The politics of the deficit.
| Author | Reeves, Rachel |
| Position | Commentary |
Since its formation in May, the Coalition government has made the reduction of the budget deficit a key priority. It started in June by taking a ?6bn axe to programmes including the Future Jobs Fund, Regional Development Agencies, the loan to Sheffield Forgemasters, free school meals extensions and Building Schools for the Future, to name but a few. This was followed by an 'emergency budget' of regressive tax increases and welfare cuts, and will be followed in the autumn by a Comprehensive Spending Review which might slash departmental budgets by up to 40 per cent.
While it is right to make reducing the deficit a priority, there is a clear choice in terms of how to achieve it. This government have chosen to pursue an approach that is damaging to growth, highly regressive and fundamentally unfair. They have cobbled together various justifications--the 'out-of-control' spending of the last Labour government and the mythical 'Greek defence', for example. But these arguments simply do not stack up. And because the justifications do not hold up to scrutiny, it has become increasingly clear that the underlying motivations are not economic, but are instead political and ideological.
Labour's legacy
It goes without saying that the financial crisis and recession have pushed up government borrowing and debt. But, before we go any further, it is important to consider the facts about government finances in the UK.
Analysis by the Institute of Fiscal Studies has concluded that on the eve of the financial crisis 'the public finances were in a stronger position than they had been when Labour came to power in 1997':
Though public spending increased from 39.9 per cent in 1996-97 to 41.1 per cent in 2007-08, over the same period revenues grew by 2.3 percentage points, meaning that total borrowing fell by 1.0 percentage point over this period. With more being spent on investment in 2007-08 than in 1996-97, the current budget strengthened even more -from a deficit of 2.7 per cent of national income in 1996-97 to a deficit of just 0.3 per cent of national income in 2007-08. Meanwhile, public sector net debt fell from 42.5 per cent of national income to 36.5 per cent, as the UK economy grew faster than the accumulation of new borrowing. (Chote et al, 2010) Hardly the statistics of a government whose spending is 'out of control'.
The current focus is on the size of the budget deficit, which is forecast to peak this year at 11 per cent. There is no denying that this is high, by comparison both historically and relative to other OECD countries. But let us look at the structural component. This is the component of the deficit that gives an indication of the deficit that would exist if the economy is at 'trend' growth, therefore stripping out the cyclical effects on the economy. Current estimates suggest a structural deficit in the region of 7.2 per cent in 2010-11 which, as in the case of the budget deficit as a whole, is relatively high. Yet, while the government claim that this is due to Labour's 'reckless' spending, the truth is that this structural component was estimated to be 2.5 per cent in 2008, and going into the recession the UK had the second lowest debt-to-GDP ratio in the G7.
The budget deficit that we are tackling now is predominantly the result of the financial crisis. In particular, the fall in GDP has, by definition, caused the deficit as a share of GDP to rise. But to bring down the debt and deficit burden requires not a 'slash and burn' approach, but a strategy for growth. If the government rebalances the economy by pursuing a robust growth strategy, we will generate both the jobs we need and the deficit reduction that the government claims is its priority. The government act as if the only way to reduce the structural deficit is through austerity. That is economically false and misleading. The structural component of the deficit is not an independent variable, it is a function of the strength and sustainability of the economy. Get the economy out of recession and you eliminate the cyclical component of the deficit. Deliver a stronger, more durable economy and you can bring down the structural component too.
The 2008-9 recession was the worst, here and globally, in sixty years, and it was predicted by no one--not even Vince Cable! The Labour government responded to the crisis with fiscal stimulus and support for the banks. This, combined with the usual effects on GDP of a recession, meant that the budget deficit rose. But without swift action we simply would not have even the tentative recovery that we see today. This recovery is not guaranteed, and ensuring growth is the key to the reduction of...
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