The deficit: it’s double or quits all round

by Jonathan Todd

The politics of the deficit has had two phases. The exposure on the FT’s front page last Monday (19 September) of a £12bn hole in public finances means we are entering a third.

The June 2010 budget divided the first and second stages. Up until then, and throughout the general election, the debate focused on whether to cut in 2010. Labour and the Liberal Democrats warned that Conservative plans to do so were reckless. Then we lost the election and the Liberal Democrats helped the Conservatives implement these cuts.

The debate that was long needed – how to approach the deficit beyond 2010 – didn’t open up until the June 2010 budget. The imprecision of Labour’s plans kept a lid on this debate until then. George Osborne lifted this lid with all the force of a dominatrix once he had the bully pulpit of the treasury. The message that Labour had mismanaged public finances and that Osborne would fix this over this parliament was incessant. It is, however, starting to become clear that Osborne won’t be able to do this.

The third stage of the deficit debate is about acknowledging this failure. The £12bn hole in public finances is a consequence of growth not keeping pace with that anticipated by Osborne. Anaemic growth produces shrivelled tax returns, which are the stuff of public finance holes. There is some debate about whether the holes are really so. But, short of sudden improvement in our growth, there will be inarguable holes before too long.

All parties face choices.

Will the Conservatives insist upon more cuts and/or tax rises in this parliament in an attempt to fill the holes and fulfil their commitment to close the deficit this parliament? Is it feasible for Osborne to not bite this bullet having staked so much economic and political credibility on the fundamental importance of closing the deficit?

Will the Liberal Democrats be prepared to support the Conservatives if they decide upon more austerity this parliament? Given that nothing binds the governing parties together like the deficit, will the Liberal Democrats see in a dispute on more austerity a chance to un-lash themselves from Osborne’s mast? When Chris Huhne speaks of a “sustainable structural deficit” does he still mean one that is eliminated in this parliament or is he laying the ground for the collapse of the government and an election earlier than 2015 on relatively favourable boundaries for the Liberal Democrats?

To what extent should Labour proclaim the holes as a justification of our warnings that the government’s cuts are too deep and fast? We are entitled to feel that we’re being proved right but, recognising that the public broadly supports deficit reduction, how successful would a “we told you so” strategy be? And where does the deterioration of public finances leave our commitment to halve the deficit this parliament? What will Labour’s line on deficit closure be if we decide that economic conditions have made halving the deficit over this timescale unfeasible?

It’s double or quits all round: The Tories give us more austerity or default to plan b; the Liberal Democrats hug the Tories and more austerity closer or reject them entirely; and we recommit ourselves to deficit reduction or simply argue that growth must be prioritised above all else.

Ed Miliband gave an indication on his thinking in his pre-conference interview with the New Statesman. “If growth had carried on, it would have been easier to halve the deficit over four years”.

This implies the following argument: halving the deficit over four years was Labour’s objective, lack of growth makes it harder to satisfy this objective and this lack is the consequence of going too far, too fast.

However, this doesn’t say, given present circumstances, how far Labour now thinks the deficit could and should be closed this parliament or how this closure should be achieved. This clarity may be required for the draw on the deficit that Douglas Alexander and Jim Murphy have long argued that Labour needs.

Ed Balls, according to the Guardian, “emits the kind of excited energy of someone convinced he’s on the verge of being vindicated”. He proclaimed to conference yesterday the failure of the government’s strategy, which the £12bn hole evidences and of which he has long warned. Alexander and Murphy have also said that Labour needs a win on growth. Balls spelled out the elements of this victory – a VAT cut, use the bankers’ bonus tax to get young people back to work and build new homes.

Yet, if the third stage of the deficit debate is to at least bring Labour the draw sought by Alexander and Murphy, Labour cannot just expose the government’s failure, we must also, as Balls recently acknowledged, “take the tough decisions to tackle the deficit in a balanced way”. The third stage of the deficit debate may be about the Tory answer to the deficit breaking down, but Labour still needs a strong answer of our own.

Jonathan Todd is Labour Uncut’s economic columnist.


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5 Responses to “The deficit: it’s double or quits all round”

  1. Nick says:

    Forget the deficit. How are you going to address the debt?

    There is a deceit practised by politicians that the deficit is the problem. It isn’t, its the debt.

    You owe us out state pensions, our civil service pension, our state second pension. You owe people for PFI, for nuclear decommissioning, and you’re going to lose money on the guarantees. Th

    Total 6,000 bn, rising with inflation.

    Borrowing 1,000 bn on top.

    Government income 550 billion and falling with GDP.

    That doesn’t take into account the really big problem, what to do with people with no pension. MIG, housing benefit, free health care, … a minimum of 13K a year tax free. Current value of that promise, 13,000 billion and rising with inflation. Still to come online in the future.

    You’ve bust the government, and just like Skilling at Enron you have to rely on accounting tricks and not talking about the dirty secret.

    The problem comes as these fall due. You won’t pay people their pensions because you can’t. Other’s won’t pay the money because it means paying other people and not getting services in return for your tax.

    12bn? Peanuts. Just like the banker who is worried about his rolex after losing all fall limbs, you’re arguing over the fluff.

    Meanwhile you’re tax policy is working. Twitter have just joined other companies in not setting up in the UK. 50% of nothing is nothing.

  2. harry says:

    nick you repay the debt by eliminating the deficit and running a surplus. so the way to fix the debt is to first fix the deficit. i think most people worked out the difference between debt and deficit in 2009, but tories on the internet continue to labour the point, no pun intended.

    (moreover you’re wrong, most of the national debt doesn’t rise with inflation, only index-linked bonds (about 1/4) do.)

  3. harry says:

    on-topic:

    i don’t think osborne promised to eliminate the deficit over the parliament, he only committed to eliminating the structural deficit – this is what the deficit would be if we strip out the effects of fluctuations in economic growth. so if we have lower than expected growth, the deficit will be higher, but the structural deficit will be the same, and osborne can still hit his target.

    but. the 12bn increase mentioned in the FT is also an increase in the structural deficit. this means we can’t cut this part of the deficit through growth. which means if osborne is to hit his target, he needs 12bn more in cuts/tax rises to make it work. and labour can’t promise to solve the problem through higher growth either. a tricky situation all round, really.

    something to bear in mind is that it’s incredibly difficult to work out what the structural deficit is. for starters you need to work out what the long-term trend for UK GDP is, which may well be lower than before because of the effects of the financial crisis, we can’t really tell. so it could be that a future calculation comes up with a smaller number, or an even bigger one.

  4. Nick says:

    nick you repay the debt by eliminating the deficit and running a surplus. so the way to fix the debt is to first fix the deficit. i think most people worked out the difference between debt and deficit in 2009, but tories on the internet continue to labour the point, no pun intended.

    (moreover you’re wrong, most of the national debt doesn’t rise with inflation, only index-linked bonds (about 1/4) do.)

    ================

    So this national debt. You’ve no intention of paying people’s pensions then?

    We don’t owe the civil service any pensions. Not a debt, since its not gilts.

    Likewise with the state pension. No intention what so ever of paying those. Not gilts, not a debt, so we can just axe that too. Since its not a debt, not a problem with not paying it.

    That’s the problem. It is fraudulent. You are advocating fraud. If we don’t have to account fully for what we owe the people, then we can carry on.

    Likewise with structural versus total deficit. Again it’s yet another fraud. It’s giving politicians the fig leaf to carry on spending other people’s money.

    Lets take you second part. Cut the deficit with growth. Lets look at a concrete example of what that means.

    1. We take Richard Branson. Good at growth. We take all his money, get he can start again. The government needs new money, so it has to sell it off to overseas investors or its just taking money from the purchasers. Raises a billion. That lasts two days. It’s fixed the deficit for two days.

    Now we hope that Richard can rebuild that billion in two days, without taking any money out of the economy. He also needs to generate all the taxes that the government was expecting, or you need to tax those overseas investors. That’s not going to happen so you move onto the next billionaire.

    Phillip Green has done a runner because taxes were so high, so how about the Duke of Westminister. More money there. Take Belgravia, and flog it off to Arabs and Chinese and Russians. Might not raise quite what you are expecting. Now what, you’ve plugged the gap for a week.

    At this point people have realized your taking the cash. They won’t buy.

    So lets see. What about the other end? Getting people back to work.

    Average person on benefits takes 12.5K a year. Housing benefit, and all the other bits. On minimum wage, they are paying 2.5K in taxes. So roughly, for each person back to work its a 15K saving. Get a million back (with no spending) and its 15 bn. 10% off the deficit.

    Bluntly, there aren’t enough unemployed to take off benefits to get growth to solve the problem.

    If there were the jobs to get a million back to work, given the track record most would go to migrants, new migrants. Particularly with the PIIGS in big trouble, lots of migrants from those countries will arrive anyway on speculation.

  5. To Nick and Harry:

    Arguing over deficit or debt makes no difference to the position we are all in at present. If the markets lose confidence in this country’s policies to address both of these issues, interest rates on our debt will rise adding to both. That is damage limitation but it represents our only option until there is some glimmer of light such as a US recovery or a resolution of the Euro crisis.

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