Tag: economy
‘There is an alternative’ – Ed Balls’ speech at Bloomberg « Ed Balls – Labour MP Blog
How big is the problem? | The wrong cure | False Economy
How big is the problem? | The wrong cure | False Economy.
How big is the problem?
No country can run huge deficits every year for ever.
The bigger the national debt that builds up, the more expensive it is to meet interest payments. At some point it becomes more difficult and more expensive for governments to borrow extra money because people become reluctant to lend to them.
But we are nowhere near that point in the UK. Let’s look more closely at the national debt.
This graph shows how it has gone up since the recession started (as it has in every other major country). You can see that it has gone up from just over 35 per cent of GDP in 2008 to an estimate of just over 60 per cent in 2011. (The GDP is the total wealth the country produces every year.)
That’s a pretty scary increase, you might think.
But let’s plot the same graph over a longer period of time.
We can see that while the national debt is higher than it’s been for some time, it’s still lower than it’s been for most of the last century. Debt has often been higher in the past – and it goes up after national emergencies such as wars and worldwide recessions. Of course the recession should not be compared to the second world war, but it was still the one of the most catatastrophic events short of a world war.
So is our debt bigger than other countries?
Here’s a chart showing national debt in 2008 for a range of prosperous countries.
Again you can see that there is nothing special about the UK’s debt when compared to other countries.
And there are two other important differences between the UK and those in much worse circumstances.
- First more than 70 per cent of UK government debt is held within the UK by things like pension funds. It is a mistake to think that our national debt is all owed to other governments or foreign speculators.
- Secondly UK debt is more long-term than many other countries. On average our debts have a pay-back period of 12 years. Countries like Greece need to keep paying back debts and are forced to borrow more to make up for that. The UK does not face any problems refinancing its debts.
Governments need to borrow money all the time as previous loans need to be paid back, or simply because tax does not come in evenly over a year. Even with today’s low interest rates the UK government has not had any difficulty borrowing.
Can we afford to pay back the debt?
Of course it would be better to be able to spend the money we use to repay debts on something more desirable. But it does not mean that debt repayments are out of control. This graph shows the proportion of the wealth produced by the country each year that has been used to pay back debts during the last six decades.
We can see that debt repayments have gone up in line with the debt since the recession hit, but they are still lower than in many years in the past.
Here’s another way of looking at debt repayments. This shows what proportion of government spending goes on debt repayment. It’s gone up in the last few years – but has been much higher in the past.
Compare where we are today with what happened between the 1992 and 1997 elections.
Yes, our debt is going up and is higher than it was before the election.
But it’s still lower than it’s been for many years this century, and is lower than in many other similar countries.
Yes, it’s costing more to pay back our debt and it’s going up.
But it’s lower than most years since the second world war. Just 6p in every pound of spending went on paying off debt last year, compared to 8p in 1996.
Ed Miliband’s Fabian speech, 15 January 2011 – The Fabian Society – where the British left thinks
Latest attack on Ed Miliband not backed up by the facts
As the cuts debate rages, and strategies for campaigning against them are discussed at today’s Netroots conference, Tony Dolphin looks at whether the latest critique of Ed Miliband’s economic policy is justified
Phil Collins took Ed Miliband to task in yesterday’s Times (£) for not confessing to the hubris that he says afflicted the Labour government ahead of the financial collapse and recession. His charge is that Labour was too optimistic about economic growth at the time and, thus, too optimistic about government revenues. As a result, government spending was too high and the deficit problem that the country now faces is, in part, due to this misjudgement.
There is an element of truth in this analysis – though it must be said that Labour’s hubris was shared by most leading economists and by David Cameron and George Osborne, who promised to match Labour’s spending plans.
In 2007, the UK economy had experienced 15 years of uninterrupted growth, unemployment had fallen by 1½ million from its peak in 1993, inflation was close to its target rate and interest rates were at historically low levels. Things do not get much better than this and if ever a government should have been running a surplus on its current budget, the UK government should have been in 2007.
But, according to the figures in the June Budget documents, the cyclically-adjusted deficit on the current budget – the measure that George Osborne targets to be zero by 2015-16 – was just 0.6 per cent of GDP in 2007-8. If Labour were guilty of fiscal profligacy, it was hardly on a grand scale. There is little doubt that the vast bulk of the deficit problem is the result of the financial collapse and recession.
Ed Miliband is right, therefore, to counter Tory talk of ‘Labour’s deficit’. How much blame he should accept on behalf of Labour when doing so (he did say in his conference speech that Labour was wrong to think that there would be no more boom and bust) is largely a political judgement – and one on which he and Phil Collins clearly disagree.
What matters more, though, is whether the diagnosis of the problem affects the remedies put forward to cure it. The Conservative (and post-election Liberal Democrat) view is that the deficit is too high because public spending is too large relative to revenues.
Their solution, therefore, is a drastic deficit reduction programme tilted heavily (77:23) in favour of spending cuts. Deficit reduction under Labour, if their last budget plans are any guide, would also be achieved largely by spending cuts (accounting for over 70 per cent of the total), though these would be spread out over a longer period.
Both parties, therefore, appear to accept to a large degree that the problem is excessive public spending. But why not increase revenues more?
The Tories, supported by their Lib Dem allies, want to reduce significantly the share of government spending in GDP, Labour’s plans would produce a similar outcome; who, then, will make the positive case for taxation to fund excellence in the state provision of health, education, defence and other services?
Of course, the best – and least painful – way of boosting government revenues, and thus ensuring support for public spending, is to increase the growth of national income. Once it is accepted that the deficit has arisen largely as a result of the recession, it should be clear that more effort needs to be put into public policies that promote economic growth.
George Osborne has spoken about the need to rebalance the economy and generate more growth through investment spending and exports, but he seems largely bereft of ideas to bring about this about.
The failure of the government to come up with enough measures to fill a white paper on growth suggests a new form of hubris has overtaken the Treasury: a belief that deficit reduction, and admittedly some cuts in corporate tax rates, are all that is required to place the economy on a path of strong and sustainable growth. Sadly, this is unlikely to be the case.
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