The debt & deficit

[newwave]

C & P from CIF (Guardian site)

Part of an article by Jonathan Freedland

It's not Labour profligacy that caused the deficit ? if the last government was spending too much why did the Tories promise, until summer 2008, to match its largesse? Labour needs to become as tireless at making this case as the coalition is at repeating, ad nauseam, that it "inherited this mess".

A posters reply which I found convincing

Absolutely. The only way to galvanise opposition to the government is to expose the fiction that the UK?s current economic problems are the result of high taxes and overspending and thus undermine the Tories? only justification for austerity measures. These are the facts which George Osborne doesn?t want us to know because they expose the Great Tory Debt Lie:

Fact 1: Average annual taxation as a % of GDP was lower in the years 1997- 2010 (35.4%) than in the years 1980-1997 (35.5%) as was average annual public spending (40% and 38%).

Fact 2: The national debt was higher in 57 years of the 20th century than in 2010, when it was 52% of GDP. In 1945 it was 237% of GDP and yet Attlee's post-war Labour government was able to bear the costs of introducing the welfare state and nationalising the railways, the public utilities and the coal and steel industries. Maybe that was because in 1945 we really were "all in it together".

Fact 3: As Osborne admitted to the Treasury Select Committee, in 2010 the UK's national debt was the second lowest of the G7 countries and, at less than 60% of GDP net of bank assets, is within Maastricht Treaty limits. It is expected to peak at around 73%. Germany is already above that level and is expected to exceed 80% in 2013. The debt levels of Japan and Italy exceed 100% of GDP.

Fact 4: In June 2010, the budget deficit was under £155 billion, well below the Treasury's £178 billion estimate made six months earlier. In other words, the deficit was narrowing after Labour increased spending in 2009.

Fact 5: The budget deficit is no more ?structural? than an overdraft in your bank account when you spend more than you earn. There is either a real deficit or not, and if there is, then it is due to either excessive spending or an inadequate tax take. Since it can easily be demonstrated that the problem is not the former, then it must be the latter ? which is around 36% compared to an EU average of 40%, has been adversely affected by the financial crisis and consequent recession, and is likely to be further aggravated when taxes are cut later during this parliament to the benefit of high earners, corporations and banks.

Fact 6: Even if you accept the idea of a ?structural? deficit, this was only 3.5% of GDP in 2007, compared with the last Conservative government?s structural deficits of 5.2% in 1992, 6.6% in 1993, 6.2% in 1994, 5.6% in 1995 and 4% in 1996. Similarly, the last 3 Labour governments managed to earn enough to cover their spending for 3 of their 13 years in office, whereas Thatcher and Major only managed to balance the books for 2 out of 17 years.

Fact 7: Osborne's claim that the UK is in danger of having its Triple AAA credit rating downgraded ignores the fact that the UK government is a reliable borrower with zero chance of defaulting, since most of its debt is held by financial institutions in the UK over a very long period of time and at very low interest rates. In fact, according to economist Ray Barrell (National Institute Economic Review, January 2010), government interest payments as a % of annual GDP are around 3.5%, the same as in the last year of Major's government.

Fact 8: Basing an economic policy on the predictions of the credit ratings agencies is absurd. As happened in the 1930s, when they failed to foresee the Great Depression, these agencies have behaved pro-cyclically ? encouraging reckless borrowing when the economy seems to be strong and threatening to slash their ratings when a crisis develops.

Fact 9: Despite Osborne's fatuous comparison of Britain's problems with those of Greece, a 2010 IMF study suggested that "the USA and UK could probably increase their debt burden by another 50% of GDP beyond projected 2015 levels without triggering a crisis."

Fact 10: Osborne has ignored a core principle of Keynesian economics - that government spending should be counter-cyclical. In other words, when growth is slow, you increase public spending and when it is strong you reduce government debt by cutting spending. Governments that reduce spending during a recession, or before full economic recovery, invariably make things worse: Economic growth slows, tax revenues fall, and welfare spending increases as unemployment rises.

Can anyone refute this

Shall we have a go at non-fact 10?

I was going to do it myself but I've found a much better summary here Keynes' ideas worked in the 30s, but they ain't working now for a huge number of reasons. You need to look forward, rather than backwards

I will leave you to it, I have work tomorrow and have to deal with (yet another) tender for a City project which is due back next Monday.

I will come back later to see if you have at last posted anything coherent.

One last thought, the posters on here are quite capable of coming to their own conclusions and can decide for themselves if they are being mislead, they dont need such as you deciding to act as a self appointed school prefect who will decide what they can or cant read or what they can or cant post.

I find a lot on here that I consider wrong but I dont go running to teacher about it unlike you I dont try to censor other peoples views.

You really do need to get over yourself.

I can unpick your non-facts all night. As in fact could my 11yo. But I think you've lost heart for the game and have slunk away to Labour Party HQ in search of more non-facts. You'll find plenty there (as you would at Conservative Party Central Office, but that's not your bent)

I can be here tomorrow though, if you want some more unpicking to be done.

@Quattrocento. Newwave belongs to that unfortunate debating style which is roughly that if you copy/paste enough yards of text and match it with bizarre follow-ups accusing everyone else of being stupid and/or Tory-voting 'filth' then you win on points. As a supporter of pure socialism (Labour is far too namby-pamby) their argument was lost decades ago.

Ho Hum I will be back on Friday, as I said I have work to do which keeps me and several others in employment.

I note you dont refute my points about you but then again you hardly can as they are correct.

Miss Miss someone has said something I dont like, TELL THEM OFF!

Chil, never let the facts get in your way.

I have never called anyone stupid, you will never find a post of mine that has, selfish is another matter.

Neither have I called anyone Tory voting filth but I do admit to calling the Tory government and members of it filth.

What points did you make about me, dearie? You asked if I was related to McCarthy? That was clear nonsense, along with the rest of your posts.

Why are you on here? Why are you posting stuff that is clearly and demonstrably untrue? What on earth is your agenda?

I'll be in the City myself tomorrow. Can't imagine I'll see you there. I think you'll be playing wargames on your PC and emailing Ed with your tales of how you managed to convert a whole raft of MNers to your way of thinking.

I think Ed will stammer and look embarrassed and stuff.

newwave

Economic theory is based on a model which tries to mimic real life. Keynes put his theory together in the 1930s. The economy has changed a lot since then. I also suggest you supplement your knowledge of economics by reading about the newclassical movement.

I will also take on your 'fact' regarding the US. You might think the US has had the small recession but it sure doesn't feel that way to the majority of people living here and we are still not out of the woods. There has been huge pressure to cut the deficit and the US government nearly came to a standstill because the Republicans and Democrats could not agree on a budget.

It's pointless trying to get through to Newwave. He's what I call a pure socialist.

Ie. someone who truly believes that socialism is better than capitalism whilst not seeing the irony that his rather well paid job and his very fortunate financial position is as the very result of capitalism and the very "rich" people he accuses of being "filth"

I can't help but wonder if we taxed those horrible city types to high heaven until they left the UK, who he would be working on a tender for?

And like most socialist's, it's all about equality and taxing the rich to feed the poor. Everyone should be equal.....as long they are more equal than others.

Strange - the Freedland part of Newwave's cut and paste is a political point of view (a bit misdirected IMO) but valid. After all - the Tories weren't a great opposition and in that sense should share some blame for the current financial mess.

The rest of the c&p is some random CIF commentator - who appears to contradict Freedland. And is definitely a 'flat earther' somewhat left of Ed Balls.

Newwave - one further point - you have said that

"The Tories are indulging in scaremongering and the recession as an excuse to screw the poor and to enrich even further those already rich."

As someone who i suspect would be considered rich I really don't see how having my taxes increased substantially is enriching me further.

I am not posting this for sympathy - I'd rather be in my position than that of many others who I can see will be affected by spending cuts. But I do object to comments like yours as I am definately not being made richer by the actions of this government.

To refute point 10 (which is kinda the big one). Why Fiscal stimulus doesn't work in the UK.

So the higher the 'fiscal multiplier' the more effectively public spending will stimulate the economy.

For example -

"Exchange rate flexibility is critical: economies operating under predetermined exchange rate regimes have long-run multipliers greater than one in some specifications, while economies with flexible exchange rate regimes have multipliers that are essentially zero"

In the UK we have a flexible exchange rate - of course.

"Indebtedness also matters: when the outstanding debt of the central government exceeds 60 percent of GDP, the fiscal multiplier is not statistically different from zero on impact and it is negative in the long run."

We are at about 58% GDP - we'll reach 60% by July.

We are also a very 'open' economy - so much of our public spend leaves the UK very quickly (via foriegn owned companies) or soon after (via high spend on imported goods).

Perhaps if Brown has been a Keynsian and we had saved during the top of the economic cycle - so our debt level at been much lower - it might have been worth a try.......

Oh I am no Tory or Tory apologist, but this is utter shite.

As Jackstar points out GB was not a Keynesian. If he had been he would not have sold off the gold reserves at the time he did for the price he did...

Also, the fundemental error of following a Keynes approach is that it was a theory based at a time when the credit agencies were a twinkle in the international markets' eye.
Today, a country's credit rating is one of the most important factors...just like yours or mine.

Quattro-

You really are full of prejudice and non-facts yourself.

The reason multinational corporations have been emigrating in droves is clearly because they are not paying enough tax in the UK and they want to pay more in Luxemburg or Switzerland or Ireland?

They're not.

Oh no, sorry they are emigrating in droves because our corporate tax rate is uncompetitively high, actually. And our personal tax rate is one of the highest in the world. So, erm, perhaps it is a question of too much spending after all.

It isn't.

This report forms part of the output of the Oxford University Centre for Business Taxation, based in the Saïd Business School. The work was financed partly by a grant from the ESRC (grant RES-060-25-0033), and partly from donations from a number of UK companies, members of the Hundred Group.

? In 2010 the UK had the 7th lowest corporation tax rate in the G20, and the lowest in the G7.

? For over 25 years the UK?s corporation tax rate has been well below the G7 average.

? Despite this, as a proportion of GDP, UK corporation tax revenue has generally been above the G7 average. Revenue peaked in 2007/08 at around £46 billion, before falling back to less than £36 billion in 2009/10.

www.sbs.ox.ac.uk/centres/tax/Documents/Corporate%20tax%20in%20the%20United%20Kingdom.pdf

Quattro-

Why are you on here? Why are you posting stuff that is clearly and demonstrably untrue? What on earth is your agenda?

So we're in debt. That much you don't dispute? Or do you? We have a deficit yes or no?

We have both in debt and have a deficit, as we have been during most of the 20th Century, along with most or all advanced Capitalist countries.

So can we continue to live in debt?

Yes, we can - as we have been doing it for a century. You've seen the graph yourself that I posted on here a number of times, why do you ask such a question?

Or at some point do we have to pay off money we borrow? And if/when we do, do you accept that involves spending less than we earn so part of that money is repayment of debt?

Our debt is not very high by historical standards at all. In fact, it is quite low in comparison with most of the 20th Century for the UK, and is lower than many G8 countries right now.

Our deficit should be tackled, because the interest on the borrowing is compounding, but putting the economy in to recession and reducing tax receipts is the opposite of what we should be doing.

Or do you think that we can borrow from Peter to pay Paul....whilst at the same time feeding the poor & needy?

What does this mean? There is plenty of money to go around. The UK is one of the richest nations in the world. We could eliminate poverty overnight if we 'bailed out' society with the same fervor we bailed out the banks. £850 Billion pounds towards fighting poverty would eliminate all poverty in less than a decade.

And has any mainstream political party suggested that cuts are completely unnecessary? Yes or no?

The Greens have said so, but anyway, who cares what the mainstream political parties say? They're not going to get very far by saying that the people who caused this crisis - the financial sector - should pay for it, will they? How do you think the Murdoch press would react to that? Do you not think the Tories are relishing these cuts in any case?

Quattro-

This is nonsense. We all know what living on an overdraft means. It means you have no money and you are living on your overdraft. This is what a structural deficit is. This is how we have been living.

This is simply wrong. A structural deficit means that government expenditure is greater than government revenue. In simpler terms: Outgoing > Income = Deficit.

It doesn't necessarily mean you're in overdraft.

If I have £1,000,000, and have a monthly 'structural deficit' of £100, then I can keep on spending in the same manner for a very, very long time.

It is true that the UK is also in debt, which is closer to an 'overdraft', but not hugely so by historical standards, and not relatively to other G8 countries either.

Quattro-

"There is either a real deficit or not, and if there is, then it is due to either excessive spending or an inadequate tax take. Since it can easily be demonstrated that the problem is not the former, then it must be the latter"

Hang on a chuffing minute. Who said it wasn't the former? Oh, you! That's right.

Show us this 'excessive spending', then Quattro. The UK spends less than the european average on health and education. The deficit rose from 3% of GDP to over 11% over the course of one Parliament - New Labour's Parliament - and this was because of the bailout for the banks, and subsequent recession and loss of tax receipts.

If New Labour are to blame, they are to blame for deregulating the financial sector - along with many other Capitalist countries - and allowing them engage in crazy casino Capitalism without enough capital to make up for any loses. It was the financial crisis which caused the jump in the deficit rate - not public spending.

1. Are you a member of a political party? If so which?

1. What are your qualifications in economics?

1. Why have you come on this site to talk utter shite?

The thing about those long lists of points that appear is that some of them seem pretty irrelevant/flat-earther/whatever, while others relate to valid and more mainstream debates about the applicability of Keynesianism to the current situation, the "too far too fast" debate and so on. Basically, as Tosca says, the deficit needs to be cut, and that's what it boils down to - when and how.

(I don't believe we can just grow our way out of this - apparently it would require 4% growth for 10 years or something, but that's one of those statistics that I've seen in passing but have no idea where it came from - I'd be interested to hear what anyone else has read).

Obviously not for nothing is Keynes a great economist, but I agree with others above that Keynesianism isn't applicable to this situation, for all those reasons plus the fact that while he might have had a good understanding of economic cycles, he didn't seem to make much allowance for political cycles. He essentially seems to have assumed that his theories would all be perfectly applied at the ideal time, whereas governments know that the difficult stuff has to be done at the beginning of the electoral cycle or it doesn't end up happening.

Plus the very fact we had a coalition, the novelty and risk that that involved (and it was less riskier than a minority government!), meant that we needed to show the markets more political will upfront to make cuts soon than might otherwise have been the case. Ideally it probably would have been good to let the recovery get underway a bit more, but I think the post-election situation meant we did need to show the markets all the more that the will was there, especially given the European situation at the time (although I know this usually gets simplified and dismissed as "but Britain's not Greece"). It was a trade-off between the risks of dampening recovery and the risks of losing market confidence.

Not that (as a Lib Dem member) I don't have my conspiracy theories that the Tories have been keen to go a bit further than is necessary with some particular cuts - or the way they've been handled - in order to drive down Lib Dem support as much as possible in the first year (i.e. cuts that their own voters are less bothered about). That said, at least some of those efforts have been neutralised, and the LDs are pretty much behind the pace of deficit reduction. The disputes are elsewhere, e.g. health service and what's going to happen to the banks.

Yes, we can - as we have been doing it for a century. You've seen the graph yourself that I posted on here a number of times, why do you ask such a question?

Don't you think at some point (say 100 years....) that there will be a crunch point where people wake up and think "Hang on....we have to start repaying the debts" I suspect most sane people would. You obviously feel it's ok to keep borrowing and using the logic that "all my mates are doing it". Ironically that's the same logic which fuelled all the banking market speculation. All the other banks were doing the same, it was normal.

Simply put, Outgoings > Income = Trouble. The only question is when.

"I don't believe we can just grow our way out of this - apparently it would require 4% growth for 10 years or something, but that's one of those statistics that I've seen in passing but have no idea where it came from - I'd be interested to hear what anyone else has read"

Vesela - strangely enough, even under coalition spending plans, most of our deficit reduction will happen thanks to economic growth and inflation. I can find you some links on this (if you'd like them).

The more you look into this area the wider the gap between political rhetoric (from both sides) and reality...

Ttosca -

In 2010 approximately 20 large companies moved abroad, most announcing that punitive tax rates were the reason. Furthermore, 20% of companies polled by HMRC in August 2010 said they were seriously looking into leaving for the same reasons.

I don't know very much about our corporate tax rate, but interesting that a comparatively low rate leads to increased revenues. This is something that I often mention on here, usually when someone is talking about 'taxing the rich' or when someone bemoans the fact that the Tories are 'looking after their mates in business'.

However, the UK has become one of the highest taxed countries in the world especially given that most OECD countries have reduced their tax burden since 1997; soon 25% of taxpayers will be in the 40% tax net. This is apart from the fact that the 50% top rate is one of the highest in the EU - only three countries (out of 86) have a higher top rate and the EU is already the highest taxed region in the world.

I am confused by your comment 'there is plenty of money to go around...we could eradicate poverty overnight if we bailed out society with the same fervour we bailed out the banks' : you do know that the bank bailout was a loan rather than a gift?