Bolitics The New Condem Government

[drat01]

The case for austerity measures rests on the Great Debt Lie and the myth of the structural deficit.

Firstly, some facts which blow apart the fallacy that the present economic crisis is the result of excessive spending leading to unsustainable debt:

• Average annual spending and taxation were both lower as a proportion of GDP under the last 3 Labour Governments (38% and 35.4%) than under the 4 Conservative governments which preceded them (40% and 35.5%).

• National debt was lower as a proportion of GDP at the start of the financial crisis in 1998 (36%) than in 1997, the last year of John Major’s Conservative government (42%).

• In 2010, the UK’s national debt as a proportion of GDP (52%) was the second lowest of the G7 countries.

Secondly, 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 – caused by the financial crisis and consequent recession and likely to be aggravated when taxes are cut later during this parliament to the benefit of high earners, corporations and banks. As The Investors Chronicle put it (15th February 2010):

“The idea of a structural deficit serves a political rather than analytical function. It's a pseudo-scientific concept which serves to legitimate what is in fact a pure judgment call - that borrowing needs cutting.”

Osborne began to revive the myth of the structural deficit in June 2010, when it was becoming clear that the deficit would be 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. The fact that the US, which has made no serious deficit reductions, has suffered almost the smallest recession of any major developed economy whereas Ireland and Greece have suffered the worst because of drastic spending cuts further undermines the government's claim that radical austerity measures are needed – and shows that Osborne’s main aim is not to reduce the deficit but to accelerate the transfer of wealth to the already rich.

And if anyone still wants to talk about a “structural” deficit, then they should remember that the last 3 Labour governments managed to earn enough to cover their spending for 4 of their 13 years in office, whereas Thatcher and Major only managed balance the books for 2 out of 17 years.

[peterms]

The case for austerity measures rests on the Great Debt Lie and the myth of the structural deficit.

Firstly, some facts which blow apart the fallacy that the present economic crisis is the result of excessive spending leading to unsustainable debt:

• Average annual spending and taxation were both lower as a proportion of GDP under the last 3 Labour Governments (38% and 35.4%) than under the 4 Conservative governments which preceded them (40% and 35.5%).

• National debt was lower as a proportion of GDP at the start of the financial crisis in 1998 (36%) than in 1997, the last year of John Major’s Conservative government (42%).

• In 2010, the UK’s national debt as a proportion of GDP (52%) was the second lowest of the G7 countries.

Secondly, 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 – caused by the financial crisis and consequent recession and likely to be aggravated when taxes are cut later during this parliament to the benefit of high earners, corporations and banks. As The Investors Chronicle put it (15th February 2010):

“The idea of a structural deficit serves a political rather than analytical function. It's a pseudo-scientific concept which serves to legitimate what is in fact a pure judgment call - that borrowing needs cutting.”

Osborne began to revive the myth of the structural deficit in June 2010, when it was becoming clear that the deficit would be 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. The fact that the US, which has made no serious deficit reductions, has suffered almost the smallest recession of any major developed economy whereas Ireland and Greece have suffered the worst because of drastic spending cuts further undermines the government's claim that radical austerity measures are needed – and shows that Osborne’s main aim is not to reduce the deficit but to accelerate the transfer of wealth to the already rich.

And if anyone still wants to talk about a “structural” deficit, then they should remember that the last 3 Labour governments managed to earn enough to cover their spending for 4 of their 13 years in office, whereas Thatcher and Major only managed balance the books for 2 out of 17 years.

Found it!

M. White comment, 10.22.

[Awol]

From the actual article rather than the comments section:

..Labour leadership's central claim that nothing was wrong with Britain's model of economic growth before the crisis and nobody was warning about a "structural" hole in the public finances. Yet last month the IMF revealed that under Ed Balls's guidance the Treasury repeatedly attempted to silence IMF criticism of the UK's structural deficit. You can't attempt to silence something that doesn't exist.

And you can't silence the OECD, which said that the UK's structural deficit went from second best in the G7 in 2000 to the worst in 2007. Britain's own independent IFS – the Institute for Fiscal Studies – put it bluntly: "Labour entered the current crisis with one of the largest structural budget deficits in the industrial world." Even Tony Blair has now admitted that "from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit".

Either the Chancellor is lying about the OECD's comments on the structural deficit or CiF poster M.White is talking out of his botty.

*Googles*

The Treasury

According to the OECD, by 2007 the UK had the largest structural budget deficit in the G7

Ah, you lose M. White.

[ender4]

edited a rash comment.

[ender4]

you know what annoys me about governments....

Labour takes from the middle class to give to the poor.

Tories take from the middle class to give to the rich.

me in the middle class gets f00ked.

[snowychap]

The comment The idea of a structural deficit serves a political rather than analytical function. that Michael White (I guess it's him) refers to comes from Chris Dillow.

Feb article (which I'm pretty sure has been quoted on here before)

:

The myth of the structural deficit

In a letter to the Sunday Times, a group of economists have asked the next government to "set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report." This raises one of my gripes - that the notion of a structural budget deficit is unhelpful.

Sure, the thinking behind it is reasonable. The idea is that recessions naturally increase government borrowing, by increasing spending on unemployment benefits, and by reducing tax revenues. But how can we be sure that this is the only reason why government is borrowing? This is where the structural budget deficit comes in. It is the amount the government would borrow, if the economy were operating at its trend level.

To measure it, we first estimate how far output is below its trend level - the output gap. Then we estimate the sensitivity of taxes and spending to GDP. We then multiply these sensitivities by the output gap. The structural budget deficit drops out.

There are, though, four problems with this.

1. We don't know what the output gap is. Economists agree that the recession has permanently destroyed some potential output. This means the output gap is less than it would be if the recession were merely due to weak demand. But how great is this destruction? The Treasury puts it at 4.5 per cent of GDP*. If this estimate is too high, then the output gap is larger than the 6.5 per cent it estimates. If it's too low, the output gap is less than this. This matters, because the larger is the output gap, the larger is the cyclical component of the budget deficit, and so the smaller is the structural element. The problem is, it'll be years before we know what the output gap really is. (If indeed, the idea of an output gap is meaningful at all, but that's another story.)

2. There's an anchoring problem, such that it will often seem as if we have a structural deficit when the government borrows a lot.

Let's do a quick sum. The Treasury estimates that public sector net borrowing in 2009-10 will be £178bn, or 12.6 per cent of GDP which stands at £1409bn, with £498bn of receipts and £676bn of spending. It also estimates that output is 6.5 per cent below potential. So, what would borrowing be when output returns to trend?

Let's say taxes rise 1.5 times as fast as GDP, as growth brings some people into jobs, and others into higher tax brackets, and because some temporary fiscal measures, such as the cut in VAT, cease. Revenues then rise 9.8 per cent (1.5 x 6.5), to £547bn. And let's say this growth saves us £20bn in welfare benefits and temporary spending measures such as the car scrappage scheme, so spending drops to £656bn. The deficit is therefore £109bn, or 7.3 per cent of GDP (This, remember, has grown 6.5 per cent from £1409bn to £1500bn). This is our structural deficit.

Sounds big? Yes, but this is a simple arithmetic effect of the fact that we're starting from high spending and low taxes and so applying reasonable growth rates to both naturally leaves us with a big gap.

We get the same problem, in reverse, when the government runs a surplus. In 1989 and 2000, it looked as if the government had a structural surplus, because applying reasonable-looking growth rates to high receipts and low spending yielded continued surpluses. We know now that those calculations were mistaken. So why should we be confident about similar calculations today?

3. Policy and the cycle are not separable. The notion that they are is an ideological fiction; it assumes that the government is merely a wise manager, resistant to political pressures.

One problem here is that economic growth, far from reducing public spending, might increase it. It might increase pressure to raise spending. This would happen if a healthy labour market made it hard to for the public sector to retain and attract staff, in which case it would need to raise pay. Alternatively, prosperous voters might ask why they see "private affluence, public squalor", and so demand better schools and hospitals; remember, increased government spending was popular 10 years ago, for precisely this reason. If the government responds to such pressures as the economy grows, is the budget deficit increasing for structural reasons. or is it just that the cyclical improvement in the deficit is less than thought?

4. The government doesn't have full control over its borrowing. Its borrowing is instead the counterpart of private sector net lending.

Imagine two different ways in which the economy might be on trend. In one, there's a boom in investment and housing, so the private sector is borrowing a lot. The government therefore runs a surplus. In the other, the economy is doing well because cash-generative businesses are thriving. Companies are therefore saving out of high profits, so government is borrowing.

In our first economy, it'll look as if the government has a structural surplus. In the second, it'll look as if it has a structural deficit. But in fact - ex hypothesi - the difference between the two economies lies in what the private sector is doing, not the public sector.

And this is no mere theoretical construct. I've just described the difference between the late 90s and mid-00s.

For these reasons, I don't think the idea of a "structural" budget balance is at all helpful.

It's not even useful in helping us on the key issue: will bond markets continue to want to lend to the government?

It's quite possible for there to be a large structural deficit, and yet bond markets are relaxed - if, say, debt is low or if investors expect the government to take strong action to cut the deficit. Equally, it's possible that the deficit is cyclical, but that bond markets are scared by it - if, say, they expect the recession to last a long time, or if the deficit adds to already-mountainous debt.

I fear, then, that the idea of a structural deficit serves a political rather than analytical function. It's a pseudo-scientific concept which serves to legitimate what is in fact a pure judgment call - that borrowing needs cutting. By all means, make this call. Just don't think that talk of a structural deficit helps enlighten us.

June blog from Stumbling & Mumbling:

What structural deficit?

Ralph Musgrave asks a good question: is the structural budget deficit a useful concept? I agree with him that it’s not.

The structural deficit is the one that would exist, if output were at its trend level. This means that its measurement depends upon three unknowns: the size of the output gap; the response of spending to moves in GDP; and the response of revenues thereto. All these are uncertain, as the OBR acknowledges:

Forecasts of cyclically-adjusted aggregates are subject to particular uncertainty, as they depend on projections of the current position of the economy relative to trend. They also rely on analysis of the effect of the economic cycle on borrowing from previous cycles, which may not hold in the future.

To get a rough idea of these uncertainties, let’s do some sums.

The OBR uses the Treasury’s procedure (pdf) for estimating the structural deficit. This says that a 1% output gap, after two years, causes current spending to rise by 0.5% of GDP and causes revenues to fall by 0.2 per cent of GDP.

Now, the OBR estimates that the output gap was 1% in 2008-09 and 4.1% in 2009-10, and that cyclical adjustment reduces the deficit from 7.6% to 5.3% of GDP.

But let’s say the output gap is one percentage point larger in both years, and that revenues and spending are each 0.1 percentage points more sensitive to the output gap.

These small tweaks reduce the deficit by a further 1.5% of GDP this year, to 3.8%.

This means that the fiscal tightening which Labour put in place is sufficient to cut the cyclically-adjusted deficit to just 0.1% of GDP by 2014-15, on the OBR‘s numbers. Which eliminates the need for a large fiscal tightening.

There’s another reason I don’t like the idea of a cyclically adjusted budget balance. It’s that, as Ralph says, the budget balance depends upon the savings of the private sector.

To see the problem, imagine output were on trend - that is, higher than it is now. This could be because the private sector goes on an investment boom, and its investment exceeds savings. If so, the public sector will have a surplus, as the counterpart of this. By definition, this will be a cyclically adjusted surplus. However, it could also be that output is strong because of strong overseas demand and UK firms save the profits generated by this. In this case, the private and foreign sectors together might have a financial surplus, so the government will have a cyclically-adjusted deficit. But on both cases, ex hypothesi, fiscal policy is the same.

Cyclical adjustment, then, does not necessarily tell us whether fiscal policy is loose or tight.

So, could it be that the notion of a structural deficit is a pseudo-scientific concept, intended to give a cloak of respectability to what is, in essence, a narrowly political desire to cut public spending? For more on this, see this paper by Randall Wray and Yeva Nersisyan.

[peterms]

From the actual article rather than the comments section:

..Labour leadership's central claim that nothing was wrong with Britain's model of economic growth before the crisis and nobody was warning about a "structural" hole in the public finances. Yet last month the IMF revealed that under Ed Balls's guidance the Treasury repeatedly attempted to silence IMF criticism of the UK's structural deficit. You can't attempt to silence something that doesn't exist.

And you can't silence the OECD, which said that the UK's structural deficit went from second best in the G7 in 2000 to the worst in 2007. Britain's own independent IFS – the Institute for Fiscal Studies – put it bluntly: "Labour entered the current crisis with one of the largest structural budget deficits in the industrial world." Even Tony Blair has now admitted that "from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit".

Either the Chancellor is lying about the OECD's comments on the structural deficit or CiF poster M.White is talking out of his botty.

*Googles*

The Treasury

According to the OECD, by 2007 the UK had the largest structural budget deficit in the G7

Ah, you lose M. White.

M. White is correct in what he says.

[drat01]

hahaha, drat got pawned!

What a silly comment

How exactly have I got "pawned" (whatever that is supposed to mean). The article is a view point that was being published that adds to a debate. If they were "my" comments why would I have quoted them

Never mind though eh just as long as you are a happy little soldier

Note: Thanks Peter for the link, I did miss it off the original

[ender4]

What a silly comment

How exactly have I got "pawned" (whatever that is supposed to mean). The article is a view point that was being published that adds to a debate. If they were "my" comments why would I have quoted them

Never mind though eh just as long as you are a happy little soldier

Note: Thanks Peter for the link, I did miss it off the original

well, it seems that you intentionally missed out the link, therefore making it seem that it was an article quoted which contained facts.

whereas the posters below you found out that it wasn't an article, but actually just some random comment from a random person, and that he was making stuff up.

[drat01]

Ender - I neither have a clue who you are nor particularly want to know, but the fact that you are obviously a world leader in the art of mind reading and can make such a rash statement about my supposed intentional omission of a link, makes me wonder what you are doing responding to any posts as you obviously know what all are thinking. I admire that skill, but of course you probably knew that.

Maybe my life has other things in it and a few quiet moments reading articles from various sources and then posting them on here, which has provoked a few responses was not my intention. The article is a good read, as are many in the Grud, and the responses likewise.

Adieu

[snowychap]

he was making stuff up.

I don't believe the person commenting was making stuff up.

[ender4]

Ender - I neither have a clue who you are nor particularly want to know, but the fact that you are obviously a world leader in the art of mind reading and can make such a rash statement about my supposed intentional omission of a link, makes me wonder what you are doing responding to any posts as you obviously know what all are thinking. I admire that skill, but of course you probably knew that.

Maybe my life has other things in it and a few quiet moments reading articles from various sources and then posting them on here, which has provoked a few responses was not my intention. The article is a good read, as are many in the Grud, and the responses likewise.

Adieu

hey apologies, i wasn't trying to start a fight or argue.

i just said what i thought when i read the responses to your post, however stupid (or not) it might have been.

[drat01]

It seems Cameron must have a twin brother, in 2009 he spoke to the nurses about the problems that arise out of re-orgs to the NHS, now in power Dave2 is proposing just that

[peterms]

Things fall apart, the centre cannot hold

That atmosphere of unity has now dissipated. Not one Tory cabinet member turned up to show support for Chris Huhne when he had to face the Commons. Newsnight could not find a single minister to bat for Ken Clarke. The Tory whips couldn't stop – or didn't even bother trying to stop – Conservative MPs from monstering Nick Clegg. There are Tories who now refer to the Lib Dems as "yellow bastards", a feeling amply reciprocated by some of Mr Clegg's MPs. Dr Fox's leaked letters play to the rightwing gallery of the Tory party at the expense of Conservative colleagues. The government is beginning to factionalise and ministers behave as if it is every man for himself.

[tonyh29]

IMF

the same IMF that recently said of Gordons bid to be it's new leader "It would be difficult to have someone so responsible for the fiscal crisis in the UK at the helm of the IMF,"

[drat01]

:-) oh Tony you are so selective on your quotes. That quote is attributed to the Swedish Finance Minister, so not really the IMF saying that is it?

Anyway nice to see one of your so called successes of this gvmt, the abolishing of the not even introduced ID card are replacing it with ........... an ID system!!

Coalition builds new national identity system

Oops

Maybe as Cameron now seems to think that Jesus is a fully paid up member of his big society idea :-) God knows all so we wont actually need it

[Jon]

Maybe as Cameron now seems to think that Jesus is a fully paid up member of his big society idea :-) God knows all so we wont actually need it

Ian - can you give me a link to this story mate? I have seen a great online cartoon about it, but don't know the story.

[tonyh29]

selective on your quotes

"Mr Cameron told church leaders they would be “absolutely right” to claim Jesus founded the Big Society 2,000 years ago, joking: “I’m not saying we’ve invented some great new idea here.”

it's not like he said "only God can judge me " or anything arrogant and deluded like that was it

[drat01]

Try the mirror one Jon - Big Society :-)

[Awol]

Try the mirror one Jon - Big Society :-)

Or this: Church Times article, but without the faux outrage so beloved of the Sun's bastard cousin.