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.