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Politics

The debt & deficit

81 replies

newwave · 13/04/2011 22:21

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

OP posts:
prettybird · 19/04/2011 10:52

Haven't read all of the thread, but I will refute "Fact 10".

As someone who tends towards Keynesianism ( and did an Economics agree, albeit a looooong time ago), what makes me so Angry at the Labour Party is that they didn't follow sound Keynesian principles :( Angry

You are supposed to save during the "Good Years" so that you have the reserves to enact the counter cyclical measures during the lean years. Labout didn't :(. They squandered the resources - both from the Financial Sector and from the North Sea oil. Without North Sea oil, the UK would be bankrupt :(

Contrast that with Norway, who built up an Oil Fund, to use for investment in the post-oil years - and, if necessary, during recession years. What have we to see for the oil revenues. Zippo.

And because of that profligacy, the UK government (of whatever colour) has very little room for manoeuvre. :(

Niceguy2 · 19/04/2011 11:20

I don't have a problem with learning from Ireland. Some of the lessons I see such as encourage R&D, low corporation taxes. They are all still valid lessons now as they were during the boom.

But learning does not mean we have to blindly emulate and we can learn just as much (if not more) from their mistakes.

There's no reason we cannot say do the above whilst at the same time firewalling retail banks so they cannot be "too big to fail". There's no reason why we must raise corporation tax (except to please the socialists). We need to ensure there's no more rampant property booms like last time and ultimately that's what killed the Irish economy. An unchecked property boom.

As I teach my kids, you often learn more from mistakes.

jackstarb · 19/04/2011 11:44

prettybird - good post. I had earlier refuted point 10, myself - but not nearly so well as you have just doneSmile.

earthworm · 19/04/2011 13:32

Lily, thanks for the link but your excerpts are rather selective.

In the article George Osborne says only that there are three lessons to be learnt from the Irish economy : high quality education, investment in research and development, competitive taxation for business.

Was anyone predicting an Irish collapse in 2006, some two years before it happened? My understanding is that Blanchflower was the first to sound alarm bells in 2007, but I could be wrong.

LilyBolero · 19/04/2011 15:15

Selective links, yes, but that's why I linked to the article so that they could be read in context.

Whether the Irish collapse could have been predicted or not, Osborne's words of a 'shining example' always resonate when I now hear him saying we 'were being linked with ireland'.

Niceguy2 · 19/04/2011 16:36

Now I'm confused. Lily, are you suggesting that given Ireland's economy went down the tubes that in fact we shouldn't seek high quality education, investment in R&D or have competitive taxation?

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