Friday, 12 December 2014

They are all 'cutting the deficit' now — but do they make any sense?

There is nothing more annoying than hearing politicians of all parties telling us 'we must cut the deficit'.  It is annoying because they never explain what they mean by it, let alone how they would do it.  It should come with a health warning, or some kind of caveat that tells you they are talking nonsense. There is no 'must' about cutting he deficit.  It is not in itself a 'must'. It is only a 'must' in the right economic context. Mr Osborne says he has cut the deficit by a third. Mr Cameron often repeats this. What they mean by cutting the deficit varies depending on what message they really want to get across.

Are they talking about the current account deficit, or are they talking about the underlying, or structural deficit? They don't tell you. They simply say 'deficit'. By doing so they give the impression that all kinds of deficit are equally problematic. They are not. You might think the deficit is 'the deficit'. Some politicians are fond of referring to household budgets for an analogy.  You can't go on spending beyond your means.  Well, no, you can't. But we often do. We often spend what we expect to pay later. We borrow. Now there are different kinds of borrowing.  For example, borrowing to pay of existing debts isn't 'good' borrowing. Borrowing to buy a car to use for work is probably, depending on the circumstances, an example of 'good' borrowing. Without the car you would have no income. So you might 'run a deficit' for a while, covered by borrowing. That kind of deficit isn't 'bad'.

We might regard the economy in the same way. The government might choose to run a deficit covered by borrowing in order to 'grow the economy'.

 In the calendar year 2007, the Labour government borrowed £37.7bn, of which £28.3bn was invested in big projects (the balance of £9.4bn represents the current budget deficit).  Last year the Coalition borrowed £91.5bn, with just £23.7bn invested (budget deficit was £67.8 bn).  So not all the deficit is 'bad'.

Let's look at this another way with another set of interesting statistics.  Let's look at debt as % of GDP.  In 1997 debt was 40% of GDP. At the start of the recession in 2007/8 debt had fallen to 36.4% of GDP. Yet this was despite increased government spending. Government spending increased enormously under Labour. The Tories are always telling us, so it must be right. So how was this achieved? The answer of course is by growth and increasing revenue.  Revenue can be key to cutting the deficit but politicians don't like going there because it is to do with taxes!

Let's also put it into another perspective. Debt as a percentage of GDP was much higher in the 1950s when according to Harold MacMillan, we had 'never had it so good'. Even as he said this, UK national debt was over 200% of GDP!  You might say, ah yes but that was because of the war. Indeed, no doubt it was, but the same argument can be applied now in relation to debt at 60% of GDP - 'ah yes , that is because of the financial crash'.  Indeed it is.

So, when we hear politicians talking about cutting deficits we need to be sure what deficit they are talking about, what they would do to cut it, and three whether what they propose makes any real sense. About that we can make no judgements because we have no idea what they would do to 'cut the deficit'. When they say 'we will cut the deficit' they are being disengenuous and frankly talking a load of bollocks.

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