The biggest confusion in British politics
Johann Hari has an article on “the biggest lie in British politics“. I tweeted that he could have done a better job of clearing up confusion between the debt and the deficit, and then received a few requests for elaboration. So here goes.
Johann’s argument is that the government is frightening us with tales of incredibly high debt, whereas in fact the debt is not high. And furthermore, that accumulating debt is a good idea right now because that will stimulate the economy. (I think he states the cases for stimulus with a certainty that the evidence doesn’t support, but I won’t say he’s wrong. He may be right.)
I certainly agree that UK government debt isn’t especially high. I may have missed something, but most of the government claims I’ve seen focus not on cutting debt but on cutting the deficit. Certainly nobody is envisaging cutting the debt any time soon.
What’s the difference? The deficit is the amount of new debt accumulated in a year, or alternatively, the amount by which government spending exceeds taxes. Johann didn’t mention the deficit in his piece. If he had I am sure he would have said that while UK government debt isn’t high, the deficit is high – extraordinarily high. So Johann is getting what he wants: a massive fiscal stimulus by a government spending far more than it takes in in taxes.
The government’s position is that the deficit is so high that it must be cut back quickly. Markets may not be worried by absolute levels of debt, which are low to middling, but will worry if it seems that the government is utterly incapable of controlling spending. Although the deficit (and stimulus) will continue for a while, it’s going to be phased out. In a few years there will be no deficit and no stimulus, and debt will no longer be increasing. I certainly hope the recession will be long over by then. I’m making no promises.
A sensible alternative view is that while the deficit (and stimulus) cannot continue indefinitely it can continue for a while, and that cuts should come later. A separate alternative view is that that if the deficit has to be reduced it should be reduced by higher taxes and tighter enforcement, not by spending cuts. I suspect Johann would support both. Fine.
10 Comments
Jon says:
Thanks for this clear and level-headed response and explanation.
29th of March, 2011PS – radio 4 is missing More or Less. Get back on the case!
Dan Smith says:
so how does our current deficit compare to previous ones? is it really bad? hit us with some numbers and facts
29th of March, 2011Simon says:
Surely if Govt spending exceeds taxes, then that is also a debt? If spending is higher than taxation, then the money must come from lenders, so therefore it is a debt.
29th of March, 2011R. Goodacre says:
I understand that national debt stands at more than £900 billion (some estimates put it much higher than that when you count items that G Brown deliberately kept off the balance sheet). At present it costs £44 billion a year just to service that debt, and that figure is forecast to increase to £50bn next year (about 40% of the NHS budget).
How can any serious commentator pretend that these sums are trivial? Where is the moral justification in loading the costs of repaying this debt, so irresponsibly incurred, on future generations?
29th of March, 2011Ian Boltz says:
Dan – from the Guradian
http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data#
29th of March, 2011Lovallo Marshall says:
Pretty sure that the government are the ones spreading this confusion, not Johann Hari. Their pre-election advertising focused on “Gordon Brown’s debt – hasn’t it grown” and they insist on keeping on saying that Britain is “bankrupt”. Clearly, it doesn’t really matter whether a country is bankrupt or not, what matters is whether it can borrow – and Britain still can, at very good rates. By changing casually between “bankruptcy” and “deficit” the government seem none too eager to eradicate the confusion. So if anyone is spreading confusion it is Osborne, and Hari is quite right to call him on it – this deficit / debt distinction is entirely true but a little pedantic, being irrelevant to the original article’s argument that debt is unproblematic.
29th of March, 2011Gally says:
That’s a re-writing of an old piece by Hari. I was appalled by it first time round. You (and he) are right that the level of debt isn’t especially high historically. However, that rather ignores the fact that for the majority of the past 250 years Britain has either been at war or recovering from one. The only prolonged period where the debt was lower was the late Victorian age where we were benefiting from being the leading industrial power…until the Empire started to become a burden rather than a source of cheap commodities.
Debt starts rising around the 1740s as we expand the Empire, and then peaks once just after the Congress of Vienna and again just after the Korean war. Subsequently we have a period (Tory administration of 50–64) where it’s brought massively under control,and then remains low (we now have a higher level of debt than at any time since 1970).
It’s quite disingenuous, therefore, to compare the current level of debt after a serious period of peacetime–(no, not ignoring Iraq and Afghanistan, but these are revenue-funded wars, not debt-funded ones) with most of the past 250 years.
It’s likewise disingenuous of Hari to use where the UK stood in relation to its G7 peers in 2007. What’s more interesting is the relative levels. All of the other countries of the G7 had done more to reduce their debt AND deficit during the preceding decade than Britain. We could and should have been in a better position (fullfact.org’s report on the economy is interesting here)
29th of March, 2011Schrankrückwand says:
Re: R. Goodacre:
The idea is that investments made by this generation benefit the future generation. It’s an investment, so the current generation bears the cost and the future generation reaps the benefits. Think of investments that increase productivity or improve social services.
This is one reason why it’s very justifiable to incur a modest deficit — the allowed deficit of 3% under the Maastricht rules are pretty much in line with the 3% technological progress we have seen over the long term.
Plus, without public debt, there would be no easy way for markets to calculate the risk-free interest rate, something that is very, very important to know.
29th of March, 2011Andreas Moser says:
What cuts? The UK government is still spending more than it takes in: http://andreasmoser.wordpress.com/2010/11/15/uk-budget-what-cuts/
31st of March, 2011Cahal says:
But most of the deficit is a result of low tax revenues and high welfare receipts, not high government spending. Cutting too fast will only exacerbate this problem.
1st of April, 2011