Skip to main content

A budget for growth would be best to address the structural deficit.

There is little I find more frustrating than listening to Labour Party front-bench spokespersons presenting the 'case' for an alternative to coalition austerity.  It is as if they are afraid of their own shadow. They fail to explain, not simply that deficit reduction is not the only or the right objective, but also they fail to outline what the alternative is and why, even when challenged by their opponents to do so.  So what is the problem?

I suspect it is because Labour are too cautious about being labelled 'deficit deniers', which is very sinful, and because 'deficit' is poorly understood or explained. The problem is the distinction between 'budget deficits' and 'structural deficits'. Although related, they are not the same. The distinction is important.

Voters clearly see that there is a massive deficit. More problematic for Labour is that they largely blame the last Labour government for it. So it is not surprising Labour don't want to appear to deny it exists, or that it is a problem.

"We have to get the deficit down" the coalition mantra runs. "Labour has no alternative other than to 'spend our way out of trouble'", or 'more borrowing'. And this is the problem for Labour. More borrowing is the solution, and it is the answer to reducing the deficit. Timidity in dealing with this problem fails to address it. But the argument can often appear opaque. Yes a policy for growth would mean an increased budget deficit, but in the longer term it would increase revenue. Only by increasing growth and revenue can the deficit be reduced. And, indeed, the coalition is finding it very difficult to 'get a grip' on the deficit, and the reason is falling tax revenue.

It struck me this week how easy it was for the British Chambers of Commerce to present an alternative objective to the government. It wasn't 'cut the deficit'; it was 'act urgently to stimulate growth'. When Labour says this it seems to get itself into trouble. One problem is economic terminology and public understanding.

 Vince Cable rightly talks of dealing with the 'structural deficit'. He is very precise, unlike many of his colleagues. Budget deficits may come and go; structural deficits are long lasting. It is possible for governments to legitimately run budget deficits, particularly when dealing with short term problems or expenditure.

Thus, it is possible to increase budget deficits to 'stimulate the economy' as these measures have a likelihood of increasing future tax revenue and reduce the deficit in the future. An example was the cut in VAT to stimulate high street activity. It costs initially but is likely to increase tax revenue through increased sales and productivity. So, up to a point and within certain criteria you can 'spend  your way out of trouble'. Indeed the only effective way in the longer term to deal with a structural deficit is to increase revenue.

Structural deficits present problems in the long term because they are costly to manage. Deficits are financed by borrowing and interest has to be paid on the amount borrowed. The longer the deficit last, the more costly it becomes. If the debt ratio to GDP gets too high, then there may be concern that a country may default on its payments. It becomes more costly to borrow to sustain the deficit. This is one reason Osborne worried so much about the triple A rating. Losing it might make it more costly to borrow.

But it is possible to run large structural deficits and still be able to borrow. The US, for example, has large structural deficits but is still able to borrow at very low interest rates. The UK’s debt-to-GDP ratio is now high, but it has little problem borrowing.

Another important aspect of structural deficits is that they don't have to be reduced immediately. By their nature they are 'structural' or long lasting. This doesn't mean they shouldn't be reduced but they could be reduced more gradually over time and it is better to do this through growth and revenue than cuts that push the economy into recession. This was always the case made by Alastair Darling.

So we should distinguish the two types of deficit. This is difficult to get across in a short television exchange where 'deficit' is lumped and no distinction is made. This doesn't mean we should ignore the problem of running a large structural deficit. That would be wrong. But it does mean we can be more sensible about budget deficits and strategic fiscal policies to stimulate growth.

The distinction between structural and budget is essential if we are to have a sensible debate about economic policies. Labour must be bolder in getting its message across. They must stop being afraid of their shadows.

Postscript

I have just had a discussion with a colleague about the distinction between budget and structural deficits. He asked if I had an example from everyday life. If I borrow to hire a van to take some goods to market, I might run a budget deficit that lasts only as long as it takes to get revenue from the sale of those goods. Without borrowing, the wheels of the economy wouldn't move. One problem at the moment is difficulty getting banks to lend to businesses, which is why the Bank of England tries 'quantitative easing' to encourage it. Borrowing to stimulate infrastructural building may also be strategic in the long term by increasing growth and revenue.

The problem of poor growth is highlighted by Bank of England figures showing that lending to businesses had fallen by almost £19bn in 2012, double the decline in 2011. More needs to be done to get banks lending to businesses and improving the relationship with businesses.

Comments

Popular posts from this blog

Ian Duncan-Smith says he wants to make those on benefits 'better people'!

By any account, the government's austerity strategy is utilitarian. It justifies its approach by the presumed potential ends. It's objective is to cut the deficit, but it has also adopted another objective which is specifically targeted. It seeks to drive people off benefits and 'back to work'.  The two together are toxic to the poorest in society. Those least able to cope are the most affected by the cuts in benefits and the loss of services. It is the coupling of these two strategic aims that make their policies ethically questionable. For, by combining the two, slashing the value of benefits to make budget savings while also changing the benefits system, the highest burden falls on a specific group, those dependent on benefits. For the greater good of the majority, a minority group, those on benefits, are being sacrificed; sacrificed on the altar of austerity. And they are being sacrificed in part so that others may be spared. Utilitarian ethics considers the ba

The secret life of Giant Pandas

Giant pandas, Ailuropoda melanoleuca , have usually been regarded as solitary creatures, coming together only to mate; but recent studies have begun to reveal a secret social life for these enigmatic bears.  GPS tracking shows they cross each others path more often than previously thought, and spend time together.  What we don't know is what they are doing when together.  Photo by  Sid Balachandran  on  Unsplash For such large mammals, pandas have relatively small home ranges. Perhaps this is no surprise. Pandas feed almost exclusively on bamboo. The only real threat to pandas has come from humans. No wonder then that the panda is the symbol of the WWF.  Pandas communicate with one another through vocalization and scent marking. They spray urine, claw tree trunks and rub against objects to mark their paths, yet they do not appear to be territorial as individuals.  Pandas are 99% vegetarian, but, oddly, their digestive system is more typical of a carnivore. For the 1% of their diet

Work Capability Assessments cause suffering for the mentally ill

People suffering from mental health problems are often the most vulnerable when seeking help. Mental health can have a major impact on work, housing, relationships and finances. The Work Capability Assessments (WCA) thus present a particular challenge to those suffering mental illness.  The mentally ill also are often the least able to present their case. Staff involved in assessments lack sufficient expertise or training to understand mental health issues and how they affect capability. Because of  concerns that Work Capability Assessments will have a particularly detrimental effect on the mentally ill,  an  e-petition  on the government web site calls on the Department of Work and Pensions to exclude people with complex mental health problems such as paranoid schizophrenia and personality disorders. Problems with the WCA  have been highlighted in general by the fact that up to 78% of 'fit to work' decisions are  being overturned on appeal. It is all to the good that they