen as duplicitous. Given that this is how Ed Balls is already seen by millions in the country, you’d be better off mugging up on the “In the Black” paper.

and this now has more supporters than the ‘tackle the deficit’ strategy:

34% to 38% is within margin of error, so that’s not necessarily true. There does appear to have been some movement in that direction, though.

But the danger for the coalition is that Lib Dem voters are now much less convinced about the government’s strategy:

The Lib Dem subsample in the November poll was 143 people – margin of error +/-8% (and it won’t be internally weighted, so probably more than that). Since it’s a net difference, that’s the difference between two numbers, both with an 8% MOE – for even more uncertainty.

The July poll had 190 Lib Dems, for a slightly better 7% MOE (and again, not internally weighted, so that’s best-case). Still huge.

So, putting the error bars on:
keep cutting has gone from 47-61 to 32-48
stop cutting has gone from 13-27 to 27-43
So net approval for cuts has gone from +20-+48 to -9-+21 (except, again, the margin of error will be even bigger because the Lib Dem subsample isn’t internally weighted)

There’s some genuine movement there, but it might not be as large as the polls suggest (or it might be bigger than the polls suggest, of course)

http://ukpollingreport.co.uk/blog/archives/4318 is essential reading on using sub-samples for anything. (And applies equally to the regional subsamples)

3. Rob the crip

Trust me I have the boom economics for Dummies. Joke I doubt it….

Finkelstein is probably right that Labour would be panned as deficit deniers if they came out clearly behind a policy of ‘borrow more to borrow less’. Yet, the mood of the country has shifted.

It’s all in the language.

I don’t know how you sell the reality that you need growth – any growth – to pay down the deficit and that in the medium term the financing of this will have to come from borrowing.

It’s an impossible sell. Like a lot of conservative policies, the easy Tory platitudes about paying down your debts chimes with the general public’s naive appreciation of macro economics. Leave aside the fact that cutting spending in a slump is economic madness, plain and simple.

This is a clash of reason versus emotionally driven rightwing ideology. And reason is losing because reason relies on cold hard fact to make its case. It is necessarily technocratic. And human beings are not at all rational. Especially in a crisis.

Having conceded so much ground in this debate during Brown’s calamitous premiership – particularly with Alistair Darling’s unhelpful comments during the crisis itself – it is diffcult to see how you pull this one round unless someone (perhaps Mr Umunna) manages to couch the urgent necessity in language that appeals to voters and makes sense to them.

This “austerity vs growth” to close the deficit is all political doublespeak from the growth side. It’s almost impossible to grow your way out of a deficit this big. Darling knew it, and I’m sure most on the Labour benches do as well. Ballls certainly does, given he had access to treasury models, so what he says is pure political positioning,tryingto take advantage of what is inevitably going to be a painful time. Less painful though than not tring to tame spending.

Let me illustrate with a simplified worked example.

I am going to use some simplifications. First, i will ignore inflation. Second, i will assumethat all current govt debtand its interests payments are contained within current govt spending. i’m going to use round numbers:

UK GDP = 1600b
UK budget deficit = 10% GDP
UK GDP growth = 2% (which is above trend – i’m goingto be overly fair tothe growth people)
UK tax revenues = 40% of GDP
UK debt funding costs = 2.5% per annum (roughly 10y Gilt yields)

The above numbers are rough for calculation purposes, but close enough to the true figures. If someone cares to, they could build a spreadsheet where you can alter every variable and also include inflation.

The calculation I am using is pretty simple:

(initial deficit + increase in spending) – (increase in govt revenues) = final deficit

So in year 1, the government is running 160bn deficit after tax reciepts of 640bn. That 160bn of NEW debt costs the government 4bn a year in interest costs. Growth of 2% means GDP goes to 1632bn. Govt revenues now are 653bn.

So for year one, the budget deficit has reduced from 160bn, to 151bn (160+4-(653-640)=151).

Looks promising, right?

Year 2 comes around. the funding costs for 151bn of NEW debt is again 4bn (151 x 2.5%). GDP grows 2% again, now to 1665bn, and govt revenues are now 666bn. Unfortunately, the government has taken on more new debt, so in this static scenario we have to do the following calculation:

(164+4-(666-653)=155

The new budget deficit is now 155bn. It’s going UP despite good growth, low interest rates and no increases in spending except for debt interest payments.

The problem really lies in the fact that GDP growth is cumulative, where debt interest payments increase both cumulatively (interest on interest) but ALSO additively when you have a large budget deficit (you have to pay interest on all debt, not just new debt).

Simply put, when you have such a large budget deficit it swamps everything elseand outruns growth. It leaves you choosing cuts to bring it down more quickly, or forced into cuts when debt interest payments eat into other budgets. if you don’t bring the deficit down though you end up in a debt trap, where it becomes harder each year to balance spending becase you effectively have to cut more just tostay standing still on the deficit. You find yourself in the Greek or Italian situation, where interest rates go up, compounding the problem as no-one will lend to you as neither growthor austerity can manage the deficit down fast enough.

if you run the same test for a combination of austerity (cutting 1% of GDP per year off the deficit) and lower growth (say 1% again) we get these numbers:

Y1: (160+4)-(646-640)-16 {for cut in deficit through 1% cut in spending} = 142
Y2: (164+4)-(653-646)-32 {for cut in deficit though 2% cut in spending} = 129

Basically the spending cut term, equivalent to 1% of GDP per year in this example, dominates the resultant deficit term.

I think it’s probably worth at least mentioning that “winning the argument” on when spending cuts need to happen isn’t worth a whole bunch if you’re not winning the right to be heard. lets look at some figures, starting with the best one for Labour cited above.

People supporting what you call Labour’s policy on spending cuts – 38%

Now look at these:

Who would be better Chancellor – Osborne 30%, Balls 24%
If Labour Govt would economy be doing – better 25%, worse 37%
Which party could handle: reducing the deficit better – Tory 41%, Labour 19% (!)
Steering country through economic crisis – Tory 33%, Labour 26%

The problem Labour has is that it has (temporarily I’m sure, these things usually are) lost the right to be heard on the economy. This is the problem that Hopi and the others are trying to remedy with ‘In the Black’ Labour, and this is also the problem that the Tories had in their lost decade after 1997 – even when people agreed with the policies, they refused to listen to them coming from the Tories.

The other difficulty is, of course, that the Eurozone is struggling under a debt crisis and advocating substantially increased borrowing to pay for a stimulus is extremely counter-intuitive, when so many people consider that the UK’s debt levels are a large part of the problem (this is even more the case when people blame Labour for these debt levels). The more effective Tory posters were those ones of Gordon Brown grinning saying I raised Britain’s debt by whatever it was, let me do it again. If you make that actually part of Labour’s manifesto, you’re making CCO’s job a hell of a lot easier.

Well Polls, you can get them to show whatever you like, the only question that matters is would you vote Labour and these relatively tested Polls are certainly showing the Eds as miles away from even getting a hearing. At this stage that is beyond an election defeat and more like a tectonic shift away from the left.
There is a comprehensible argunent about whether it is wise to stop spending on growth having established a sensible picture, it is a temptation to be resisted and any company would ask the same question.
Unfortunately spending on Growth is not what New Labour want.They want to bolster Public Sector Pensions, Welfare and the salaries of their client state who fund them They have argued that their overspending was actually a good thing as it produced counter cyclical debt. As I remember thinking , thats like saying if you kick your own arse hard enough you can fly. They advocate spending religiously and never allign themselves with wealth creators who they seem to despise
That is not spending on growth that is just pumping demand into a disfunctional econonmy by the worst menans and feeds into the reputation of New Labour who only ever say one thing ..” Throw money at it “. Its not investing in Sales its chucking freebies at the HR department

The probloem with Labour continuing with this unelectable stratgey is that it alows Cameron to cynically exploit the terrified tax payer in the South who have no alternative . This may well be good for his carreer but it is not good for the country which needs leadership away form these Greeks Siren voices singing “Spend spend spend ” .

That we still throw £12 billion away on foreign aid as the resiidue of a historic PR tactic is beyond tragic

@Paul Newman

We could do a lot worse than increase welfare payments.

Take hysterical Tory and Tabloid emotional claptrap out of the equation and funneling money through welfare recipients into the economy is by far the most efficient way of circulating money in the economy.

Shopkeepers don’t care who pays them for their goods and services. So long as someone can.

9. Man on Clapham Omnibus

@5 probably one of the most interesting posts for a long time.I presume fairer taxation ie. making companies pay the proper rate of Corporation Tax would assist in this model since the extra tax would lower the deficit.

10. Leon Wolfson

@7 – And you keep arguing for murdering the poor, because they primarily vote labour.

Cold and starvations works wonderfully for your purposes.

@8 – Exactly. Cutting benefits *directly* cuts consumer spending.

@9 Clapham

I specifically ignore tax rises in my argument, though were a new tax to actually raise money it would indeed reduce the deficit (as it does on my in depth spreadsheet).

Do note i hold the revenue as a % of GDP fixed, which is probably innaccurate – with good growth it would tend to fall slightly with no new taxes, and also the 40% of GDP i assign to tax revenue in this model is too high; it’s more like 36% in reality.

Basically, in all assumptions i made for the simple example above, i was really very generous to the “growth” crowd. a bit of simple maths with a pinch of realism shows that it isnear impossible to grow your way out of such a large deficit. Which is why people whosaywe can annoy me so much – they’ve either not done some simple analysis for themselves or like Ed Balls, they are simply lying for political gain.

The real problem is that not all tax rises do make money, and it’s hard to calculate. the 50p tax rpobably raised a small amount of money, but that will decrease over time as people seek to avoid it (look at Sting) or simply leave. Higher corporation taxes would probably do the same. Laffer curves really doexistbutare really hard to actually show where the peak is until after you have collected all the tax.

There is a stark difference between the public favouring the opposite of what isn’t working (regardless of whether they think that’ll work instead or not) and what they’re favouring actually working and being a political possibility.

Ben M – I have heard it said that such money goes around more Ben ( not sure I believe it) but throwing demand around does not solve anything and anyway since the bulk of additional borrowing is bound to go on social payments of various sorts if it worked it would have worked already …already.
If it is the supply side you are concerned abot , and we must be , then tax breaks for research , lower corporate tax and, a Labour idea, subsidies for child care ( hence for employment ) would be much better ideas to name but a few , a straight income tax cut would be better and ameliorating the near 100% marginal rate for family bread winners between £40k and £50k is crying out for change.

Most people think that the 5% welfare increase the colaition have allowed is already a poor descision when the rest of the country is losing income in any terms

Anyway we know where Labour would spend and e know how much . On their people and too much

Notice also the trend in who thinks the deficit should be reduced is pretty proportional to the areas that have public sector/benefit dependencies. They aren’t really saying they’re against deficit reduction, necessarily, they could be against deficit reduction as the only way they know about this is in the Left/Right political framing that sees public jobs/pensions and benefits cut.

If people knew deficit reduction to be achieved through reallocation of one time funding to short term debt pay off, and higher/fairer taxation, I suggest that graph would be the other way up for exactly the same question.

“Year 2 comes around. the funding costs for 151bn of NEW debt is again 4bn (151 x 2.5%). GDP grows 2% again, now to 1665bn, and govt revenues are now 666bn. Unfortunately, the government has taken on more new debt, so in this static scenario we have to do the following calculation:

(164+4-(666-653)=155″

I fear I’m being stupid here, but in this calculation shouldn’t that 164 be 151 – as the 151 represents the new deficit?

@ 15 Planeshift

I’m basing everything in “year 0″ money to avoid the complexity of taking inflation into account etc, and make the calculation of the new deficit easier. So year 2 numbers are represented in year 0 terms….

17. gastro george

@16

Except Planeshift’s right, isn’t he. There’s no inflation in any of the terms, so why not move the calculation forward?

18. George Kendall

@ 16 Tyler

@Planeshift and @gastro are right. When working out the deficit for a year, your calculations need to include the deficit of the previous year, not the initial deficit.

However, that doesn’t mean I agree with Ed Balls. In reality, growth wouldn’t have been 2% a year if we stopped the deficit reduction programme. It might have been fractionally higher than under the Coalition, but nothing like enough to bring down the deficit at the pace it needs to come down.

And if the deficit weren’t coming down fast enough, the interest rates on new loans the government takes out would have to rise, and interest rates would be higher for the economy as a whole.

But the real problem with not pursuing an assertive deficit reduction programme is not that growth wouldn’t be high enough, but that we would enter a new crisis before the deficit were under control. If that happened and we had lost the confidence of the financial markets, a Keynesian response to the new crisis would be impossible, because we could only borrow at prohibitive interest rates.

And it looks like we could enter such a crisis imminently, sooner than most of us feared.

@Leo Barasi
Polls are hard to read in mid-term. Ed Miliband and Ed Balls are rated poorly on the issue of the economy, but this may even be understating people’s distrust of them. We are deep in mid-term protest. That mid-term protest might even result in a decrease in the coalition’s lead on the economy, but that doesn’t necessarily mean Labour is starting to win the argument.

Time may prove me wrong, but I’m not convinced by the YouGov polls. I remember only to clearly the days when opinion polls in the eighties showed a majority in favour of tax increases to pay for better public services. But, in the end, they voted the Tories back in again.

If you ask a voter whether they are a head-hearted swine, who wants to see deficit reduction, even if it means lower growth, and so more unemployment and misery, they’ll be inclined to say go for growth. But (a) do they believe going for growth will result in sustainable growth? and (b) are they just saying ‘go for growth’ because it feels like a nicer thing to say, even if they don’t really believe it? I think the best way to judge that is to see the poll rating of politicians who are putting the case for growth over deficit … and Ed Balls doesn’t come out well at all.

Tyler not only is your basic maths just flat out wrong it also takes no account of the internal workings of an economy. Growth would lower unemployment and that would lower welfare spending and increase tax revenues as well.

@ George Kendall

I’ve very much simplified the calculation, but I do take into account the reduced deficit, when I work out the cost of debt interest cost of the extra debt. I could haveshown it moreclearly i suppose, but I rounded everything to 0dp for brevity. Likewise in the “austerity” version i modify the initial deficit by -16 per annum to signify spending cuts.

I also used “year 0″ money as a quick way to keep everything simple by excluding inflation.

It’s a very rough and ready approach, but illustrates the point, and is simpler to explain than the true calculation.

I actually have (and use proffessionally) a spreadsheet which models pretty much everything, and you can easily adjust each quarterly input. It basically gives me the same answer – unless growth is much greater than the long term trend, we can’t grow our way out of debt and we will end up in some form of crisis.

I’m sure my model differs little from Treasury, OBR, ratings agency and bank economist models. Which is i suppose why so few of those people think fiscal consolidation is optional i guess.

@ Akimov

It’s a SIMPLE model. it’s not meant to measure every aspect of reality, nor is it truly feasible to do so.

However, I was excessively generous to the growth brigade. I assumed 2% growth every year (which didn’t happen even in the 97-08 boom), higher tax revenues than reality and also thatbonds yields/debt financing costs would stay expcetionally low – which they wouldn’t if the UK turned around and said they weren’t going to at least try and cut spending.

EVEN then the growth model can’t beat the deficit.

“. When working out the deficit for a year, your calculations need to include the deficit of the previous year, not the initial deficit.”

Basically, I think the calculation you need to use is basically

“previous deficit + new costs added through servicing debt + cost of servicing previous deficits – (increase in govt revenues) = final deficit”

So the equation for year 2 is:

151+4+ 4-(666-653)=146

for year 3 is

146 +3.65 +8* – (679.32 -666) = 144.33

(* = cost of servicing deficit for year 1 and year 2)

Using this formula means a ‘growth only’ strategy has diminishing returns, and by year 4 the deficit starts to rise, and by year 7 you are back effectively back where you started. Compund interest is the most powerful force in the universe ;-)

The lesson I think is that you can only use ‘growth only’ as a deficit reduction plan over the short term.

However, if you freeze public spending, and then make cuts equivelant to the cost of servicing previous years deficits each year (so in the scenario of Tyler’s we have to make 4 billion of cuts in years 2 and 3, 3.5 billion in year 3, etc), then assuming growth stays the same we eliminate the deficit in year 14, and generate a surplus in year 15.

So I think what the model shows (and we have to accept that it is very simplistic and makes a number of generous assumptions – factor in an increase in the interest rates on your debt and see what happens) is that we have to build spending cuts into a plan for deficit reduction. Thankfully, economic growth itself – as well as increasing revenue, cuts spending as we end up spending less on unemployment benefits – provided growth reduces unemployment levels. If it doesn’t then you do need spending cuts.

The lesson I draw from this is that an economic stimulous needs to be finite, focused on increasing employment, and on projects that will generating income. The other lesson is that I have too much time on my hands ;-)

@Planeshift

Excellent. That makes sense to me entirely.

Or to put it into words:

Growth at 2% per year might give us about £13 bn of extra tax revenue a year, and the interest payment on a £160 bn deficit at 2.5%.would be an extra £4 bn for each year that the deficit is running.
For year one, that means a £9 bn cut in the deficit.
For year two, you have to pay extra interest on two years of deficit, and growth would still only go up by about £13 bn, so the deficit only falls by £5bn.
For third year, three years of interest is almost as much as you’ll get from growth.
For year four, the extra interest you pay will exceed the extra income you get in growth, and the deficit will start to rise again.

And no, this isn’t a sign of you having too much time on your hands ;)

This is an important issue, which much of the media woefully fail to cover. Indeed, I’m thinking I’d like to write a full article on it on LibDemVoice. Would you guys mind? I’d credit you both, of course.

@Tyler

Do you agree with Planeshift’s reworking of your concept?

And thanks, Tyler, for getting the discussion in this thread started on these calculations. It’s forced me to think this through in a new way.

If you have more detailed workings of how this might work, I’d certainly be interested to see them.

And respect to LiberalConspiracy. A remarkably civilised and serious discussion. if only the rest of the web were like this.

“EVEN then the growth model can’t beat the deficit.”

Sure if you ignore inflation and the fact that a huge part of the deficit will disappear on its own. However it seems rather pointless to say that.

“would stay expcetionally low – which they wouldn’t if the UK turned around and said they weren’t going to at least try and cut spending. ”

The USA has an exceptionally low rate and they are a total mess when it comes to spending cuts.

24. gastro george

I was going to make the same point as Akimov. Even a small level of inflation will reduce existing debt progressively.

It’s also worth noting that 2% is not a generous level of growth. It may be above trend growth today, but historically growth has been low for a number of years, mainly due to the levels of unemployment.

Further, a central bank can drive down bond yields if it desires.

Fundamentally, the concept of “unsustainable debt” is as chimeric as NAIRU and the structural deficit.

@ George Kendall

I don’t entirely agree with planeshift’s reworking, but it’s pretty immaterial given he ends up with basically the same answer – and on such a basic model I was jsut trying to convey the point that when you have high deficits it is near impossible to grow your way out of debt…..which makes the austerity vs growth debate a moot point.

I’d love to send my spreadsheet over but it’s officially company intellectual property, and i’d have to email it out of the office (these financial institutions take security very seriously – my PC there has no disc drives and the USB ports are disconnected). It’s a very large file as it has all sorts of other calculators on it – it really started life as a pricer for inflation linked bonds and swaps.

That said, I do believe there are some calculators for similar things freely available for download from the net, or it only takes a few hours to build a simple-ish calc which you can refine overtime.

@ Akimov

Inflation increases govt spending as well as reducing the value of it’s debt. Inflation as a way of deficit/debt reduction worksbest when you are actualy cuttingreal terms spending.

Some of the deficit MIGHT disappear through growth, but that is an assumption bigger than mine on 2% growth. The financial industry is not going to get back to beingthe major taxpayer it was pre-crash any time soon, and “automatic stabiliser” unemployement benefits type payments won’t close the deficit either.

@Tyler

Ugh! My mind must have been full of cotton wool. I clearly shouldn’t post after midnight.

Looking at it again, Planeshift and I were double-counting the extra expenditure on debt.

If the calculation is:
(initial deficit + increase in spending) – (increase in govt revenues) = final deficit

Then, if the increase in spending is over year 0, then that increase in govt revenues should also be from year 0. So, surely, your calculations should read as follows:

yr 0 = 160
yr 1 = 160+4 – (653-640=13) = 151
yr 2 = 160+8 – (666-640=26) = 142
yr 3 = 160+12 – (679-640=39) = 133

Or have I misunderstood something fundamental?

This doesn’t change my opinion in my first post in this thread, that this is a far too optimistic scenario. In a scenario where we ended our deficit reduction programme, debt interest might double, growth wouldn’t suddenly leap to 2%, it would only be fractionally higher than it has been. Also, a model like this would only work if we assumed we had abolished boom and bust. Sadly, it didn’t work out too well the last time we made that assumption.

But, to be fair, there are factors that work in the other direction:

@Akimov is partly right about inflation, it would (and will) reduce the cost of servicing most historic debt. Though, of course, it wouldn’t help with new debt, as the lenders would factor inflation into the interest rates they charge, nor with index-linked debt.

Also, the increasing size of the economy would mean the deficit, which we’ve expressed in terms of pounds, would shrink faster as a percentage of GDP.

But I disagree with the comparison with the USA. As the reserve currency, they have huge advantages over us. Though, whether that advantage will remain in the coming century is a worrying question. When the world begins to make serious moves to replace the dollar as the reserve currency, the world will be in for a very difficult transition.

As for reduced welfare payments, a small increase in growth would mean a small reduction in those payments.

Which brings us back to the central question in this debate. Would ending the deficit reduction programme significantly increase growth. I fear it wouldn’t, and in the long run, it’d reduce growth.

Try caclulating tax take and spending seperately to work out the defcit, like I’ve done here (hopefully this will come out ok, i’m copy and pasting from a spreadsheet.

Tax take:

Year GDP Tax

0 600 240
1 612 244.8
2 624.24 249.696
3 636.7248 254.68992
4 649.459296 259.7837184
5 662.4484819 264.9793928
6 675.6974516 270.2789806
7 689.2114006 275.6845602
8 702.9956286 281.1982514
9 717.0555412 286.8222165
10 731.396652 292.5586608
11 746.024585 298.409834
12 760.9450767 304.3780307
13 776.1639783 310.4655913
14 791.6872578 316.6749031
15 807.521003 323.0084012

Now try calculating spending based on the assumption that spending = previous years spending plus cost of servicing overall debt. We start with no debt, so there are no service charges in year 1.

Year Spending debt cost of servicing debt

0 400 0 0
1 400 -160 4
2 404 -315.2 7.88
3 411.88 -469.504 11.7376
4 423.6176 -626.69408 15.667352
5 439.284952 -790.5279616 19.76319904
6 459.048151 -964.8335208 24.12083802
7 483.1689891 -1153.602691 28.84006728
8 512.0090563 -1361.08712 34.027178
9 546.0362343 -1591.897925 39.79744812
10 585.8336825 -1851.111943 46.27779857
11 632.111481 -2144.386965 53.60967411
12 685.7211552 -2478.088612 61.95221529
13 747.6733704 -2859.431736 71.4857934
14 819.1591638 -3296.639515 82.41598788
15 901.5751517 -3799.123776 94.9780944

By year 15 we are now taking 323 bill in tax, but simply operating a policy of only increasing spending to cover debt servicing we are now spending 900 bill.

Basically growth only works if by freezing spending, you include covering the costs of debt within that freeze, in other words debt servicing takes a bigger slice of pie and other areas therefore need to get cut.

28. Leon Wolfson

And another Tory screed (and yes, I’m aware of who the author CLAIMS to be) trying to hide the fact that their economic policy is a failure which would cause charges of incompetence to be levelled against directors of a company. Growth would be considerably ABOVE 2%, this is true, if the government didn’t have their foot firmly on it’s neck. Heck, jumping up and down on it.

To claim that it’s good that benefits would magically be reduced if there’s growth is just funny. Yes, because there wouldn’t have been the need for QE3, and hence inflation would be lower. Gee!

@ george + planeshift

As planeshift shows, grow th can work but only if your factor in the increased debt interest costs into your spending. Which means you need to cut spending elsewhere – austerity by default.

The real danger there is that youyr borrowing costs shoot up and the “growth” plan falls out the window of feasibilty. Of course, the more debt you already have the more likely that happens, but also the worse the effect is if it does.

I’m glad we all roughly agree on the result, even if we all got there through seperate methodologies though. The chances all three of us made horrible mistakes are fairly low. If I have time I might make a seperate simple model which I would be allowed to distribute.

On the inflation topic, it does reduce govt debt, but it also increases govt spending. Again, much like compound interest, it can have a positive or negative multiplier effect.

@ leon wolfson

Over the period 97-08, the labour boom years, average annual growth was under 2%. If you somehow think that, just after a massive recession, and still in the middle of a huge crisis we could somehow have emerging market style growth through debt financing it (which acts as a drag on growth remember) you are crazy, or taking some form of hallicinogenic.

Here is the UK annual growth rate going back to 1956. The growth rate in the NL years was above trend until around 2000, and probably averaged around trend growth of 2.25% until the recession. This fits the pattern of Mr Brown increasing public expenditure around the same time. For example, Afonso & Furceri (2008) in an ECB study found that “a percentage point increase in the share of total revenue (total expenditure) would decrease output by 0.12 and 0.13 percentage points respectively for the OECD and for the EU countries” Accusations that Mr Brown was only growing the economy through public expenditure are wrong, it was the opposite and his increases in public expenditure were a drag on growth.

http://www.tradingeconomics.com/united-kingdom/gdp-growth-annual

This LSE report pretty much says the same thing that the public sector was a drag on growth.
http://blogs.lse.ac.uk/politicsandpolicy/2011/11/15/uk-growth-and-productivity-1997-to-2008/

The economy was growing but so was the population. Therefore, one would want to look at GDP growth per capita. Here the record compared to peer countries was actually quite good. Accusations that it was all based on a bubble carry less weight when one considers that the financial sector was only contributing about 0.4% to annual growth. Wages and debt-fueled consumption do not determine productivity. Productivity determines wages and consumption.

How much all that was down to the last government and how much was it due to just a better UK economy is down to interpretation. Politicians like taking praise for good times and bad times are nothing to do with them. So best just to leave them in their own delusions. I don’t think the economy performed poorly under the last government and it was clearly not just a bubble. The argument against Mr Brown is not over his stewardship of the macro economy. It was that he was reckless with the public finances and used unsustainable revenues for recurring expenditure.

What rate of growth the UK economy can now achieve comes down to how large one sees the output gap and how much permanent damage the financial crisis has caused to the UK economy. A large output gap means that there is scope for slowing fiscal consolidation. Zero output gap means that slowing fiscal consolidation would be pointless as all we would get is inflation. I worry that the growth potential of the UK economy has fallen. However, it is very difficult to get a clear picture with the EZ hanging like the Sword of Damocles over the UK economy.

@Tyler

“As planeshift shows, growth can work but only if your factor in the increased debt interest costs into your spending. Which means you need to cut spending elsewhere – austerity by default.”

Except, in the simplified model I gave in @26, I did include increased debt interest. It’s just that increased revenues after growth (at approximately £13b/yr) are greater than increased debt interest per year (at approximately £4b/yr).

The problem with @planeshift’s calculations is that he double-counts the cost of servicing the debt. So, in year 2, he includes £4bn of extra interest in the £404bn spending, but counts it again in the £7.88 cost of servicing debt.

While it is true that compound interest is powerful, in this scenario, there are compound effects not just to debt interest, but also to the growth rate.

Of course, freezing spending at year 0 levels will still be austerity, in that demand for public services will increase (with increased population, an ageing population, and increased demand, for example, for expensive new medical technology).

“The real danger there is that your borrowing costs shoot up and the “growth” plan falls out the window of feasibilty.”

I agree. Without a credible deficit reduction plan, our interest rates would probably rise to Spanish, or even Italian, levels. I also think that hoping for the kind of growth we had between 97 and 2007 is hopelessly unrealistic. We won’t be seeing a repeat of consumer debt-fuelled growth, and we’ll have a harsher international environment. Confidence, rather than being improved by leaving a massive deficit largely as it is, would probably decline, as businesses and consumers waited in dread for the bond markets to panic, and the crash to happen.

“I’m glad we all roughly agree on the result, even if we all got there through seperate methodologies though. The chances all three of us made horrible mistakes are fairly low.”

Sorry if I’ve not been clear. But after a midnight failure to see the double-counting in @planeshift’s calculations, I don’t agree.

I’m afraid that disproving Ed Balls isn’t as easy as that.

“If I have time I might make a seperate simple model which I would be allowed to distribute.”

I’d love to see it. If you can produce a model which satisfies my criticisms, I’d be very interested.

32. Leon Wolfson

@29 – Yes, the one called “understanding economics”. You RECOVER from recessions. Growth is HIGHER for a period. IF you recover. We have not recovered, and that’s the government’s fault.

@31 – So there is no alternative to the Tories in your view. Well, thanks for your party political card.

@Leon Wolfson
I presume you think Alistair Darling was a Tory too, when he produced his deficit reduction plan.


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