Reducing the Government’s Deficit is not the same as reducing the UK’s Deficit.


Now that the immediate fuss over the recent Budget has died down a little it is perhaps time for some more considered reflection on the nature of any criticism on the failure of the government, and George Osborne in particular, to make anywhere near the progress promised on the question of cutting the budget deficit. Maybe we can get it right for the next time it hits the headlines. The deficit problem is not going to be solved any time soon.

Naturally, the duty of an opposition is to constructively oppose, and so if the government’s deficit does not fall and total debt does rise, when the Government has a clear policy for just the opposite, then the Lib Dems, together with the other left of centre opposition parties, need to point out the failure of that policy. However, we need to be careful. That argument can be easily turned around. So we are in favour of even higher taxes and even more drastic cuts in public spending, are we? And when we say we are not, how does that chime with the public? Will they accept we are really being constructive? Aren’t they just going to think we want it both ways?

Unless we explain some basic Keynesian economics they are going to think exactly that, and our economic credibility is going to suffer. There is much more to the economic debate than the government’s budget deficit as defined by the difference in what the government spends and what it receives in revenue. A simple, and easily understood, point to make is that what it receives in revenue is not at all independent of what it spends. The government is by far and away the largest player in the economy so different rules apply than they do for, say, you and I. If we spend less, our income is unaffected. This is not true for government. So the process of cutting spending and raising taxes can send the economy into a spiral of recession. Nothing improves. Unemployment and low paid employment increases. Taxation revenue falls. The deficit remains just the same or maybe even worsens.

We need to look at the bigger picture and point out that the strategy of this government has never been to reduce the burden of debt for the UK as a whole. Rather it has been merely to shift it from itself to everyone else. This key and undeniable fact should be the focus of our opposition and criticism. The government, and its predecessors has actively encouraged the build up of private debt in the economy by reducing interest rates and removing or relaxing regulations on bank lending every time an economic stimulus has been required. We need to hold up our hands on this and accept our fair share of responsibility too. Interest rates are lower now than they have ever been, even in the depths of the Great Depression. The responsibility for macro-economic management has to a large extent been shifted from the Treasury to the Bank of England. Mark Carney, the Governor of the BoE, is in an impossible position. On the one hand he has to keep interest rates ultra low to try to meet growth and inflation targets which have been set by government, and on the other hand he is under political pressure to normalise and raise interest rates, and so give savers some incentive to be savers rather than borrowers.

Rising levels of personal and corporate debt do represent a huge problem, not just for the future, but right now. They have created a huge bubble, at worst, or a distortion, at best, in the housing market which has meant that the current level of house prices now bears no relationship to incomes. A whole generation has been priced out of home ownership. This is going to be extremely difficult for any future government to correct. If prices fall to more normal and historic income ratios, many existing home buyers will face bankruptcy. If they do not fall, of course the problem remains unresolved.



There is also the question of the other largely forgotten deficit, the current account deficit, or the deficit the UK runs in its trade in goods and services with the rest of the world. It is time to start remembering about that! If the UK is in deficit, as a whole, then someone has to fund that deficit by borrowing. The political debate at the moment, whether we know it or not, is only about who should do the borrowing; the government or everyone else in the private sector. We need to move the discussion along from where it is and explain how the level of required borrowing can be much less in total by everyone, government and private sector alike. We can indeed have a much healthier economy, with lower deficits (both government and trade), with low levels of unemployment and still afford to maintain the free health and affordable education programs to which we all are, or should be, fully committed. At the same time the Lib Dems can establish a distinct and popular political position as being the party which is opposed to all excessive levels of debt in the economy and not just debt in the public sector.

* Peter Martin is not a LibDem party member but has voted LibDem in previous elections.

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8 Comments

  • I’m no economist, but:

    “If prices fall to more normal and historic income ratios, many existing home buyers will face bankruptcy.”

    Why? As long as they can continue to pay the mortgage, why would falling house prices cause bankruptcy?

  • Ian,

    I get that losing your job may result in bankruptcy but that’s possible anyway even if your house hasn’t lost value.

    But when you say people “have to” move house – well they obviously wouldn’t move if the outcome would be bankruptcy. And has anyone ever been forced into bankruptcy by a “loss of faith” when they were otherwise keeping up with their mortgage payments and other bills?

  • As long as they can continue to pay the mortgage, why would falling house prices cause bankruptcy?

    They wouldn’t — as long as they can continue to pay the mortgage. But when interest rates finally rise from their current historically low levels, they won’t be able to pay the mortgage any more. So they will have to sell the house; but it won’t sell for enough to pay off the debt; Hence, bankruptcy.

  • Peter Martin 7th Apr '16 - 8:45pm

    Carl,

    Keynesianism, at its simplest, means that the Government should do the opposite of everyone else to stabilise the economy. If everyone else is borrowing and spending too much the Government has, to prevent high inflation, to be a saver (ie run a surplus) and spend less. If everyone else is saving too much the Government has, to stimulate the economy, to be a net borrower and spend more.

    “Everyone else” means all those who participate in the UK economy by exchanging ££ for goods and services. This has to include our trading partners such as Germany and China who may wish to provide goods and services for ££ but don’t wish to spend them all. They are the big net savers at present.

    Consequently, unless those within the UK economy can be persuaded to be net borrowers, the Government itself has to do the borrowing to prevent recession.

    And that is what has happened in the UK economy in the last twenty years or so. Successive governments have encouraged too much borrowing in the private sector simply to make their own figures look good.

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