"let's Start Denying This Deficit Properly"

[Tenubracon]

http://www.guardian.co.uk/commentisfree/2011/may/18/tory-cuts-uk-bank-debt

Looks like she doesn't get the differemce between deficit and debt ...

Here is the problem with the economy, and the coalition's stewardship of it, from an observer's point of view: they say "the huge burden of debt the last government left us with", and although I smell a rat, I cannot smell how large this rat is. Ed Balls or – more audibly, actually – Gordon Brown before him, can say this deficit reduction policy is lunacy, but it's hard within a context of adversarial politics to tell how much danger we're really in.

A Tory MP might say on Any Questions, "We have to do this or we'll end up like Ireland", and we might know instinctively that we're not Ireland yet not know exactly how unlike Ireland we are. It's straightforward to disagree with specific cuts – but maybe, because it's simpler, we're arguing about which tree to cut down when we should be arguing about the whole programme of deforestation.

Michael Mendelson is now an academic at the Caledon Institute of Social Policy, but his relevance for these purposes is his work in government: he was at the centre of fiscal policy during the great Canadian "bloodbath budget", the massive-scale deficit reduction undertaken by Jean Chrétien's liberal command in the mid-90s.

Canada's success was the ideal held up in Tory electioneering: it is rare to effect successful consolidation – to the extent that it's only happened six times among OECD nations since 1970, and one of those was Greece (in other words, it didn't happen but looked as if it had). Apparently Tories did solicit advice from key players of the Chrétien experiment prior to Britain's 2010 election, but only about the mechanics of deficit reduction. Nobody asked whether conditions were right. Nobody asked if it was a good idea to try this at home.

The first problem is that the UK is nothing like Canada. They succeeded because they had vigorous growth, their exports were strong (oil and manufacturing, both to the US, which was also booming) and private-sector demand for labour was outstripping the public sector cuts from the minute they started.

Mendelson explains: "You can't just choose when you're going to cut your debt, any more than you can say 'I'm going to sell my house now and get the same price as I got three years ago'. There's a market. And it's odd that the people who are the most defensive of the market don't seem to understand that fiscal management is also part of the market. You can't just decide that you're going to free up resources that are currently being used by government unless you're sure there's somebody else who's going to buy them."

To edge back a step, our deficit was nothing like Canada's either. Theirs had been rising steadily since 1974, and debt had got to 70% of GDP. Ours was 30% before the financial crash, a figure that is manageable, almost respectable. Mendelson observes: "You're an extremist country, it's odd. You don't think of yourselves that way. But you are. There is no crisis in Britain. Even if you're not a Keynesian, at the very least you'd admit that it is incredibly risky to implement a massive one- or two-year cutback in public-sector spending in the midst of what everybody recognises as the most dangerous period of economic turbulence since the Great Depression. Why would you do that now?"

The totem of the huge New Labour overspending that has brought us all to our knees is fiction. This might explain why the opposition never complained about it at the time. There was an upturn in national debt after the financial crisis and the bailouts, and "you couldn't have carried on like that indefinitely", says Mendelson. "But with some moderate constraint, washing out the transient effects of the crisis, the rate of increase of the debt would have been moderated."

But that is just the beginning of how phoney the coalition's war against debt really is. If we're nothing like Canada we're nowhere near Ireland either. "Ireland didn't have a debt crisis. Ireland had a balanced budget, it had a very low debt-to-GDP ratio. Ireland's problem started because they decided to guarantee all the bank debt. So if you want to look at the Irish problem and say 'we don't want to end up like that', the first thing to ask is 'what's the structure of the UK bank debt?'"

Nobody's asking that because to accuse the banks of anything is taken as the last resort of the deficit denier. It's time to own up to that, instead of backing away. It's time to start denying this deficit properly. Imagining for a second that even with this misinformation and mismanagement the economy pulls through, what's the best-case scenario?

"If the world continues to recover economically you'd probably be looking at continued slow rise in unemployment for another couple of years, a stagnant GDP, you'll probably miss the deficit targets, unless they have been purposefully understated. And then, four or five years hence, you will begin to recover, much more slowly than the rest of the world. Your debt-to-GDP ratio won't be that much better because your GDP won't have grown that much and your debt remains your debt. But sure, you'll be into a period of renewed growth four or five years hence, after a significant amount of pain."

And that growth would have happened anyway?

"Well, it would have happened a lot sooner."

The good news is that I'm out of space to pass on the worst-case scenario.

• This article was amended on May 19 2011 at 8:21am. It originally stated: "Theirs had been rising steadily since 1974, and had got to 70% of GDP." This has been corrected to: "Theirs had been rising steadily since 1974, and debt had got to 70% of GDP."

Edited May 19, 2011 by Tenubracon

[Si1]

"To edge back a step, our deficit was nothing like Canada's either. Theirs had been rising steadily since 1974, and debt had got to 70% of GDP. Ours was 30% before the financial crash, a figure that is manageable, almost respectable."

what a silly woman

[Executive Sadman]

There does seem a leaning towards blind faith (away from logic) in an almost religious fashion within the liebour party.

Reading the letters in a local paper not far from me, the local liebour leader wrote, with no a hint of irony 'the cuts are unneccesary, because debt to gdp was low in 2007'

WTF has 2007 got to do with 2011?

Has he been in a cave the past 4 years?

The economy got well and truly Browned since then.

If anything, given how fast the debt:gdp situation has detiriorated since then i'd say such an argument is one FOR more cuts, not against them.

I did think of writing a response letter, since his started off by swiping at some other councillors ignorance, but couldnt get it down to the 250 words. And liebour lost seats in that ward anyway, so i guess no one bought his crap

[Executive Sadman]

"To edge back a step, our deficit was nothing like Canada's either. Theirs had been rising steadily since 1974, and debt had got to 70% of GDP. Ours was 30% before the financial crash, a figure that is manageable, almost respectable."

what a silly woman

More or less exactly what the guy i mentioned was on about.

Do they have a time machine?

Are they intending to write off all debt incurred after 2007? (ie, the majority of it?)

Or is this more inane waffling that has no economic basis?

[Executive Sadman]

I mean it beggar's belief, it really does.

Doubting figures accuracy is one thing, but intentionally basing economic policies on figures you know are years obsolete...why arent these people in the loony bin?

[The Knimbies who say No]

What a plank.

[happy_renting]

It's scary that the Grauniad is the rag of choice for the nation's educators, when it's journalists are so evidently innumerate.

Debt reduction can only begin after the deficit is entirely eliminated. What's so hard to understand about that?.

[Executive Sadman]

It's scary that the Grauniad is the rag of choice for the nation's educators, when it's journalists are so evidently innumerate.

Debt reduction can only begin after the deficit is entirely eliminated. What's so hard to understand about that?.

Yes, the liebour leader i was on about was a teacher. quelle surprise.

Even scarier, was that he's a maths teacher.

[Executive Sadman]

Anyway, im no longer calling it 'education', i like Celentes word for it, 'regurgitation'

We're producing an country of lame brained bio-robots.

Edited May 19, 2011 by Sadman

[R K]

Excellent article.

It's the same sort of bullsh1t thinking that says 'we can't reverse globalisation'.

Utter garbage.

Taxy taxy (rich) and re-implement the capital controls Thatcher removed and it'll be quickly sorted.

Everything goes back to the WTO nonsense and the rich taking a bigger and bigger slice of the pie.

[Nickolarge]

You guys have such a narrow, blinkered and one dimensional view that debt and deficit reduction is the economic equivalent of the holy grail.....the answer to all our ills that must be placed at the forefront of all monetary policy with little or no regard to any negative consequences.

That is so obviously a totally foolish position to adopt.

[tomandlu]

You guys have such a narrow, blinkered and one dimensional view that debt and deficit reduction is the economic equivalent of the holy grail.....the answer to all our ills that must be placed at the forefront of all monetary policy with little or no regard to any negative consequences.

That is so obviously a totally foolish position to adopt.

I agree up to a point. What I don't understand is how anyone, whether of the left or right, thinks that running an economy on a continuous deficit is anything but an admission of failure... and that's ignoring the issue of whether journalists ought to be allowed to write about the economy when they don't seem to have a firm grasp on the fundamental difference between debt and deficit.

The other side of the coin is that it's hard to have much sympathy with the right when they think you can just reduce public spending without decreasing taxes and expect the economy to improve...

[Injin]

You guys have such a narrow, blinkered and one dimensional view that debt and deficit reduction is the economic equivalent of the holy grail.....the answer to all our ills that must be placed at the forefront of all monetary policy with little or no regard to any negative consequences.

That is so obviously a totally foolish position to adopt.

Pro tip : there are a lot of "savers" on here (and gold/silverbugs.)

In order for "savings" to be any us the status quo must be maintained and debtors crucified.

In order for gold to keep going up in value, the economy has to be further trashed.

An equitable or fair minded solution isn't wanted.

[Injin]

I agree up to a point. What I don't understand is how anyone, whether of the left or right, thinks that running an economy on a continuous deficit is anything but an admission of failure... and that's ignoring the issue of whether journalists ought to be allowed to write about the economy when they don't seem to have a firm grasp on the fundamental difference between debt and deficit.

The other side of the coin is that it's hard to have much sympathy with the right when they think you can just reduce public spending without decreasing taxes and expect the economy to improve...

Financial system design.

The choice is between more debt and utter doom until it gets changed.

[Bloo Loo]

You guys have such a narrow, blinkered and one dimensional view that debt and deficit reduction is the economic equivalent of the holy grail.....the answer to all our ills that must be placed at the forefront of all monetary policy with little or no regard to any negative consequences.

That is so obviously a totally foolish position to adopt.

negative consequences always come when you promise more than you have...either you dont fulfil the promise, or you make life hell for yourself fulfilling it.

either way, the initial promise is where the problem started.

[Injin]

negative consequences always come when you promise more than you have...either you dont fulfil the promise, or you make life hell for yourself fulfilling it.

either way, the initial promise is where the problem started.

Right, and ending that means financial system reform.

No more "money from thin air" piffle, for a start.

[Executive Sadman]

I agree up to a point. What I don't understand is how anyone, whether of the left or right, thinks that running an economy on a continuous deficit is anything but an admission of failure... and that's ignoring the issue of whether journalists ought to be allowed to write about the economy when they don't seem to have a firm grasp on the fundamental difference between debt and deficit.

The other side of the coin is that it's hard to have much sympathy with the right when they think you can just reduce public spending without decreasing taxes and expect the economy to improve...

Debt (and deficits) arent a problem as such surely? if debt in the form of deficits are growing at a slower rate than the economy in general, debt to gdp shrinks over time. Browns problem was that he ignored the private sector debt load due to his ideological hatred of the 'monetarists' and only saw his deficit (the structural one from 2002 on or so)

Unfortunately liebours plans ensure debt will grow at a faster rate than the economy as a whole.

Tories do as well probably, albeit at a slower rate.

Theyre really arguing over nothing much at all.

My problem is whereas the tories at least pay lip service to rebalancing, production and exports, liebour make no secret of their slavish obsession at returning to the bubble economy. Cutting VAT to stimulate and prioritise consumption above production, forcing banks to lend on housing and cutting stamp duty.

Whereas what is really need'ed is no business rates for manufacturing business. Cheaper transport and less regulation.

[Quicken]

I found this comment on the article interesting. Any thoughts?

10 facts which George Osborne doesn’t want us to know because they expose the fiction that Labour spent all the money:

Fact 1: In 2008, the first year of the UK recession, seven of the eight European economies with a higher GDP per capita than the UK (Austria, Finland, Holland, Denmark, France, Germany and Sweden) also spent more as a % of GDP. The single exception was Ireland, which not so long ago Osborne held up as an example to the UK, and which has since suffered economic collapse.

Fact 2: Average annual public spending as a % of GDP was lower in the years 1998-2010 (38%) than in the years 1980-1997 (40%) whereas average annual taxation was the same at 36 % of GDP.

Fact 3: Public spending fell from 38% of GDP in 1997 to 35% in 2000. From 2000 onwards, the Labour government began to spend money on run-down schools and hospitals. Thus public spending increased to 39% of GDP in 2007 – and then to 45% in 2010, as the effects of the financial crisis took hold and the government rightly followed the Keynesian rule that spending increases should be counter-cyclical.

Fact 4: Margaret Thatcher described Blair as “my greatest legacy” because he had rejected what she saw as Labour’s core principle of “tax and spend”. Accordingly, Gordon Brown kept to the previous Conservative government’s spending plans for the first 3 years. But they had been elected to improve neglected public services and so were committed to increase spending. Much of New Labour’s electoral success was due to its appeal to voters who wanted it both ways – better schools and hospitals but no tax increases. Likewise, much of the vitriol now directed at Gordon Brown comes from those same fools.

Fact 5: As for the structural deficit, this was only 3.5% of GDP when Brown left the Treasury in 2007, compared to 4% in 1997 and an annual average of 5.5% in the years 1992-1996. According to IFS data, the UK has run a structural deficit for all but five of the last forty years. In fact, 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 balance the books for 2 out of 17 years. Sure, austerity drones can blather on about economic cycles, but the fact remains that New Labour’s fiscal policies were little different from those of the Thatcher and Major governments.

Fact 6: Brown is often criticised for failing to reduce debt during an economic upturn. Yet Labour reduced the national debt from 42% of GDP in 1997 to 35% in 2008 – when it was lower than in 11 of the 18 years between 1979 and 1997 and lower than corporate debt (250% of GDP) and private debt (70% of GDP).

Fact 7: The national debt has been higher in 200 of the last 250 years than it was 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 8: 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, was 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 9: In 2007, Cameron promised to stick to Labour’s spending plans. Then came the financial crisis, the damaging effects of which he now chooses to deny – unlike Mervyn King, Governor of the Bank of England, who told the Treasury select committee that public spending cuts were the fault of the financial sector (March 1st 2011). But it isn’t surprising that Cameron is reluctant to blame the banks, since he had previously criticised Gordon Brown for regulating them too tightly – and more than half of the Tory Party’s funding comes from the City.

Fact 10: Budget deficits are due to either excessive spending or an inadequate tax take. Since it is clear that the problem is not the former (Facts 1-9), then it must be the latter – which is around 36% of GDP compared to an EU average of 40%, and is likely to be further aggravated when taxes are cut later during this parliament to the benefit of high earners, corporations and banks.

Yes, Gordon Brown failed miserably to rebalance the economy, re-regulate the financial sector, control consumer debt, reverse widening inequality and prevent asset inflation. But that he didn’t overspend is indisputable. Remember the nickname “Prudence” and the praise lavished on him by the Tory press? New Labour’s obsession with market liberalisation put it somewhere between mediocre and poor on the scale of (in)competence, but on the same scale, the present rabble lie on the far side of disastrous.

Edited May 19, 2011 by Quicken

[scepticus]

It's the same sort of bullsh1t thinking that says 'we can't reverse globalisation'.

But you can't, not unless like A b*stard said, "you cut the undersea fiber optic links".

The best form of defense against mercantilist strategies is to not let foreigners hold our government bonds, and the best way of achieving that, arguably the only way, is not to have any on the market.

[Executive Sadman]

Fact 5: As for the structural deficit, this was only 3.5% of GDP when Brown left the Treasury in 2007, compared to 4% in 1997 and an annual average of 5.5% in the years 1992-1996.

What was the increase in money supply in 1992, 1997 and 2007 vs. inflation within the private sector then?

Given the total deficit was only about 6% in 1992 iirc, the peak of the 90s recession, i find a 5.5% "structural" deficit hard to believe.

[Ames]

http://www.kipling.org.uk/poems_copybook.htm

[Quicken]

Fact 5: As for the structural deficit, this was only 3.5% of GDP when Brown left the Treasury in 2007, compared to 4% in 1997 and an annual average of 5.5% in the years 1992-1996.

What was the increase in money supply in 1992, 1997 and 2007 vs. inflation within the private sector then?

Given the total deficit was only about 6% in 1992 iirc, the peak of the 90s recession, i find a 5.5% "structural" deficit hard to believe.

Yes. I don't know enough about the specific numbers, but I was hoping someone here could do a point-by-point demolition of that list.

[interestrateripoff]

The first problem is that the UK is nothing like Canada. They succeeded because they had vigorous growth, their exports were strong (oil and manufacturing, both to the US, which was also booming) and private-sector demand for labour was outstripping the public sector cuts from the minute they started.

So if you don't get strong growth via manufacturing exports etc... then we just keep spending money we don't have?

[SarahBell]

Does "deficit denier" have it's own wiki entry yet?

[Quicken]

So if you don't get strong growth via manufacturing exports etc... then we just keep spending money we don't have?

No, but it probably means we are f**ked either way.