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

"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 a gift"

Good point. As I often say, on here, if tax revenue was that easy to come by - why didn't Brown and Darling take that option?

I think ttosca is confusing wealth with income. A fairer sharing out of the nations wealth (homes, land, businesses, art collection) might lead to a fairer society (wonder who gets to live in Buck Palace - Polly Toynbee?) but it won't effect our deficit.

And taxing wealth has the same impact as taxing income. Too much tax and the rich leave, retire or up their tax avoidance level.

earthworm-

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.

First of all, you should show that this is true.

Secondly, so what? The assertion that 20 large companies moved abroad, ostensibly because of tax reasons, doesn't disprove:

? 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.

Corporations will always cry about tax rates - that's what they do. They will always try to pay the lowest tax possible, and the lowest wages possible.

If you are suggesting we should try to compete with China, India, and Poland, then I suggest you think again, unless you want to live in the same conditions as these countries.

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'.

Don't get too excited. The theory states that the relationship between nominal tax rates and income revenue is shaped like a hill: if you increase tax rates, revenue will increase until it reaches a peak, over which revenue will decrease. This is called the 'laffer curve'. The problem is, nobody knows where the peak is, and it's difficult to generalise from this general principle to what is most appropriate to one country.

"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 a gift"

Haha. Well, I'm not so sure it was a loan not a gift. It remains to be seen how much of that money we get back.

In any case, if you want to look at it like that, consider how 'bailing out society' could be considered an investment: if you properly fed the poor, treated drug addicts, made sure no kid lived in poverty, made sure all kids had access to good education, then the economic benefits would almost certainly pay for themselves, as these people will then go on to be productive members of society - socially and economically.

Thanks for this OP newwave, it needs to be broadcast widely and frequently!

ttosca - yes, that is exactly the reason Labour enabled lower taxes AND lower spending - because their policies and government ensured we had more productive members of society.

The most interesting point on this thread, and one I have posted a few times, but it is almost always ignored is this;
Up till the financial crash, the Conservatives supported Labour's spending plans, and pledged to "MATCH THEM, POUND FOR POUND" (Cameron's words).

Come the crash, there was a choice. Alistair Darling (who I have a huge amount of time and respect for), chose to take an approach that preserved jobs and kept inflation and interest rates down. The Tories at that point said we should slash spending. However that would have meant enormous unemployment, soaring inflation, rising interest rates, and quite possibly a depression instead of a recession.

The Tories can not criticise Labour's spending up until 2008, and should be a bit more humble about the fact that had they been in power, we would still have had a massive debt and deficit at this point.

One further point - there is simply no mandate for this pace of cutting - LDs and Labour both campaigned to 'halve the deficit over 4 years', Tories had Osborne's plan. If you total the Labour/LD votes, they are far more than the Tories fast cutting plan received. And yet this is what we have ended up with.

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).

Sort of. The coalition thinks that private sector growth will more than offset all the lost jobs from the public sector and all the costs associated with higher unemployment and cutting public services.

This isn't really a recipe for growth. It's a recipe for privitisation. The fact is, most of the 'deficit reduction plan' amounts to cuts in public spending.

Agreed on both counts, Lily. Not that I'm a fan of New Labour, but it's disingenous to blame them for the deficit. It wasn't public spending which caused the huge jump in the deficit, it was the economic crisis caused by the financial sector.

And you're right, there is no mandate for these cuts nor for the privitisation of the NHS.

Hi Lily

I guess one of the luxuries of being in opposition is you can say stuff without really having to put your money where your mouth is. I'm no big fan of Cameron himself but it is true the Tories did say that. That said, you can probably compare it to Ed Miliband who is going around saying "We would make cuts too but we're not like those the nasty Tories, we wouldn't have cut that....." without ever saying what they would cut themselves.

I do blame Labour for the structural deficit as they inherited a balanced budget from the Tories. And whilst they stuck to the previous Tory govt spending plans all went well. The books balanced. It was once Gordon Brown ripped open the nations chequebook that things started to come unstuck. But it would be wrong to blame the entire debt (remember thats different) to the deficit.

And the additional part of the deficit (ie. not the structural part) which was caused as a result of the banking crisis whilst not directly being Labour's fault, they do have to take a fair share of the blame for purposely pursuing a hands off regulatory regime. Whilst the good times rolled, Labour were happy to look the other way. Now you could of course say well the Tories would have done the same and yes I reckon they would have. But the fact remains they were not in charge, nor where they even close to a majority.

I'm sure someone will probably now say "Oh yeah but Labour had to borrow to invest in the NHS and schools thanks to years of Tory starvation blah blah" but that's just stupid talk.

I'd love to buy a second car right now for my OH to drive to her new job. We need it, but I can't afford it. I could borrow money but I choose not to as I don't like debt. So we will make do until we do. Same principle here. I'd love a all singing, all dancing NHS where nurses are in abundance and schools where every child achieves their best. But we can't afford that so borrowing money to achieve it only ends in tears. And here they are!

niceguy-

You seem to be slightly obsessed. The debt has gone up and down over the course of the 20th Century. It hasn't accumulated to ever greater amounts. There is no need to panic for a 'crunch time' when the debt just reaches such high proportions that it would seem impossible to ever pay off.

As I've explained about 1,000 times before, the debt has been much, much higher for most of the 20th Century. There is no debt crisis.

There is a problem with a high deficit, which has been discussed endlessly on these threads. Many of us don't think that slash and burning public spending is either morally acceptable or a pragmatic solution to our economic problems.

In any case, it is simply untrue that New Labour spent such outrageous levels of money on public spending that the deficit problem was caused by that. As I've also stated about 1,000 times, before the financial crisis, the deficit was at 3% of GDP - which is well within EU regulatory limits, and below average for the EU. After the financial crisis it shot up at over 11%.

Once again, it isn't New Labour that caused the deficit problem, it's the financial sector - except insofar that they deregulated the banks, as you note.

Mate, just because you have "explained about 1000 times" doesn't mean I have to agree with your opinion.

The actual debt itself is almost a secondary issue. Money doesn't really exist anyway. What I mean is, you couldn't take your five pounds to the BOE and despite their "promise to pay the bearer on demand..." you'd get nothing except laughed at.

Nowadays, money is merely a measure of confidence. And that's why owing more money before doesn't mean its fine now. Quite simply, the market is no longer happy with that.

No longer are banks & institutions happy with forever lending money to governments believing that its a safe bet. As Iceland, Greece, Ireland and soon Portugal have shown, governments can default just like a private business can too. All of a sudden, they've woken up and thought "Bugger me....will we get this money back?? We've lent trillions and they're just borrowing more & more!"

So the cutting of the deficit is key into restoring market confidence so that we can continue to function without going cap in hand to the IMF.

Of course the obvious solution would have been to live within our means so that we need never make austerity cuts in the first place and we wouldn't have to pay ludicrous amounts in interest payments which could actually have been spent on the NHS & education. The very public services which are often listed as the reason we should keep endlessly borrowing money for.

The funny thing about capitalism is that the market will force people to behave in certain ways in order to survive. This is no different. No individual government is able anymore to control the market. And here is the market correcting itself.

NG2

I'm sure someone will probably now say "Oh yeah but Labour had to borrow to invest in the NHS and schools thanks to years of Tory starvation blah blah" but that's just stupid talk.

Nice try, if the schools and hospitals they inherited from the Tories were half way reasonable then you would maybe have a point but in many cases they were outdated dumps that were deliberately starved of resources. It is not "stupid talk" it is just the truth.

The issue I have with people of your (as I perceive it) political persuasion is that you cannot admit that Thatcher/Major allowed the infrastructure of our public services to deteriorate to a criminal degree and sad to say mostly for ideological reasons.

BTW what did the Tories do with all the money from North Sea oil and gas, it certainly was not spent of the uk's infrastructure.

Ttosca, the following companies left the UK IN 2010 : Charter, Regus, Macdonalds (Europe), Hendersons, Brit Insurance, WPP, Shire, Informat, Pepsico, Wolsely, Kraft, UBM, Gallaher, Hiscox, Shell, Inios, Experian, Cadburys etc.

My point about the bailout is that we currently have £57 billion in RBS/Lloyds shares that could pay off a 7% chunk of the national debt (figures from The Economist).

I am aware of the Laffer Curve, no doubt we disagree on this too.

Newwave, governments of both persuasions have benefitted from North Sea oil revenues (£230 billion since 1968). Production actually peaked in 1999.

Newwave, governments of both persuasions have benefited from North Sea oil revenues (£230 billion since 1968). Production actually peaked in 1999.

Ok so what did the Tories do with their "share" Labour used some of it to improve the countries infrastructure.

And a deficit of 3.1% of GDP prior to the financial crisis was actually rather rubbish given we had been enjoying a period of economic growth; it was the second largest deficit in the G7 and the fourth highest amongst the 26 countries for which the OECD collects data. At that time many countries, such as Australia, were running surpluses.

Absolutely pointless debate. Reason has never worked against religious fundamentalism.

niceguy-

Mate, just because you have "explained about 1000 times" doesn't mean I have to agree with your opinion.

You don't have to agree with my opinion, but at least try and refute the facts instead of just repeating yourself. I both explained and showed a graph to you several times what the UK debt has been historically, and you continue to make statements about 'accumulating debt' like this huge ever increasing mountain that, at some point, we can't add to any more and we have to pay it all back.

As I have shown, debt has gone up and down, and is at a relatively low point in history. It is not this huge, unprecedented mountain of debt. Stop repeating this unless you can actually show otherwise.

The actual debt itself is almost a secondary issue. Money doesn't really exist anyway. What I mean is, you couldn't take your five pounds to the BOE and despite their "promise to pay the bearer on demand..." you'd get nothing except laughed at.

Yes, you're right.

Nowadays, money is merely a measure of confidence. And that's why owing more money before doesn't mean its fine now. Quite simply, the market is no longer happy with that.

'The market' doesn't have an issue with the debt, but how much we are paying on the deficit: that is, the 'debt service'. They are panicking because our deficit payments are high, and we're accumulating interest on the money we owe.

So the cutting of the deficit is key into restoring market confidence so that we can continue to function without going cap in hand to the IMF.

I agree we need to reduce the deficit. The debt, however, is not currently the problem, and shouldn't be for decades to come.

Of course the obvious solution would have been to live within our means so that we need never make austerity cuts in the first place and we wouldn't have to pay ludicrous amounts in interest payments which could actually have been spent on the NHS & education. The very public services which are often listed as the reason we should keep endlessly borrowing money for.

And once again, we were living within our means. Repeat after me 1000 times: the financial crisis cost the UK £850 Billion pounds, caused a recession, massively reduced tax receipts, and increase in welfare costs. It was the financial crisis which got us in to this mess, not overzealous public spending. UK public spending on health, for example, is relatively low compared with other european countries.

The funny thing about capitalism is that the market will force people to behave in certain ways in order to survive. This is no different. No individual government is able anymore to control the market. And here is the market correcting itself.

Nonsense, mate. We don't even have a Capitalist economic system. If we did then the banks would have all gone bust and not have hundreds of billions of pounds of public money thrown at them to rescue them. You think this is 'the market', it isn't. It's socialism for the rich, and Capitalism for the poor. The banks get bailed out hundreds of billions and continue to award themselves millions on bonuses. The public gets tax rises, cuts in public services and other austerity measures.

And a deficit of 3.1% of GDP prior to the financial crisis was actually rather rubbish given we had been enjoying a period of economic growth; it was the second largest deficit in the G7 and the fourth highest amongst the 26 countries for which the OECD collects data. At that time many countries, such as Australia, were running surpluses.

Firstly, I'd like to see the evidence.

Secondly, so what? How is it rather rubbish? 3.1% GDP deficit is not a crisis. It is will just over the EU proscribed limit (3%).

You mean it is 'ok' to have the state of financial affairs so bad that we would not have been admitted into the EU?? You are aiming really high, aren't you?

Ttosca,

The 3.1% deficit that you yourself referred to exceeded the 3% limit outlined in the EU Growth and Stability Pact. This, along with other indicators, led the IMF to predict that the UK would suffer a longer recession than other developed countries.

As I said earlier, we had the second largest deficit in the G7 and the fourth highest of the 26 countries that the OECD collects data for; my source is The Economist but it's behind a pay wall.

By the time Gordon Brown reluctantly limped out of office, we had the largest deficit in the developed world.

So, for being unprepared, I maintain that the last government is culpable for the longest recession of the top 20 economies.

And actually this would be forgivable if things had improved throughout their tenure, but they didn't - look at green targets, educational competitiveness, NHS productivity, poverty. But they did successfully bribe lots of people by pulling them into state benefits.

Oh, and a link to support my assertion that we had one of the largest deficits in the developed world; the figures are actually from the Wall Street Journal but again it is behind a paywall so this is the best I could do.

Wow Ttosca. What a lengthy reply. I don't see why you can repeat yourself 1000 times but seemingly I cannot. I'm trying to make you understand but obviously failing.

We both agree that the debt is a secondary issue BUT it's not a non-issue. We have a deficit yes? And like me, if I suddenly went into overdraft now, I'd expect my bank to be understanding based on my long standing good credit history (hopefully). But if I already owed a massive amount and was continuing to borrow, I suspect my bank would be less sympathetic. So the market IS concerned with the debt albeit not it's primary concern. The debt is part of the problem but the deficit is the pressing issue. On that we agree.

We obviously are NOT living within our means because even during the boom years, we were borrowing money to service our spending commitments. That is not living within our means.

Oh and seeing as you like links, here's one for you: Link

Look at who we're ranked next to. Iceland, Ireland, Afghanistan. Hardly economies which have weathered the storm well!

Niceguy - the problem I have when people bring up the 'Iceland, Ireland, Greece' comparison is this quote from George Osborne from an article he wrote for the Times called Look and Learn from across the Irish Sea

"A GENERATION ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain?s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn."

"What has caused this Irish miracle, and how can we in Britain emulate it?"

"The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn."