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Fifteen months ago I reported on what was then a affliction primarily hitting Anglo-Saxon politicians, Chronic Deficit Disorder (“neurotic fear of red ink”). Since then the malady has spread through Europe and entire populations.
Throughout the developed world public sector deficits and debt are not the major problem, and in all but a few not even a problem by any rational assessment. The problem is global recession that could become a global depression if governments persist in aggressive fiscal austerity. If you don’t believe me, you can see teh statistics on the IMF Global Outlook update (“Global Recovery Stalls”, http://www.imf.org/external/pubs/ft/weo/2012/update/01/pdf/0112.pdf).
Despite looming depression and the myriad miseries it will bring, it appears that more people believe the nonsense about deficits and debt than fear the disaster of depression, in the United States, Britain, Germany and even Spain and Italy. How is it possible that in this re-run of the Great Depression of the 1930s, so many people blame governments not the recklessly speculative and semi-criminal activities of the financial sector? Far from being viewed as villains, the lords of finance are again riding high as the ultimate assessors of sound fiscal policy (as in, “fiscal policy must not unset financial markets”). That those responsible for the ruination of the economies of so many countries could be treated as the judges of fiscal prudence defies parody. But they are.
Recently I obtained a clearer understanding of why many people in Britain despite their concrete experience of the misrule by finance, would support the fiscal policies that make things worse. On the front page of The Guardian, Britain’s least reactionary daily newspaper (I can no longer write, “most progressive” for reasons soon to be clear), was the article, “'Arduous' times ahead as UK debt tops £1tn”. In the article one read, “that the government now owes £1[trillion] underlies the scale of the task facing the Treasury in bringing the public finances under control” (25 January 2012, page 1).
HM Treasury, where the chancellor boldly solves a non-existent problem.
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The message is clear: due to out-of-control spending, Britain has a “huge debt burden”, and this “burden” will “weigh on the economy for years to come”. The good news is that the right wing Chancellor, George Osborne, “is making progress in tackling the deficit”, which is elsewhere described as the “structural deficit”. This message would sit well with Guardian readers, including members and supporters of the Labour Party. The party’s leader, Ed Miliband, announced only few days ago that he and his would-be chancellor could not commit themselves to reverse any Coalition spending cut unless they know “where's the money going to come from” (Andrew Marr Show BBC, 15 January 2012). |
I mulled over The Guardian article and the confused economics of Miliband's political message as I entered my local gym and swimming pool “complex”, which while fee-charging, has a degree of economic and ethnic diversity (recently converted from a public bath, and now a commercial establishment, a conversion that befits our times). As I peddled my bike machine, I watched two programs, first on the private channel ITV a talk show in which I was warned of possible instability in financial markets if the public deficit and debt were not reduced. Following this, publicly-owned BBC1 offered a program on “benefit fraud” with the inflammatory title, “Saints and Scroungers”, with those who “cheat you, the taxpayer” falling into the latter category and those who expose the “scroungers” being the candidates for beatification. This particular program exposed a man who had defrauded “us” of over ten thousand pounds in a year.
The amount benefit thief took from “the taxpayer” might be compared to “a seven-figure bonus” scheduled for the chief executive of the failed Royal Bank of Scotland (mentioned in the same Guardian article as above) or the close to one trillion pounds lost to the UK economy since 2007 due to the irresponsibility of that same chief executive and his fellow travelers.
In less than an hour, 1) I was informed by the least reactionary UK daily that government debt was huge and immediate action was required to bring expenditure under control, 2) by private television that failure to do the previous would bring down the wraith of financial markets, and 3) by public television that an unspecified but certainly "substantial" amount of the largest item of public expenditure, social protection, was fraudulent. With these messages repeated in even more virulent form in the right wing media (though being more polemical than “Saints and Scroungers” is a challenge), no one should be surprised that the rubbish about debt and deficits is believed. The few of us that recognize it to be rubbish should ask ourselves how were escaped with our reason in tact in face of such a propagandistic ideological onslaught.
Rubbish it is. I begin with the assertion that the pubic sector debt is “huge” and a “burden”. Measured in today’s prices, the net public sector debt in 1955 was £574 billion pounds. At the end of 2008 as the financial crisis began, the total was less, £565 billion, and when the Labour Party lost the May 2010 election, the debt was at most £700 billion. Even the infamous one trillion debt at the end of 2011 represented a mere one percent annual growth since 1955, which had it been continuous would have gone largely unnoticed.
More important that which party held power when are two obvious facts: 1) the rapid growth of the public debt is the result of the serve recession that depressed tax revenue and inflated social protection expenditures (most obviously unemployment payments); and 2) as a share of GDP the debt is far below its post-war high (see Figure 1). A third fact is also relevant: the long term decline in the debt “burden”, from about 140% of GDP in 1955 to below 30% in 1992 (and again in 2002) was not the result of “austerity”, it was the result of growth.
The deficit story should be equally un-newsworthy. HM Treasury reports an overall deficit of 8.7 percent of national income (GDP), but as every reputable expert knows (even the Chancellor) the relevant measure is the current expenditure deficit less interest payments. That statistics was a mere 3.5 percent of national income, perilously close to the infamous Maastricht criterion of sound fiscal policy. Finally, the much-cited flight from UK bonds that would drive up interest rates should finances "deteriorate" is absurd. As I showed in a recent article in the Social Europe Journal, euro instability has caused a flight to UK bonds, such that their interest rate is below one-half of one percent. And for those who argue that the deficit has weakened the pound, the reality is almost no change since a year ago. (For the interest rate and pound-dollar exchange, see http://www.social-europe.eu/2011/11/a-uk-recovery-program-go-keynesian-part-1/.)
UK Public Debt, constant prices and percent of National Income (GDP),
1955-2011 (end of year)
The UK public debt is not large. The public deficit is not a problem. Bond rates and commercial borrowing rates are rock-bottom. The pound is not weak. What is the problem that motivates expenditure cuts that intensify the misery of unemployment and falling incomes? The current government is the problem. Get rid of it. But, replace it with what? Perhaps that is the real problem. |
