The IFS’s verdict on Labour’s deficit argument is in – and it ain’t pretty

Yesterday saw the publication by the Institute for Fiscal Studies of its annual ‘Green Budget‘, which looks generally at the global and UK economic picture as well providing a detailed analysis of the UK fiscal position. The document is fascinating in many respects, but one of the parts that particularly caught my eye was its devastating take on Labour’s position on the deficit.

Since the Autumn Statement, when figures for the estimated size of the budget deficit in future years were revised upwards, one of Labour’s main arguments has been that by cutting “too far, too fast” the government has in fact made the deficit worse in the medium term.

Here’s what the IFS had to say on that argument:

The official estimates of the direct impact of policy measures announced since the coalition government came to power are that these will reduce borrowing by 2.7% of national income a year by 2016–17. Over the same period, the Treasury’s and OBR’sforecasts suggest that underlying borrowing has been revised up by 2.6% of national income in 2016–17. In other words, the fact that borrowing for 2016–17 is now forecast by the OBR to be roughly the same as forecast by the Treasury in March 2010 reflects two offsetting factors: (i) the underlying economic outlook has weakened significantly and thus borrowing would be expected to rise; and (ii) the current government has taken action to cut public spending and increase tax revenues by more than had been committed to by the previous government, which the OBR expects will reduce borrowing.

Of course, there are uncertainties around any estimates of the impact of policy changes on overall borrowing and it is possible that some of the weaker outlook for the economy has actually been caused by a detrimental impact of the additional fiscal consolidation announced by the coalition government that is not captured in the official estimates of the measures’ impact on revenues and spending. However, the error in estimating the size of the policy impact would have to be implausibly large to lead one to conclude that borrowing would actually have been lower in the absence of the additional tax rises and spending cuts that have been announced since May 2010 [emphasis added].

What the IFS are essentially saying, then, is that (1) the coalition’s deficit reduction programme has had a relatively small impact on overall economic growth, particularly compared to other factors and that (2) the budget deficit in 2015-16 would be significantly higher were it not for the tax rises and cuts being implemented by the government (see the final, emboldened sentence).

Anyone who has stopped and thought about Labour’s argument – that tax rises and spending cuts will lead to a higher budget deficit in the medium and long term – will realise instantly that it is utter drivel, but it’s good to see an institution as respected as the IFS putting it in black and white for all to see.

* Nick Thornsby is a day editor at Lib Dem Voice.

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7 Comments

  • “What the IFS are essentially saying, then, is that … (2) the budget deficit in 2015-16 would be significantly higher were it not for the tax rises and cuts being implemented by the government (see the final, emboldened sentence).”

    The emboldened sentence says nothing whatsoever about the deficit being “significantly higher.” It says it’s implausible that it would actually have been lower, which is obviously something quite different.

  • Andrew Suffield 3rd Feb '12 - 12:31am

    Agreed on (1), doubt on (2). I will confess to a modicum of prejudice here, because it dovetails neatly with something I have said many times: I don’t believe that any government has ever been successful in having more than a small or temporary impact on the economy they govern. There are some points in history where it can be debated whether economic changes were the result of government action or economic forces beyond their control – but not many, and for the bulk of the past century it’s hard to argue that any government has caused any substantial change.

    For once it’s not even incompetence, it’s simply that economies have a great deal of momentum and governments have little real control over them. Even the Soviet experiment couldn’t get it to work – whenever a government tries to exert more than a little control, people reject it and ignore or work around them.

  • David Pollard 3rd Feb '12 - 6:36pm

    At the time it seemed to me that the Thatcher moneterist policies of the early 80s had a dramatic effect on the economy. My mortgage interest rate went up to 15% which slowed my spending up a bit I can tell you. The result was a massive recession, but I suppose it was really only short term and the economy did grow strongly after that.
    As far as now is concerned, I would like to see a graph comparing 1. what the Labour plan was for deficit reduction, 2.what the Osborne plan is and 3.what is actually happening. From the IFS quotes above, it appears that the Osborne plan is following the Labour plan pretty closely. Is that correct?

  • Andrew Suffield 5th Feb '12 - 4:51pm

    A policy of austerity at a time of economic stagnation is the worst thing you can do and is a policy that has been tried and failed many times over.

    Can you identify any such occasions where any policy has worked?

    The OBR is meant to be independent, and yet somehow they have made the kind of predictions you would have expected the likes of George Osborne to make since he has become chancellor.

    That shouldn’t be very surprising, because the vast majority of economists think along similar lines and make similar predictions plus or minus a few percent.

    (Note that those few percent are the only real difference between the major parties)

    The argument that an economic stimulus is “utter drivel” is in itself absurd when you consider that during the last recession we as a party advocated an economic stimulus, and continued to do so right up until May 6th 2010, and changed our mind the day after the general election on May 7th 2010.

    The current government is borrowing billions and spending a large chunk of it on economic stimulus. Let’s not pretend we’re arguing over anything more than those few percent.

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