I hope I’ve explained here the difference between ‘debt’ and ‘deficit’, and I’ve tried to do this because the two words seem to get mixed up a lot. I remember a few news items in the period leading up to the general election last May where journalists and politicians talked about ‘getting the country’s debt under control’ or even ‘reducing the national debt’. What they actually meant was ‘reduce the national deficit ’, so that we were still getting into more debt, just not as quickly as before. The Labour Party’s manifesto for the 2010 general election set a target to ‘more than halve the deficit over the next four years’ (see page 11). I’m cynical about politics-speak so forgive me for taking their minimum figure of halving the UK’s national deficit. Working from that 2009 deficit of £159 billion, we can rephrase Labour’s target as saying ‘we will take action so that at the end of 2013 the UK will still be losing money, but at a rate of less than £80 billion per year’. Assuming they knocked £20 billion off the deficit each year, that would leave the UK with a national debt of something like £1,300 billion at the end of 2013.
But anyway, that all sets the scene for my latest musing, which is about how seemingly intelligent people can come to such hugely different views on the best response to the national deficit and debt. The new (does it still count as new?) government believes that the deficit needs to be reduced pretty quickly and they have their share of commentators, journalists and so on applauding their stance. And, a little to my surprise, it seems that the majority of the population agrees for now.
This graph is from a report released today by Ipsos MORI. (Click here and go to page 23.) People were asked whether they agreed or disagreed with the statement, ‘in the long term, this government’s policies will improve the state of Britain’s economy’. And taking the percentages of people who agreed or disagreed, 23% more people agreed.But there are also many joining Labour in arguing forcefully and loudly that the government’s approach will end in disaster, bringing on the dreaded ‘double-dip recession’. Click here and here for a couple of recent examples from the Guardian. It seems to me that both the ‘cut now’ and ‘cut later’ groups want basically the same thing; for the UK to return to lasting economic growth as soon as possible. So how is it that they’ve come to pretty much opposite opinions as to how best to reach this point? I thought economics was supposed have a strong scientific, objective basis? Help me out, folks!
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The science of economics, or more accurately the ability of economists to successfully predict what will happen, is dependent on the size and quality of the data available. When the dataset is limited, as all datasets are, then assumptions are made, sometimes large ones, and it is here that the differences will occur. A lot of the time politicians choose a particular model as proposed by their favoured economist (Keynes, Friedman, Stiglitz etc) and try and fit the available data to it.
ReplyDeleteThere is also the problem of the huge number of variables that come into play, many of which are out of the control of the government. I tend towards the view that the differences between the Labour and Conservative strategies at election time (the differences are greater now) were not actually all that great, and that the far greater influence on the UK's finances would be how the global economy fared.
As I recall Labour were only proposing a year wait before starting cuts, compared to the Conservatives, and that the depths of the cuts proposed overall were broadly similar. The bigger differences were more to do with where the cuts would occur, but in ten years time would I have noticed the difference? I was not convinced.
What I found particularly frustrating about the debate at the time of the election, and since, is that it became (if you'll pardon the expression) something of a willy waving competition about who was willing to cut more. There were no serious proposals about encouraging British industry and using the increased taxes and reduced unemployment that a resurgent manufacturing sector would bring to bring down the deficit.
'A lot of the time politicians choose a particular model... and try to fit the available data to it.' Sad but probably true for a lot of policies.
ReplyDeleteAs for the willy waving competition, it eventually got to that stage but for a long time the Labour government was saying there wasn't really a problem, no? It was only quite near election day that Gordon Brown could bring himself to say that cuts would be needed, wasn't it?