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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.

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