The cuts that will be proposed today by the Coalition Government will not reduce the national debt. Over the next four years, the debt will continue to grow. After four years, if all goes according to plan, it will stop growing. By that time it will already be a lot higher than it is today.
We, as a country, are currently adding £400 million a day to that national debt. That’s £400 million that we, and our children, will need to cover the interest payments on until it’s paid off. For every three pounds the Government raises in tax, it currently spends four pounds.
What does that £400 million mean? We can, I’m sure, all come up with ways to visualise it. Here’s mine.
My local authority, Stockport, is one of the larger ones, providing over 600 services to 280,000 people. That costs about half a billion pounds a year. If Stockport shut down for a year – all the staff and councillors took unpaid sabbaticals (and somehow managed to live without claiming additional benefits), we closed all the schools for a year, no road repairs, no adult social care, no childrens’ homes, no refuse collection – if we just dropped the lot for a whole year with no knock-on costs it would allow the country a thirty hour break from increasing the national debt.
You would need to completely close down nearly 300 local authorities the size of Stockport (and again with no knock-on costs), not to eliminate the national debt but just to stop it growing.
That’s not going to happen, of course. But that level of savings is exactly what’s required if we’re to reach a point where we’re living within our means.
Those frankly eye-watering levels of cuts will leave the State spending, as a proportion of GDP, about what it spent in 2006.
So, at some point, we need to get to grips with this.
Is that time now? Can and should we put off the hard choices for another day, perhaps even leave it for another government to deal with in a few years time?
Yes, that’s an option. We can chance our arm, hope we don’t lose our Triple-A credit rating and keep on growing our debt, £400 million a day, week after week, month after month, year after year. After all, there are countries with bigger debts than we carry, both in total and as a percentage of GDP – the USA and Japan for a start.
There are very sensible arguments to be had about that on both sides. No-one knows for sure that any one course of action is the best and it would be foolish to pretend that there’s a cut-and-dried proven case for cutting over four years rather than over seven (or vice versa). There are also debates over the split between cutting spending and raising taxes. with some arguing that taxes should increase by more than the Coalition is planning, to keep that spending above 2006 levels.
But the quicker we can cut our spending the less we end up paying. The slower we cut back, the more we – and those that come after us – will end up paying both in interest payments and, one day, to repay the actual debt that’s built up.
The cuts announced today, which we expect to be around 5% a year over four years, won’t be easy. Every single one of us will have things we disagree with, aspects where we think that – on balance – the wrong decision has been made, or we would have done differently. That isn’t a good reason to duck the issue.
The Lib Dems have known this for a while. I supported the need for cuts in public spending at our 2009 conference in Bournemouth. I supported them during the election campaign, and I support them now.
(Error in the first para where I’d written “deficit” and meant “debt” now corrected)
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38 Comments
Iain
To what extent do the cuts directly effect you or are you mearley content to make difficult choices for others.If you could pay off your mortgage twice as fast by letting your family go hungry I take it you would do so?.Treating a nation of millions like a failing buisness rather than a society with people in need should never be the answer.
However as a Liberal try reading George Monbiot in yesterdays Guardian and convince me you and your party havn’t been duped into willing collaboration with the dismanteling of much of what your own traditions have built.
£400,000,000 a day? Why are we not all banging on Gordon Brown’s door asking why?
Why do the poor and the vulnerable have to pay the lions share for Brown and the bankers mistakes?
If welfare spending gets smashed today for the idealogical pleasure of Osborne and the right it will be shameful.
The debt, it won’t reduce the debt. It will reduce the deficit.
Iain,
(1) Do you volunteer to be one of the one million people predicted to lose their jobs according to Price Waterhouse Coopers?
(2) Do you think Nick Clegg retains political credibility, given his current enthusiasm for Cameron’s deficit reduction strategy which he denounced as “irrational” when campaigning for votes in May?
(3) Do you think the Liberal Democrats are likely to survive as a party if they continue to prop up Cameron’s right-wing Tory government and keep Clegg as Leader?
“But the quicker we can cut our spending the less we end up paying. The slower we cut back, the more we – and those that come after us – will end up paying both in interest payments and, one day, to repay the actual debt that’s built up.”
Of course, that simplistic claptrap is precisely the opposite of the simplistic claptrap that Nick Clegg was spouting during the election campaign.
I suppose there is a certain consistency in the party always spouting simplistic claptrap, even if the orientation of the claptrap undergoes random 180 degree reversals …
Another article about debt reduction that says nothing at all about the impact on growth. Making 1/2 million public sector workers unemployed – let alone the knock on effect on private sector jobs that rely on the public sector – will of course push up spending on benefits and will increase the debt even more.
These arguments are all very familiar.
I am wondering what examples of a country we are following to achieve what we want here? It was said until recently we should copy Ireland. Now all of a sudden Ireland is different and not a good example after all? So how can we possibly know that what we are doing is the right thing.
Joseph Stiglitz knows from personal experience what works and what doesn’t work in achieving debt reduction from working for the World Bank. This is what he says about it; http://www.independent.co.uk/opinion/commentators/joseph-stiglitz-fiscal-conservatism-may-be-good-for-one-nation-but-threatens-collective-disaster-2000517.html
I do not know of any economist of similar stature who thinks the policy of the Coalition is the right one to follow.
I really don’t thinky ou know what you are talking about.
When you use the word ‘deficit’ you actually mean ‘debt’.
Our ‘debt’ will stop growing in four years, if the coalitions plans work (which they won’t, incidentally).
But the plan is to reduce the deficit to 0 in four to five years (or make a surplus).
The deficit is the amount of money the government spends over its income annually.
The debt is completely divorced from that.
If you can’t tell the difference, and you’ve been harking on about the need to cut the ‘deficit’ fast since the election, why should I take your posts seriously?
This article make that embarassing mistake of confusing the debt with the deficit. It really isn’t a difficult concept to grasp – one is the stock of debt, the other the addition to that stock each year.
Also the assertions made are questionable. Martin Wolf in the FT today makes sobering reading – he quote the IMF saying that cuts on this scale tend to reduce GDP by 1-2% a year. If true you would be right that today’s cuts won’t reduce the deficit.
And when I say ‘completely divorced’ I should really say that the deficit adds to our total debt, but is how much the government is in the ‘red’ annually.
You better ring up Osbourne if you think that his actions will lead to an increase in the amount the state overspends annually. I don’t think he will be happy.
Oh, and the thing that we really need to reduce is the structural deficit, which can only by reduced effectively by economic growth.
Osbourne thinks he can create an export-led growth in our country where exports have only been falling, during a repression. His idea is that the private sector will magically fill the gaps that public spending fills currently (because whilst the right like likes to spread the myth that the public sector is parastic, we live in a symbiotic economy where the public sector represents about 50% of GDP, cutting that drastically will have a massive impact on the private sector).
Frankly we are in dangerous waters. It is quite clear that Osbourne is econmically illiterate, he is just following the plan least likely to piss off the financial sector. There will be no export led growth, I doubt even Osbourne believes this is realistic. The deficit will not be turned into a surplus in 5 years, because these cuts will reduce growth too drastically (and probably be too opposed). The Conservative’s economic plans will fail, theyw ill not achieve their goals, and by supporting them the Lib Dems will be brought down with them.
Not only will it be seen that the deficit reduction package will not work, it is quite possible these austerity measures might lead to a double-dip rcession or a depression… which really would be a problem.
“But the quicker we can cut our spending the less we end up paying. The slower we cut back, the more we – and those that come after us – will end up paying both in interest payments and, one day, to repay the actual debt that’s built up.”
What a load of garbage.
This is not the same as running a household. How many households have their own manifold microeconomies?
Yes cutting the deficit quickly would reduce the amount in interest we have to pay annually (but frankly the amount we have to pay in interest is somewhat irrelevant, because our total debt is not a big worry, it is the deficit which causes financial uncertainty).
Yet is making severe cuts to public spending the best way to reduce the deficit quickly? That is highly debatable, as cutting will inevitably reduce GDP and growth. IF GDP and growth are reduced, tax intakes will be drastically reduced too…. whilst welfare payments will have to rise to cater for the unemployed (and all these unemployed will not be paying taxes… and they won’t just be public sector workers). If the government gets the cuts wrong, they could end up increasing the deficit (or reducing it much less efficiently).
I think we need to be a bit calmer – when there is a deficit there is clearly a case for cutting, otherwise you could simply raise the deficit year in, year out.
The problem with Ian’s piece is (aside from the deficit/debt issue) is he doesn’t seem to recongnise that cutting a government deficit can sometimes (the IMF survey says often, but these surveys are often not applicable to every situation) worsen the situation. For this I blame Nick Clegg, who has been going around comparing it to a household’s borrowing and debt situation.
‘The Lib Dems have known this for a while. I supported the need for cuts in public spending at our 2009 conference in Bournemouth. I supported them during the election campaign, and I support them now.’
Should I take this support with a pinch of salt, since you don’t seem to know what the debate has been about for the last year? If you didn’t know the difference between sovereign debt and the deficit should I really not just assume you wanted the UK to engage in an act of unspecified collective self-flagellation?
“I think we need to be a bit calmer – when there is a deficit there is clearly a case for cutting, otherwise you could simply raise the deficit year in, year out. ”
Hmm, I;m not very calm at the moment. I don’t like the idea of someone posting support pieces for economic policy without having gotten the grasp of some very simple basic terms. I actually have no reason to know in my line of work or in anything I do (except spend money) what a ‘deficit’ is… I would expect commentors and politicians to have a bit more wherewithal than me.
I hope that is not being nasty. I am sorry if I am being rude. Yet frankly our economy is not a joke, and I don’t see why puff-pieces for wrongheaded economic policy with errors in them should go unchallenged.
People are just splitting hairs here.
The point is that it’s all really very simple. Whatever you call it, it’s just like a big cake. And if you don’t cut the cake it will stop growing. A four-year-old could understand it.
http://www.politics.co.uk/news/economy-and-finance/backfiring-cuts-might-slow-deficit-reduction–$21384971.htm
“Harsh spending cuts could prove counterproductive to dealing with the deficit by lowering Treasury tax revenues, a thinktank has warned. ”
Simple enough.
The apologists seem to have hit on this business about cutting spending to 2006 levels as a handy way of making the cuts sound less drastic than they are.
But of course, one huge component of public spending – health spending – is to be completely protected from cuts. And concerning another – welfare – we have to remember that unemployment is about 50% higher now than it was in 2006 (and if new private-sector jobs don’t materialise to compensate for the half million that are going to be cut from the public sector, it will be 80% higher than it was). Add the recent announcement that spending on schools is also going to be protected, and it doesn’t take an economic genius to see that the cuts to the rest of public spending really are going to be “savage.”
Government bonds are 2/3rd owned within these shores – your pension fund is heavily invested in bonds. The recent increase in national debt is down to the Bank of England purchasing government bonds to support the banking industry.
The interest on 2/3rd of these bonds is recycled throughout the british economy.
Why do people insist on holding Ireland up as an example of deficit reduction hobbling recovery? Irelands problem is that we are bound into a single currency which is not an optimal currency area. They cannot devalue so all the readjustment has to be borne by the real economy.
We do not have a fixed currency so Ireland is pretty irrelevant.
Timak is right. Iain your analysis is that of an accountant not an economist. It makes no sense to reduce GDP by 8.7% either for debt or deficit reasons when real resources are then lying idle. The tail is wagging the dog. There are other ways of correcting the financial side of the equation, I offered a credible alternative in my piece at https://www.libdemvoice.org/opinion-revisit-economic-theory-before-cutting-the-real-economy-21593.html
Matthew, I don’t think it’s fair to put it solely on Clegg; Cameron made a big deal in all of the TV debates about comparing government spending to household spending.
Yes, he did, as did Osborne. But I imagine their comments carry less weight on this site!
I am glad someone has highlighted the issue of the national DEBT. Since the election the media, politicians and pundits have just banged on about the deficit with little or no reference to the debt which is a completely different animal.
I’ve just been reading Spiegel Online “Cameron’s Risky Shock Therapy”:
————-
QUOTE: “Many observers, however, say that a more leisurely debt reduction would have been enough. The former Labour government had envisioned halving the deficit within four years rather than balancing it. Financial markets likely would have been satisfied with such a path.
As it stands, Osborne’s policy is nothing short of a massive political experiment, a high-stakes bet with an uncertain outcome. A senior official in the Treasury told the Financial Times that no one knows quite what will happen next. The Labour opposition has accused the Tories of using the debt crisis as a pretext to push through their vision of a smaller national government.” UNQUOTE
———————
We really are a fig leaf for a radical right wing government. Let’s hope we can bluff ourselves out of a meltdown a the next election. Was it worth it?
@Matthew “Martin Wolf in the FT today makes sobering reading – he quote the IMF saying that cuts on this scale tend to reduce GDP by 1-2% a year”
Thank you for quoting Martin Wolf, whose approach is a welcome relief in a sea of hysteria. He is credible, because he is honest enough to acknowledge that he does not know what will happen.
Wolf doesn’t entirely disagree with with the coalition. He *agrees* with concentrating on cuts rather than tax rises.
“That (concentrating so much of the adjustment on spending) was a choice. I would largely agree with it.”
And Martin Wolf acknowledges the uncertainties:
“Do I believe all this? No. Am I definitely right? No. But then neither is the government. Economics is an art, not a science. This policy may be a triumphant economic success. It may be the biggest fiscal policy blunder since the early 1930s. It may end up somewhere in between. Time, as the cliché goes, will tell.”
There’s been a tide of attacks levelled at Iain, as if it were a bigoted article, that didn’t recognise the alternatives. But, like Wolf, Iain acknowledges there are alternatives to the Osborne plan when he says: “There are very sensible arguments to be had about that on both sides”.
I just wish you guys, when you respond to articles like this one, could also be a bit more like Martin Wolf.
@all
Regarding the typo… guys, Iain made the mistake, since corrected, of referring to the deficit when he meant the debt. From the context, it was obvious what he meant. Most of us make typos, including some of those castigating Iain for this one. Why can’t we be a bit more charitable, and, frankly, less hypocritical?
@Sesenco “Do you volunteer to be one of the one million people predicted to lose their jobs according to Price Waterhouse Coopers?”
Here’s Price Waterhouse Coopers overall assessment of the budget reduction strategy:
“Overall, the emergency Budget puts in place a credible plan to eliminate the UK’s structural current budget
defi cit over the lifetime of this Parliament. The medicine is tough and may dampen growth in the short term, but
it should help to support a more sustainable economic recovery in the longer term.”
George Kendall,
You haven’t answered my question.
Here it is again, in case you’ve forgotten it: “Do you volunteer to be one of the one million people predicted to lose their jobs according to Price Waterhouse Coopers?”
I do apologise for being rude about Iain’s mistake it doesn’t invalidate his piece. Although writing in a way which confuses the deficit and the debt is more than a typo, as getting the two confused leads to completely different interpretations of the article. That said, we all make these kind of mitakes (me more than most I would think), so I shouldn’t have been so aggressive.
This is interesting: http://www.ft.com/cms/s/0/b1046bc4-dbd0-11df-af09-00144feabdc0.html
‘One safe bet in Whitehall is that this week’s long-awaited spending review is a gigantic gamble. As one senior Treasury figure put it: “Nobody knows what the outcome is going to be – and that includes the politicians.”
Another went further. “Not only does the coalition have no real sense of how the cuts will turn out but in a funny way they don’t care.”
He cited a meeting at Number 10 a few weeks ago attended by the PM, the chancellor and top civil servants. “They were discussing the possibility of a double-dip recession yet there was almost a feeling that if it happened then too bad – they must still go ahead with the cuts. So they’ll carry on cutting with the risk that if it is not all right they’ll have to come running back to change it.”’
@Rob
No problems. Good of you to apologise. A lot of people aren’t willing to do that 🙂
@r patey
I suspect Iain is snowed under with work on other LDV work. Earlier, he had to spend ages reformatting the article I submitted … sorry about that Iain.
The fact is, nobody knows at this point whether this will work.
But equally, they don’t know whether any other course of action would work either.
Good, isn’t it?
MrsB
Good how the hell is it good it’s still just a big game to you blogger types isnt it.Well as someone with disabled children at the sharp end of job cuts perhaps you’d like to explain whats good about it?.
Oh and Iain if you would like to take a minuite from your hobby politics and answer my real life concerns I’m still waiting.
Oh yes and George as I have no option in the matter will you voulnterally sacrifice your job for mine?. A little varient on Senskos question.After all I was silly enough to vote Lib Dem but you are still a paid up member despite their sickening trechery so only fair you take one for the team.All in it together and all that .
I have a very simple question for Iain, the writer of this post, and other Lib Dems who think like him. (I speak as a fairly non-tribal Labour party member, ex-Lib Dem, married to a Green.)
Imagine that the Conservatives had won an outright majority at the last election and the Lib Dems were in opposition.
Can you, hand on heart, say, in all sincerity, that you would take the same view about this budget if your party was in opposition? (Imagine that the budget is identical in every respect, its just being put forward by a Tory government, not a Coalition government.)
In this alternative, parallel universe I have imagined, I suspect we would not be seeing articles like this on Lib Dem Voice.
This is not to say that the writer of this post is being consciously dishonest. I suspect he really, really wants to believe what he says is true – and that he wants to believe that he believes it.
But I think my thought experiment points to the likelihood that there is a certain amount of what the psychologists call ‘adaptive preference formation’ going on here. People don’t like to think they are doing or supporting things that are incompatible with their deepest values and beliefs. They will try hard to escape the ‘dissonance’ of being in such a situation.
In the process, they can end up being untrue and disloyal to what their values and beliefs really entail – nd this is what I think is happening here.
Correction: I must exempt Iain Roberts personally from the above piece of psychological analysis since he says he supported a strong cuts policy before the election. But I still think my proposed thought experiment is a useful one for you Lib Dems to apply….
@Stuart White “Can you, hand on heart, say, in all sincerity, that you would take the same view about this budget if your party was in opposition?”
It’s a good question. Similarly, you could ask your fellow Labour supporters “Can you, hand on heart, say, in all sincerity, that you would take the same view about deficit reduction if your party was in government?” (A reasonable question, surely, as Darling’s plan, even if over a longer period, would have meant similar cuts)
I’m not going to comment on the detail of the spending review. I have no doubt that there’ll be things in it I really dislike, just as there were a few in the emergency budget. But we don’t yet have enough detail, and I’d prefer to take time to think through how I feel.
In more general terms, before the election I would have supported a slower deficit reduction programme, perhaps extending the programme by a year. I never thought £6bn of cuts this year would make much difference to the recover, one way of the other.
I still hold to that position, but I’m less sure of it. Since the election, I’ve read a lot more about economics, and I can see the arguments for the faster programme Osborne is introducing. I outline some of this thinking in my recent post in we shouldn’t blame the banks.
What I am passionate about, and have been from before the election, is that we do need to deal with the deficit in a reasonable timeframe. Although this was Darling’s position, it was not Ed Balls’s. And it’s not the position of most visitors to this site.
A year ago, my instinctive wish would have been for a coalition with Labour. About four months before the election, I realised that I no longer wanted that. The trigger had been the attempt by Gordon Brown and Ed Balls to use “the forces of Hell” to force Alistair Darling out of office for speaking the truth about the deficit. And how, after the event, they shamelessly lied when they claimed they hadn’t done it.
To my mind, that demonstrated a deeply flawed morality, and a totally closed mind to the serious financial crisis that was engulfing us.
My anger towards Labour has since dissipated, because the Labour party rejected Ed Balls, and because Ed Miliband, in choosing Alan Johnson, seems to be shifting to a more honest approach. I hope this continues.
I still have a residual distrust of Labour on the economy, because I can’t be sure if the attitude that prevailed before the election will reassert itself.
But I am reasonably optimistic that folk like yourself will remain in the ascendent. I certainly hope you do. That’s why I wrote a post saying that we should wish Labour well.