Guest blog by Plaid Hightown
Since the banking crisis we have been told that this is the gravest economic problem the world has face since the Great Depression.
In 1921 the UK economy was undergoing a post war boom, admittedly with high levels of debt due to expenditure on the war. The Lloyd George ministry, the last time the ‘Liberals’ were in power, responded to this situation with the ‘Geddes Axe’ which slashed public expenditure and resulted in a decade of stagnation followed by depression.
In 1928 at the end of a great decade of laissez faire economics the United States elected the conservative Herbert Hoover President, the only time being elected President was actually a demotion, Hoover oversaw the Wall Street crash and responded with same economic policies that favoured the rich at the expense of the poor.
The arrest of the Great Depression only began with the election of Franklin Roosevelt as President, who immediately began to tackle the economy by closing the bad banks and enforcing a stringent regime of banking and market regulation. Roosevelt oversaw a massive increase in public spending, which resulted in an increase of the debt and the deficit. Hoover failed and Roosevelt succeeded.
In response to the latest crisis in Thatcherite capitalism the UK Government has announced the most drastic cuts to public expenditure in generations because, they claim, the UK debt and deficit have reached ‘frightening’ levels. In fact they are half of what they were for the period 1918 to 1969. The debt and deficit stand at 70% and 11% of GDP respectively.
Up until 2008 the debt and deficit had been at respectable levels when the banking crisis occurred and economic growth went from a robust 4% in quarter 4 2007 to -5% in quarter 4 2008 so a direct correlation can be drawn from a decrease in economic growth to a massive increase in the debt and the deficit.
In order to put the deficit in perspective let us look at other G7 states, all of whom bar Canada have higher deficits and none of whom are proposing cuts like the UK Governments. In fact the US Government have been increasing spending as a financial stimulus, which has resulted in a higher economic growth rate than the UK’s in the last three quarters.
Now the UK Government says that it is imperative to reduce the debt and the deficit in order to regain the confidence of the financial markets and drive down the cost of Government borrowing. Even though the cost of borrowing fell during the first two quarters of this year.
The UK Government has ruled out tackling the deficit by raising taxes on the rich or business. Businesses like the banks that caused the financial crisis in the first place. The same banks that are doling out bonuses equal to 2007 levels.
UK GNP currently stands at $2.25 trillion, with the Government announcing cuts of $128 billion, this amounts to a reduction in GNP OF 5.7%.
This is allied with the shedding of 500,000 jobs from the economy. Now assuming that the UK employment rate stays the same as it was in the last quarter it would add an extra 35,000 to the figures of those on benefits.
So the UK Government have proposed growing the economy by reducing GNP and increasing the number of the unemployed. This would be a fantastic achievement and it is in everyone’s interest that the Government succeeds in growing the economy but the portents are not good. These cuts are unjustified, unfair and will damage the prospects of economic growth.
"In fact [debt & deficit] are half of what they were for the period 1918 to 1969."
ReplyDeleteThe amount of debt built up over two world wars was the result of extraordinary circumstances -- we should not look back and think that if it was possible then to sustain that level of debt, then it is possible now. It is not. Why? (a) Previously Sterling was the world's main reserve currency which allowed us to borrow more; (b) the debt was only sustained by extraordinary programmes such as lead-lease and the Marshall plan - the equivalent now would be an IMF intervention; (c) you make no account for personal and corporate debt which is now much higher than any time previously; and (c) current debt has not peaked yet, even over the course of this parliament with the coalition's planned cuts, debt will double.
"The debt and deficit stand at 11% and 70% of GDP respectively."
No, you have it the wrong way around. Debt is 70% and the deficit is approx. 11.5%.
"Up until 2008 the debt and deficit had been at respectable levels when the banking crisis occurred and economic growth went from a robust 4% in quarter 4 2007 to -5% in quarter 4 2008 so a direct correlation can be drawn from a decrease in economic growth to a massive increase in the debt and the deficit."
Its true that a considerable portion of the current debt is down to borrowing to mitigate the effects of the recession. But not all, even accounting for growth the UK would still running a deficit as under Labour the state expanded far beyond the willingness of residents to pay for it through taxes.
"In order to put the deficit in perspective let us look at other G7 states, all of whom bar Canada have higher deficits and none of whom are proposing cuts like the UK Governments."
ReplyDeleteTotally incorrect. The UK has the highest budget deficit in the G7. Don't believe me? Believe The Economist: http://www.economist.com/node/17159424?story_id=17159424
"In fact the US Government have been increasing spending as a financial stimulus, which has resulted in a higher economic growth rate than the UK’s in the last three quarters."
The Obama administration implemented a stimulus package of $800bn, the equivalent of 5% of their $15 trillion GDP. The results have been so meagre that they are now discussing a second stimulus -- this proves the first stimulus was not successful - yet they have taken on huge extra debt (though as I noted above the US Dollar is the global reserve currency allowing them to sustain higher levels of debt that we can in the UK).
"The UK Government has ruled out tackling the deficit by raising taxes on the rich or business. Businesses like the banks that caused the financial crisis in the first place. The same banks that are doling out bonuses equal to 2007 levels."
As a small country with an outsized banking sector I would actually agree that bank contribution should probably be increased. With regards to taxes, the top 5% of earners (i.e. the "rich") already contribute 43.1% of all income tax. Anyway, any further tax increases would place a further drag on growth which will be need to replay the debt.
"UK GNP currently stands at $2.25 trillion, with the Government announcing cuts of $128 billion, this amounts to a reduction in GNP OF 5.7%."
Again completely wrong. Total government spending will increase every year -- there are departmental cuts so as to protect health etc. but in total NO money is being taken out of the economy.
"So the UK Government have proposed growing the economy by reducing GNP"
ReplyDeleteNo, as I just said total government spend is increasing.
"These cuts are unjustified, unfair and will damage the prospects of economic growth."
As I explained in it is not just current levels of debt we have to consider, but projected levels. According to the OBR's figures total debt will double between now and 2015/16 even with the current proposed levels of departmental cuts. The interest payable on that debt will increase from £43bn this year to £66bn in 2016. This is about 50% of the total NHS budget, and more than what we pay for defence, for police, for transport, etc and thus deprives more deserving causes of money. Secondly, these interest payments really do take money 'out of the economy' as a large proportion is paid directly to foreign government holding UK gilts.
I recommend you read the following post before replying:
http://druidsrevenge.blogspot.com/2010/09/cuts-separating-fact-from-fiction.html
Druid, thank you for taking the time to read the blog and respond in such detail, firstly may I begin with an apology you are completely correct when you state that the deficit is 11% and the debt is 70% rather than the other way around, this has been amended, I shall beat a minion mercilessly, and I promise not to enjoy it this time
ReplyDeleteHowever I do wish to point out that the rest of your argument whilst appreciated is one that I obviously disagree with, you correctly point out that the deficit that accrued during most of the twentieth century was attributable to the extraordinary circumstances of two world wars however after the second world war until the first thatcher Government there was no attempt to reduce national debt instead the Governments of this period created the NHS, nationalised the railways and coal and steel industries a and made secondary education free, I appreciate that this might be insignificant to a right wing ideologue like Osborne but they were vitally important in creating a more equal and better society. All this is now under threat in pursuit of the ideal Chicago school of economics society as has been tried in places like Ireland and Chile.
I am glad you agree with me that the US government stimulus has resulted in a higher growth rate than the UKs, thus validating my hypotheses that to remove stimulus from the economy as your party propose to do will result in negative growth.
I also see that you agree that by cutting 500,000 public service jobs the numbers seeking benefits is likely to increase thus negating any savings made by these cuts and in fact could prove to be counterproductive.
Your argument that the after the spending review government expenditure will stay static seems to ignore inflation which if taken into consideration would suggest that over the next four years public spending will decrease from this year’s position.
The Economist article and graph that you refer to is indeed very interesting, now if you look at the OECD forecasts on the same graph you will see the debt as a % of GDP for the UK will be lower than France, Italy and the United States.
You are also right when you say that the UK is over reliant on the financial sector, if this Government was serious about ensuring a fairer and more robust economy then it would set about decreasing the UK s reliance on the financial services and encourage the growth of the economy outside the southeast of England.
Also you have not considered the massive cuts that local authorities have already had to make. The ESRI in Ireland have also release a report last week stating that the cuts programme as pursued by the Irish Government will have a disastrous impact on the prospects for economic growth in Ireland.
The CSR will see benefits for the poorest and most vulnerable in society reduced, whilst there will be no adverse affect on the wealthy save the reform in child benefit, which according to the government they don’t need anyway. There is now way that you can argue that these cuts are in fact fair.
I appreciate that you feel that the cuts are unjustified and I found your blog to be interesting and you have obviously put a lot of effort into it, whilst we may disagree on the justification for the cuts I can’t believe you would argue that they are fair.
I am glad you agree with me that the US government stimulus has resulted in a higher growth rate than the UKs, thus validating my hypotheses that to remove stimulus from the economy as your party propose to do will result in negative growth.
ReplyDeleteI also see that you agree that by cutting 500,000 public service jobs the numbers seeking benefits is likely to increase thus negating any savings made by these cuts and in fact could prove to be counterproductive.
Your argument that the after the spending review government expenditure will stay static seems to ignore inflation which if taken into consideration would suggest that over the next four years public spending will decrease from this year’s position.
The Economist article and graph that you refer to is indeed very interesting, now if you look at the OECD forecasts on the same graph you will see the debt as a % of GDP for the UK will be lower than France, Italy and the United States.
You are also right when you say that the UK is over reliant on the financial sector, if this Government was serious about ensuring a fairer and more robust economy then it would set about decreasing the UK s reliance on the financial services and encourage the growth of the economy outside the southeast of England.
ReplyDeleteAlso you have not considered the massive cuts that local authorities have already had to make. The ESRI in Ireland have also release a report last week stating that the cuts programme as pursued by the Irish Government will have a disastrous impact on the prospects for economic growth in Ireland.
The CSR will see benefits for the poorest and most vulnerable in society reduced, whilst there will be no adverse affect on the wealthy save the reform in child benefit, which according to the government they don’t need anyway. There is now way that you can argue that these cuts are in fact fair.
I appreciate that you feel that the cuts are unjustified and I found your blog to be interesting and you have obviously put a lot of effort into it, whilst we may disagree on the justification for the cuts I can’t believe you would argue that they are fair.
"however after the second world war until the first thatcher Government there was no attempt to reduce national debt instead the Governments of this period created the NHS, nationalised the railways and coal and steel industries a and made secondary education free"
ReplyDeleteNot true, after national debt peaked around 1945, it continued to fall all the way through to the mid 1970s.
"I am glad you agree with me that the US government stimulus has resulted in a higher growth rate than the UKs, thus validating my hypotheses that to remove stimulus from the economy as your party propose to do will result in negative growth."
It appears you ignored what I wrote. A stimulus is supposed to kick-start an economy back into growth by breaking the vicious circle of low spending and low incomes. The US Govt spent 5% of GDP ($800bn) on a stimulus yet despite this and record low interest rates, unemployment is still around 9.6% and the Fed's August report, known as the Beige Book, is predicting that the economy will slow considerably. So meagre have been the returns that the Obama administration is now planning a second stimulus -- absolute proof that the first one has not worked. Do you want to try borrowing a further 5% of our GDP (and the compound debt that will accrue) in the hope that it might work here? You may not realise it but Keynes never suggested stimuluses as an all purpose policy recommendation -- it was to him a strategy of desperation, something only to be tried when monetary policy failed to push an economy back into growth. Quite why you think that several quarters after the UK left recession we should be implementing a stimulus programme would baffle him.
"I also see that you agree that by cutting 500,000 public service jobs the numbers seeking benefits is likely to increase thus negating any savings made by these cuts and in fact could prove to be counterproductive."
ReplyDeleteOnly if no other jobs whatsoever are created over the four years time frame for these job losses -- which is not the case. The OBR predicts that over the same time period, the private sector will create three times as many jobs. Will it? I don't know, but those are the predictions.
"The Economist article and graph that you refer to is indeed very interesting, now if you look at the OECD forecasts on the same graph you will see the debt as a % of GDP for the UK will be lower than France, Italy and the United States."
That doesn't excuse you for claiming that the UK's deficit was the smaller than every other country in G7 bar Canada. You got it wrong and are now trying to find another argument. However as you now want to discuss the UK's debt relative to other countries, rather than looking at a snapshot in time, it is more relevant to this discussion to understand the trajectory of growth of debt. Over the period 2004-09, the UK's national debt has grown faster than any country other than Iceland. And it will keep on growing if something is not done to stop it -- except that you want to misread Keynes and borrow another 5% of GDP to kickstart an economy which isn't even in recession.
"You are also right when you say that the UK is over reliant on the financial sector, if this Government was serious about ensuring a fairer and more robust economy then it would set about decreasing the UK s reliance on the financial services and encourage the growth of the economy outside the southeast of England."
Something I have posted on often: http://druidsrevenge.blogspot.com/2010/09/towards-regional-rates-of-corporation.html
Public national debt dipped under 100% in the mid ‘60s however the huge level of debt did not stop successive Governments from building the welfare state.
ReplyDeleteThe Obama administration is indeed considering another stimulus package, however to say it has been unsuccessful when the United States has enjoyed higher growth rates than the UK is disingenuous. The stimulus has produced some success where as the UK government proposes that we take a step into the void there is no guarantee that the cuts will succeed reviving the economy and we can look at the Irish situation to see what a disaster such dramatic cuts can have on an economy. At the time of the emergency budget in 2008 Brian Lenihan received widespread praise from financial commentators for taking the only possible steps to save the Irish economy, two years later and Ireland is headed back into recession and the unemployment rate is now at 13.5%, with the ESRI predicting that to reduce the debt to 3% by 2014 will send the economy into a deflationary spiral of low growth and high unemployment. So in the UK government has taken a hatchet to the public expenditure with only one thing certain the poor will suffer have increased the likelihood of stagflation.
"The Obama administration is indeed considering another stimulus package, however to say it has been unsuccessful when the United States has enjoyed higher growth rates than the UK is disingenuous."
ReplyDeleteOf course their growth rates increased -- they borrowed 5% of their GDP from China and then injected it into their economy! Therefore they should have seen a growth rate of 5% over that period! But that wasn't real growth (i.e. an increase in productivity), it was just temporary increased demand without a permanent increase in supply. Accordingly now that the stimulus has ended the US economy has slumped back to its previous state, without reducing the number of unemployed in the process. Hence the supposed need for a second stimulus - because it did not kick-start the economy.
" The stimulus has produced some success where as the UK government proposes that we take a step into the void there is no guarantee that the cuts will succeed reviving the economy"
You put all your faith in the economics of stimulus without recognising what a gamble it also is in reality. Or engaging with Keynes own view of 'priming the pump' as I described in my last comment.