Osborne’s ‘clever’ games should come back to bite him in the end

In a sane world, the news today that George Osborne’s wishes to enshrine in law a new ‘fiscal framework’ to ensure future governments only borrow in ‘exceptional circumstances’ would be greeted by laughter followed by the Chancellor’s immediate resignation for economic illiteracy.

Unfortunately, we do not live in a sane world. We live in a world where the idea that a governments finances are comparable to a households finances is a zombie that just won’t die. Many people – including many who should know better – will nod sagely at this news and think it’s a great idea.

This latest wheeze from Osborne is clearly designed to expose Labour’s perceived weakness on the economy (as if they could get any weaker). Faced with this, what should Labour do?

Their immediate reaction appears to brand it a ‘political stunt’, which is exactly what they’ve said every other time Osborne has tried one of these tricks. Labour haven’t said whether they will support this measure or not, but I think they should congratulate the Chancellor on his excellent idea and support it wholeheartedly. Then, when the mythical surplus proves illusory, they can batter Osborne with his own words. And if they ever do get back into power, they can just pretend they are sticking to the rule while doing the opposite. That’s pretty much what the Coalition did for 5 years, but hey, that’s just politics right?

There are a lot of reasons why Osborne’s surplus is not attainable for more than a year or two as Ann Pettifor sets out pretty clearly here:

“…

no matter how determined he may be, the Chancellor cannot eliminate the deficit – the balance between government income and expenditure.

While you and I can cut our overdrafts by cutting our spending, or by increasing our income – the all-mighty Chancellor cannot do the same. The public sector deficit is not dependent on his actions, or the government’s policies. It is dependent on economic activity in the economy as a whole. If the economic ‘cake’ (that is employment) shrinks, the government deficit will rise. As the ‘cake’ expands, the government deficit will fall.”

And for a longer explanation of the damaging effects of austerity, I can recommend todays Billy Blog.

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How well do people understand the term ‘government deficit’?

Here’s an interesting poll finding from Yougov this week. They asked people the question “How well would you say you understand what people mean when they talk about the government’s deficit?” In answer, 69% said they had a very clear or fairly clear understanding. Not bad then. It’s talked about every day by politicians, so it’s good people understand what it means.

Not so fast though. Yougov followed up by asking “Which of the following do you think best describes the government’s deficit?” The majority (51%) thought “The total amount of money the government has borrowed” rather than the more correct description (“The amount of extra money that the government borrows each year”), which was only picked by 31%. 2% even answered “The total amount of money that everyone in the country has
collectively borrowed on overdrafts and credit cards.” Oh dear.

This is probably good news for the Tories. They can run around saying they have halved the deficit and most people will associated that with lower government debt (which people in turn tend to equate with their own household debt, where more=bad). It’s also bad news for people like me who want to try to explain to people that government deficits might not be an altogether bad thing, and that our government debt is not an issue that should supersede all others. It will also make me more skeptical about any future headlines generated from polling data!

You can find the full tables by clicking on the link above, but here are the headline figures. Interestingly, Labour voters were less likely to say they had a clear understanding of what a government deficit was, but they were no more likely to pick the wrong answer than supporters of other parties.

Screenshot 2015-01-19 at 6.04.16 PM

Cameron’s speech sends the alittleecon bullshit detector into overdrive

David Cameron gave a speech on the deficit today. Standing in front of this background, he said some shall we say, questionable things:

I’ve heard the tone of his speech described as ‘hyperbole’, but I would go further and say there were a lot of balls out lies in there. His tactics appeared to be what I would call Shappsian, where you just tell intellectually lazy lies in a matter-of-a-fact way in the belief that people are too stupid to see through it.

First, the background, and the strapline “A Britain Living Within Its Means”. By means he’s talking about money, rather than stuff. If he meant the latter it wouldn’t be so bad, just basic common sense. What he actually means is reducing the deficit so spending is equal to or less than taxation. In attempting to achieve this it will mean households – in aggregate – will need to take on more debt than it had when the economy crashed in 2008. The Conservatives have a bloody cheek talking about living within our means.

Cameron also talked about the ‘chaos’ that would result should Labour win the election. His definition of chaos is:

“It’s election year, and the choice is clear: staying on the road to recovery – or choosing the path to ruin. Competence or chaos.

With the other parties, all you get is confusion.

Uncosted plans. The spectre of more debt. The shadow of more taxes on your family, your home, your business.

With the Conservatives, you get the opposite. A strong and competent team, a proven record, and a long-term economic plan that is turning our country around …

We cannot overstate how important this is.

If we fail to meet this national challenge, the writing is on the wall.

More borrowing – and all the extra debt interest that brings, meaning there is less money to spend on schools and hospitals and all the things we value as a country.

More spending, and the higher taxes that will require – hardworking people thumped to pay for Government wastefulness.

And higher interest rates too – punishing homeowners, hurting businesses, losing jobs.

In short, economic chaos.”

Labour have given themselves a bit of wiggle room over their spending, committing only to balancing the ‘current budget’, meaning, they have left scope for higher spending on whatever they want to define as capital spending, but on current plans, there’s little between Labour and Tory over spending. The amount of spurious nonsense you would have to swallow to take Cameron’s assertions at face value are surely too much for most.

Talk of ‘unfunded’ spending is a silly argument in itself. Cameron is saying both that this will mean more borrowing and higher taxes, but if Cameron is right (he’s not), the extra spending would be ‘funded’ either by higher taxes (in which case, in the mainstream view, no extra borrowing), or by extra borrowing (in which case, no extra tax). He can’t have it both ways, and in fact can’t have it either way, because taxes and borrowing are not needed to ‘fund’ spending at all.

Cameron talks of more borrowing leading to more debt interest payments, but as Richard Murphy points out, interest rates on long-term debt have plummeted over the last 10 years, so even if spending did go up, and the deficit was matched by issuing debt, as the older, higher interest debt was refinanced with new low interest debt, debt interest payments may even fall, not rise. A public debt crisis is not on the way whoever wins the election.

The final bit of nonsense I wanted to pick up on was Cameron’s assertion that interest rates would rise if Labour won. This is rubbish because interest rates in the wider economy are strongly correlated with the base rate set by the Bank of England. This is 0.5% at the moment, and has been for several years because the economy has been weak, and most economists think low rates stimulate the economy. As the economy recovers, we should expect to see interest rates rise, so if the Conservatives are saying the economy will continue to improve with them but slip into chaos with Labour, we should expect rates to rise with the Tories, but stay the same or fall with Labour. A complete 180 from what Cameron is suggesting. It’s not necessarily bad if rates do start to rise (although it will be for some people). It’s just what’s likely to happen in a recovery.

Not a lot to like then. He is relying on voters being idiots. This is not to say Labour do not makes questionable assertions of their own, but it’s been the Tories who have been straight out of the blocks with the sort of negative, fear-mongering campaign many suspected would be the way things would go. How will Labour respond?

What the Tories used to say would happen if the deficit was only halved by 2015

election poster

It’s funny how things change. The Conservatives launched this, their first election poster this week. One of their three boasts is “THE DEFICIT HALVED”. This has now been redefined as a success, but Jonathan Portes has dug up some great quotes from 2011 when they were saying something entirely different:

Mark Lancaster: The Government’s plan to eliminate the deficit by 2015 is in stark contrast to the Darling plan, which was simply to reduce it by half. What assessment has the Minister made of the likely impact of the Darling plan on the level of debt and the cost of servicing it?

Mr Hoban [Mark Hoban, at the time a Minister at the Treasury]: If we had continued with the previous Government’s deficit reduction plan, debt would still be rising in 2015, not falling, meaning that we would have to spend an extra £3 billion in one year on debt interest while still having to make spending cuts. The lack of ambition in the previous Government’s plan put our credit rating at risk, thus threatening the prospect of higher interest rates and putting a brake on the recovery.

Then, only halving the deficit by 2015 as per Labour’s original plans would “put our credit rating at risk, thus threatening the prospect of higher interest rates and putting a brake on the recovery.” Now though, halving the deficit is cause for high-fives all round!

This is not to say that Labour’s plans were better than the Tories, both were stupid to focus on the deficit, which was never a big issue. I just make the point to show how divorced politics and economic reality have become. Failure can be redefined as success at will, and something that once was said could lead to catastrophe is now just a step on a road to long term recovery. It’s rather transparent, so hopefully more people will start to notice.

Budget deficits are neither good nor bad

This is going to be a re-blog of a re-blog, which is a bit lazy of me, but I’m repeating it again because I think it’s rather pertinent at the moment, what with the talk about long term economic plans to generate budget surpluses and spending cuts and tax hikes supposedly totalling £50bn on the way. It’s so far removed from the usual debate about austerity, I try and repeat it as often as possible. Anyway, this is from an old Bill Mitchell blog (my favourite economist) and he’s writing about whether budget deficits or surpluses are good or bad (Bill’s Australian by the way if you didn’t already know):

The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.

There is nothing intrinsically good or bad about any specific budget outcome.

In response to the 1982 attempt by conservative politicians to pass a Balanced Budget Act in the US Congress, the revered macroeconomist Gardner Ackley said:

My own position on deficits has always been, and remains, that deficits, per se, are neither good nor bad. There are times when they are not only appropriate but even highly desirable, and there are times when they are inappropriate and dangerous. During a recession or a period of “stagflation”, deficits are nearly unavoidable, and are likely to be constructive rather than harmful.

This blog – A voice from the past – budget deficits are neither good nor bad – has more discussion about Gardner Ackley.

To add meaning to the discussion we have to relate the budget outcome to the circumstances in the economy rather than be side-tracked by some pre-conceived notion that some balance is desirable and another is not.

It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.

That goal is constrained by the availability of real resources that the nation commands – labour, capital, land, etc – but not by the financial capacity of the currency-issuing government.

In most budgetary discussions, it is erroneously assumed that the national government has a financial constraint and has to budget like a household.

The analogy neo-liberals draw between household budgets and government budgets is false. Households use the currency and must finance their spending.

However, government issues the currency and must first spend (i.e. credit private bank accounts) before it can tax (i.e. debit bank accounts). The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system.

The Euro nations are an exception to this rule. They surrendered currency sovereignty, and thus have to borrow to cover deficits. This makes them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk. The current Euro problem lies in the flawed design of its monetary system, which was a neo-liberal ploy to limit the capacity of these governments to borrow and spend.

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. Neo-liberal claims that bond markets limit government spending are false.

The fact is that the only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A. When there is mass unemployment, for example, we can conclude that the government has no real constraint at that point in time and can bring those labour resources into productive use through higher spending.”

Smaller state ≠ smaller deficit

A lot of the commentary around the recent Autumn Statement has been around how the plans to move the government’s budget from deficit to surplus over the next 5 years will involve cuts and a rolling back of the state to 1930s levels of expenditure.  This doesn’t make a lot of sense to me however, because lower government spending as a proportion of GDP does not mean the deficit would be lower. You can just as easily have a 5% deficit with government spending 50% of GDP as you could if they were only spending 35%. The two just aren’t related. For example, Denmark’s government spends about 57% or GDP, but has a budget deficit below 1%. The US government on the other hand spends about 40% of GDP, but has a deficit of over 5%.

It’s probably not possible (even if it were desirable to do so) for the UK to reduce its deficit for the foreseeable future. It has a large trade deficit because countries like Germany, China and Japan have based their economic strategy on exports, so to really cut its deficit, the UK would have to rely on the private sector (households and businesses) taking on more debt. This could work for a while, but as recent history shows us, it’s not really a sustainable economic model. We would probably crash again before the budget was balanced.

So what is this talk of massive cuts all about if it’s not about the deficit? It’s already transparent to many, but it seems to be about ideology. Proponents of a smaller state have given up trying to argue for this on its merits and are instead trying to frighten people into accepting cuts. Will this work? I think not because even if the public did accept further cuts, it’s not a strategy that’s likely to create a smaller state, rather one with worse public services with the cracks being covered by expensive sticking plaster solutions. To really shrink the state would require those in power to forget about the deficit and introduce some huge tax cuts at the same time as spending cuts.

The size of government should be a political question, not a numbers game. What services should the government provide and what should be left to the private sector. Warren Mosler puts it well in his book:

“…the way I see it, we first set the size of government at the “right” level of public infrastructure, based on real benefits and real costs, and not the “financial” considerations. The monetary system is then the tool we use to achieve our real economic and political objectives, and not the source of information as to what those objectives are. Then, after deciding what we need to spend to have the right-sized government, we adjust taxes so that we all have enough spending power to buy what’s still for sale in the “store” after the government is done with its shopping. In general, I’d expect taxes to be quite a bit lower than government spending, for reasons already explained and also expanded on later in this book.”

 

Osborne plans to deliver his surplus on the back of rising household debt

George Osborne delivered his Autumn Statement today (in winter!), setting out the outlook for the economy over the next 5 years. He is quite a ‘clever’ politician, so you don’t really learn a lot from listening to his speech as he changes definitions and context so best to suit his narrative. The figures he quotes though are produced by the OBR, which you can download for yourself here.

I’m not going to say anything about his speech, but rather focus on the ‘quest for a budget surplus’ as I’ve decided to call it. All parties seem to be on this quest, so I thought it might be worth setting out what assumptions need to be made in order to get us to a surplus by 2019. To do this, I’m using the OBR’s forecasts for the UK economy’s ‘Financial Balances by Sector’ found in table 1.10 from the spreadsheet Economic and fiscal outlook supplementary economy tables – December 2014.

Although people do so all the time, it’s not really possible to discuss the government’s deficit in isolation, because there is an accounting identity which means the government’s deficit (or surplus) is equal to the non-government’s surplus (or deficit). You can disaggregate ‘non-government’ in a number of ways, but the OBR break it down into ‘households’, the ‘corporate’ sector and ‘rest of world’ (which to simplify, we can think of as the trade balance).

Here are the figures the OBR put out today put into a chart. The bars up to 2013/14 are actual data, and the bars beyond are their forecasts for the next 6 years. The green bar is the government’s budget balance. You can see that in 2009/10, the deficit was over 10% of GDP, and the OBR forecast it will be eliminated by 2018/19 when there will be a small surplus.

Financial Balances

How will we get there though? In the year just gone (2013/14), the government’s deficit came in at 5.6%. The non-government balance was comprised of a 0.1% household ‘deficit’, a 0.9% corporate ‘surplus’ and a trade deficit of 4.4% (this should sum to 5.6% but doesn’t because, as the OBR explain, there is a ‘residual error’ – this case 0.4%). The chart above shows the green bar shrinking over the years, but what is changing in the other sectors at the same time?

At the moment we have a rather large trade deficit of almost 5% of GDP. The OBR are forecasting this will be cut in half over the next 5 years. Is this likely? They are also forecasting world GDP growth to slow down over the next few years, so the prospect for UK exports may not be that rosy.

The blue bar on the chart is increasing quite significantly out to 2019/20. This is the household balance, and it is forecast to be in deficit going forward. That means the OBR expect households to spend more than they earn (in aggregate) year on year. How likely is this to come about? To give some context, we can look at what the household sector’s balance was in previous years to see how feasible an outcome of a 3% household deficit might be. The figures going back to 1997 are contained in this post on Neil Wilson’s blog. Neil’s second chart shows that in the run up to the financial crisis (from about 2004 onwards), households ran a small deficit of between 0% and 2%. This contributed (partly) to the biggest crash in over half a century, but for the OBR’s forecasts to work out households would have to run deficits about double (or more) this level year after year. Is this even possible without causing another recession before we get to 2020? I don’t see how it is. This chart from the OBR’s full report also shows the full picture since 2000 clearly. The required rise in household debt is unprecedented in recent times.

net lending

The ‘quest’ seems like pie in the sky stuff to me, and dangerous stuff at that. When it became clear Osborne would miss his targets after 2010, he eased up. Hopefully, whoever wins next year, will quickly realise what a fools errand the quest is and do the same. Pumping up household debt to dangerous level is not a sustainable longtermeconomicplan!

The UK’s budget deficit creeps back up.

Figures released today by the ONS show that for the first 6 months of this financial year, the government’s budget deficit has increased by 10% over the same period last year. But should we care? Labour certainly thinks so. Shadow Treasury spokesman Chris Leslie said:

“These figures are a serious blow to George Osborne. Not only is he set to break his promise to balance the books by next year, but borrowing in the first half of this year is now 10% higher than the same period last year. As the [Office for Budget Responsibility] said last week, stagnating wages and too many people in low-paid jobs are leading to more borrowing.”

Chris Leslie is probably right in the sense that the figures are a blow to George Osborne – at least in the minds of those in the media bubble who think the deficit is the all encompassing issue for the General Election. For most people though, other factors like jobs, housing and wages are likely to be more important factors for floating voters.

In a way we should be glad the deficit remains high. For all the talk, and while certain sections of society have been clobbered by austerity measures, overall, government spending continues to make a positive contribution  to growth. George Osborne has failed utterly to meet the targets for deficit reduction he set himself, but we should be thankful for that. If he had succeeded, we’d probably be failing down a pretty deep hole right now.

There is another sense that Leslie is correct though. While the size of the deficit doesn’t really matter (at least at the moment anyway), the fact the tax receipts are weak could be an indication of poor wage and productivity growth, which is definitely something Labour should be banging on about (but preferably only when they have a proper policy of their own to address the problem).

 

Tories end all pretence that the deficit is the biggest issue

It would be funny if it wasn’t so tragic, but the week after Ed Balls gave a speech declaring his love for fiscal rules and balanced budgets, David Cameron gives a speech in which he abandons all pretence that the number one priority is reducing the deficit. Of course Cameron wouldn’t admit that that was what he has done, but in offering a large tax cut to the top 10-15% of earners, (and a small one to the top 80%), it sends a clear message that all the rhetoric about getting the deficit down is just that – rhetoric.

That’s not to say that Cameron’s tax announcements today are a bad thing. Frankly, more tax cuts are to be welcomed, although if it was me, I would seek a better distribution than the one that would result from these cuts announced today:

So tax cuts, OK fine, although more progressive would be better. What I find hard to take is the double standards displayed by Cameron. The deficit is a huge issue when spending cuts are on the table, the grandkids start getting a mention and it’s a huge moral issue, but when a tax cut is being announced, you just get some hand-waving about the ‘structural’ deficit, which as Chris Dillow explains, is pretty much unmeasurable so can be whatever you want it to be. It would be great if politicians on both side of the aisle could just cut the crap and stop pretending it’s all about the deficit. Then we can have a grown up discussion about the level of taxation and public spending each side thinks is appropriate for the type of society they want to see evolve.

Decisions on tax and spend should be judged, not in terms of some arbitrary numbers, but rather in terms of what public purpose the government wants to achieve. Cameron implicitly acknowledged that today, by playing to his voter’s desire for lower taxes and a smaller state. Once you clear away the fog of the talk about debt and deficits, that’s what it really comes down to, and that’s what Labour should be arguing too. How much should we tax? Who should the burden fall on? And how much of a role should the state play in the economy?

Nick Clegg responds to Ed Miliband’s memory loss

I’m often quite critical of the Labour Party, but Ed Miliband ‘forgetting’ to mention the deficit in his conference speech earlier this week, isn’t something I’d have a go at him about. As Chris Dillow rather succinctly put yesterday, the deficit just doesn’t really matter that much, and the point at which it might matter is so far away from where we are now, it’s really not worth spending any time worrying about.

Nick Clegg though disagrees. He thinks Ed Miliband not mentioning the deficit in his speech was a really bid deal, and said as much in what I’m going to call a torrent of gibberish. The Guardian quotes him as saying:

“For Ed Miliband or the Labour party to claim that a budget of £110bn annually will be solved magically by spending £2.5bn extra, it will not.

If you do not know how to pay things for in the first place you cannot support the public services.”

Clegg seems to think Labour’s announcement of a small increase in NHS spending was their solution to the budget deficit (whatever solution means in Clegg’s world). Either that or he thinks we’re all idiots. The second sentence just exposes Clegg’s ignorance. He believes government has to collect tax before it has any money to spend rather than the other way round which would be more accurate.

With someone like Ed Balls, you get the feeling that he knows better, but pretends otherwise because he thinks that’s what people want to hear. With Clegg, I think he genuinely believes the rubbish he comes out with. It’s a little embarrassing sometimes.

Picard