Posts Tagged ‘Borrowing’

John McDonnell and George Osborne: Two faces of Gordon Brown

19/04/2016, 10:56:55 AM

by Jonathan Todd

John McDonnell is bringing to mind the Gordon Brown of the 1992 parliament, while George Osborne is coming to appear the Brown of the 2005 parliament. Where Brown had neo-endogenous growth theory, McDonnell has an entrepreneurial state; both have public investment at their core. Where the later Brown had 10p tax, Osborne has tax credits; too clever by half missteps by Stalins transfiguring into Mr Beans.

“Business investment is falling,” McDonnell noted in a speech last month. “Exports are falling. The productivity gap between Britain and the rest of the G7 is the widest it has been for a generation. Without productivity growth, we cannot hope, over the long term, to improve living standards for most people.”

It is a powerful critique, grounded not in the overthrow of capitalism but in making it work more efficiently. Notwithstanding their divergent accents, you can close your eyes and imagine Brown, as shadow chancellor, castigating the Major government. Or more recently, Ed Balls attacking the Cameron administration.

The fiscal rule that McDonnell espoused in his speech might be interpreted as a crisper version of that which Balls took Labour into the last election with. The practical consequences of the McDonnell and Balls fiscal rules may be little different but McDonnell more explicitly backs capital spending.

“We believe,” McDonnell declared, “that governments should not need to borrow to fund their day-to-day spending.” This hawkish position on current spending contrasts with a more dovish approach to capital spending. “Alongside this, we recognise the need for investment which raises the growth rate of our economy by increasing productivity as well as stimulating demand in the short term.”

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The unravelling of the deficit strategy

22/06/2011, 10:12:16 AM

Labour had a strategy for cutting the deficit – it was called GROWTH. The government’s strategy was to cut spending. The consequence of those cuts is undermining growth, and that now risks blowing apart the deficit reduction.

In last week’s figures, retail sales for the month of May slumped to their lowest level in 16 months.  There is a risk that growth is about to stall.

The OBR provided a pre-June Budget prediction of the 2011 budget deficit under Alistair Darling’s budget. So, with our libraries still open, with EMA, with future jobs fund, no VAT rise etc, the borrowing in 2011 would have been 8.3%.

OBR June 2010 predictions based on Labour’s deficit reduction plan

20102011201220132014
Growth1.32.62.82.82.6
Borrowing10.58.36.653.9
Unemployment8.1%7.9%7.4%6.8%6.3%

Since the June emergency budget, the OBR has consistently downgraded 2011 growth, and increased its prediction of government borrowing. The graph shows the changes.

The current predictions for growth of 1.4% will result in borrowing of 8.1% of GDP, just below that predicted for Alistair Darling’s budget. But, if growth falls to 1.1%, then the government’s cuts will not only all have been in vain, the cuts could plunge the economy into a Japanese-style high deficit deflation.

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The final figures are in for the government’s borrowing: a total of £141.1bn.

21/04/2011, 06:50:41 PM

We made a back of an envelope prediction last month about what we expected the outturn to be and plumped for £135bn on the basis of the arguments we have persistently been making about the dividend from the previous government’s stabilisation of the economy and the growth it enabled.

The OBR also had its chance in the March 2011 budget – with all those models and only eight days left of spending before the end of the financial year – to make their prediction. They went for £144bn. Well, we’ll have to split the difference. The outturn for 2011 was (again) lower, thanks (again) to Labour’s growth dividend.

So the previous Labour government’s strategy of growth-supportive deficit reduction reduced the deficit from a prediction in March 2010 £163bn to today’s outturn of £141bn; a reduction of £22bn.

The new government’s strategy of cutting growth to crowd in private sector investment has meant that the OBR has added a further £35bn that this government will borrow over the lifetime of this parliament. And given that the OBR record is to be wrong, about 10% or so out, this could be a lot higher.

It’s distasteful that the benefit cuts of £7bn were justified by the OBR’s prediction of a £149bn deficit. That June prediction was wrong by £7.9bn –  enough to pay for those benefit cuts. We wonder if they will sleep well tonight in the north Oxford beds.

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