This was, according to George Osborne, to be one of those years when the deficit was going to really start going away. Instead, as the FT reports:
Public-sector net borrowing in the UK (excluding banks) rose to £12.1bn in August, defying expectations among economists that it would come in at a lower level of £9.2bn.
The figure, released by the ONS marked an increase of £1.4bn compared to the same month last year.
But in the financial year to date, which runs from April to August, borrowing dropped by £4.4bn to £38.4bn, compared to the same period in 2014.
Now you can just say this is unfortunate. Or a bump. Or you can say it is because George Osborne is fundamentally wrong, as I did in July, when it comes to his economic forecasting.
The simple fact is that George Osborne cannot eliminate the deficit unless he either delivers growth (which is inconsistent with government cuts) or he can persuade consumers to borrow record sums, business to invest record sums, and UK business to export mo0re or UK consumers to buy fewer foreign goods - with the last all happening at the same time.
These things are just not going to happen. There is no economic reason on earth why they should.
In that case the poor borrowing data says three things. The first is George got his economics wrong when doing cuts. Second, he got this forecasting wrong for the reasons noted. And third now if the time for Plan B. Except he has never had one.
It's easy to explain why the deficit is refusing to go away. Unfortunately the Treasury does not seem to be open to persuasion.
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Of course, there is a fourth option; that Osbourne is using cutting the deficit to transfer as much of the public sector as he can to the pockets of the private sector and run down the NHS and Social Security.
They will hope (indeed, to an extent, it is already happening) that consumer confidence, that is, people going into debt to buy, will buoy up the economy so we can remain a low wage, low skill economy that serve big business rather well but is ruinous to the rest of us.
He may well believe the discredited notion that cutting the deficit will instigate recovery (something that has never ever worked), but I suspect it is a handy cover for transferring as many public assets to the private sector as possible.
All he can do is set budgets and tax rates.
The determination of the deficit is out of his hands.
He has no real idea how people will respond to either of the above in terms of spending /savings decisions (VAT, Corporation tax, PAYE, welfare payments). Apart from that the decision to try to determine it, is for purely political /ideological motives anyway and nothing to what this country can afford. That is the real crime against the people.
The use of Osborne’s name is , of course, an example of ‘metonomy’ (where a name is used to represent a whole nexus of things). He will be simply parroting his advisers (remember Churchill’s remark after the disastrous return to Gold ‘I was only following the advice of my advisers).
“cannot eliminate the deficit unless he either delivers growth (which is inconsistent with government cuts)”
I’d like to know which oven that assertion was baked in. Seriously though, in your view, what for you is the best academic paper which defines its terms and which supports that view.
Cuts cut GDP
It does not take an academic paper to say that
The IMF has proposed that fiscal multipliers may be above 1, since the beginning of the recession, which means explicitly that changes to cut government spending will cut gdp to an equal or greater extent than they save money, and if the fiscal multiplier is greater than the inverse of the percentage of gdp that the government takes in taxes, they will be entirely counter-productive, reducing services without improving public finances, as well as damaging economic growth.
In the same circumstances government could freely increase spending that has a fiscal multiplier above that threshold, without increasing the deficit.
You could naively say that threshold is about 3.13, given the current average of government taxation to gdp of 0.32, and given that the majority of taxation is on economic activity itself rather than resources, wealth etc. It’s actual value would be more complicated to determine.
For values of a fiscal multiplier between 1 and that magic number, extra spending increases economic growth at the cost of government debt, meaning that more growth is created than debt.
This doesn’t necessarily mean that the debt to gdp ratio stays static either, because debt obviously charges interest, but..
Basically, in this scenario fiscal expansion means trading private prosperity for government debt, at a good exchange rate, and contraction means the opposite.
All of this is built into the idea of a fiscal multiplier, and if you want a recent paper from IMF economists discussing this, you could look at this one.
https://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf
A warning though, this paper is doing exactly what this blog post is doing in more exhaustive form; it is comparing predictions of GDP and public spending relationships with their actual results, across countries, and observing that those predictions have been wrong in a way that is consistent with underestimating the fiscal multipliers that have applied to the actual spending cuts that have been done.
In short, the paper is saying “there isn’t as much growth or deficit reduction as expected, and the most likely culprit is a misunderstanding of the damaging effect of cuts on gdp”.
Also, in principle, different government actions could have different public spending implications; it’s possible that there are some good cuts, and some kinds of investment that are particularly profitable. This kind of study only looks at the average results of actually implemented policies.
On the other hand, (being more rough now to get a bit of perspective) if you dig into its references, you can find predictions of possible fiscal multipliers above 1.6, although not necessarily higher than that 3.13 threshold above, meaning that these things are not bad in every conceivable way – they still get the government debt down even as they increase unemployment, reduce services, and make us poorer – but they do so at an extremely ineffective rate compared to that of more prosperous times, and if the multipliers decline over time to similar levels according to the prosperity and stability of the country, then cutting early on a political and non-economic timescale is a completely pointless exercise.
Thanks
Try reading Keynes.
“cannot eliminate the deficit unless he either delivers growth (which is inconsistent with government cuts)” I’d like to know which oven that assertion was baked in. Seriously though, in your view, what for you is the best academic paper which defines its terms and which supports that view.”
Well, try reading Keynes.
@Frubert T Bunn,
“cannot eliminate the deficit unless he either delivers growth (which is inconsistent with government cuts)” I’d like to know which oven that assertion was baked in.
Growth will not necessarily eliminate the deficit in money terms but, obviously, when expressed as a percentage of GDP the deficit will be less providing that it doesn’t increase. That’s still possible though, especially in the short term. Growth, however, does mean that UK debt will be a safe option for overseas investors. Public Debts and deficits are hardly ever a problem for a healthy and growing economy.
To really understand the deficit we need to look at the problem from a different angle from the usual one of comparing spending with revenue. Sure, the difference between the two defines the deficit, or maybe the surplus, but that’s about it. Bitter experience should have taught all economists and politicians that cutting spending and raising taxes doesn’t close the deficit in easily calculable ways. That’s because cutting spending nearly always cuts tax revenue too. If we stop employing a public sector worker, for example, we no longer get back the 30% or so tax and NI contributions on his salary. We don’t get 20% VAT, or the fuel duty, or the alcohol duty etc when the rest of the salary is spent. In addition, when the unemployed worker signs up for unemployment pay…
If we consider the creation of a new currency, say the Greeks quit the EZ and reintroduced the New Drachma we can see how it all works quite easily. To start with no-one has any liabilities or assets in the ND as it doesn’t exist. If the Greek Govt issue 100 million ND (spending it on their army, civil service etc) and get back 60 million ND in taxation their deficit will be 40 million ND. So where has it gone?
Simply its been saved by users of the ND. So maybe 30 million will have been saved domestically. 10 million will have been maybe saved by the central banks of the big exporting countries if the Greek people have bought imports than exports.
So it follows that: GOVT DEFICIT = SAVINGS
and that SAVINGS = DOMESTIC SAVINGS + TRADE DEFICIT
So the question of how to reduce the government deficit can now be answered. Reduce the propensity of those in the domestic economy to save and reduce their desire or ability to purchase too many imports.
Yes
Now do it
The only way will involve a big devaluation of the £. That would make imports less affordable and our exports more competitive on world markets.
So maybe we need to hammer home the message that to reduce govt deficits we need to get used to having the £ valued at something much closer to parity with the $ which of course will make petrol and all other imported goods that much more expensive.
My guess is that the average voter would learn to love the deficit once they understood the alternative was an increase of something like 30-40 % of all imported goods.
Cheers. That report contains enough information to show that government spending cuts can be consistent with growth, it depends though on what cuts and in what context. Multipliers less than 1 do exist.
So if Corbyn wants to cut corporate subsidies ( farm subsidies as an example to multinationals ) he may be right.
But don’t trust politicians’ growth forecasts!
A funny thing happened in Australia,. As of late 2013, the value of the $Aust.(AUD)fell from a Dutch disease, mining boom high of about $1.05 USD down to its current level of about US 70cents.
Now, one would normally expect big changes. All the things that Peter Martin described in his comment. So far, as it turns out, very little has changed.
Some of this can be explained (sort of). The depreciation mercifully coincided with a fall in world oil prices. Observers will wait to see if the change is steady (trend not volatile). Inventories, industries and seasons need time to adjust. Sure, OK. But what about the massive cost-push rise in import prices?
It hasn’t generally happened (at least not in relative proportion) and I am beginning to conclude that there is no such thing as competitive pricing in Australia. The oligopolies that dominate groceries, hardware, petrol, banking (you name it) merely add the benefit of a higher currency to their oligopoly mark-up prices, and when the currency is lower, they do without.
I am sure that changes will eventually happen, non-mining exports will rise, imports fall etc. But the lesson is – don’t take to much for granted, at least not in the short term.