When is the right time to reduce the deficit?

Liberal Democrats and Social Democrats have a very wide range of opinions, including economics. However, despite our differences, it’s possible to discuss them in a good-natured, honest way, without polemic.

The time to reduce the deficit has been a matter of huge controversy over the last six years. Paul Krugman is, perhaps, the best known advocate of continuing stimulus. In 2012, he attacked the UK deficit reduction programme as ‘deeply destructive’. He said, “Give me a stronger economy and I’ll turn into a fiscal hawk. But not now”.


The deficit reduction between 2010 and 2012 was certainly controversial. Some Keynsians believed the UK had no choice, because its structural deficit was so enormous, others disagreed.

However, from Spring 2013, the UK has now grown at over 2% for 10 consecutive quarters. Growth prediction is an uncertain science, but the OBR’s best estimate last November was that this will continue.

Two per cent is close to our historic growth rate: the 30 year average from 1980-2010 was 2.19%.
If we had a balanced budget, I could understand the argument for more stimulus. But we still have a substantial structural deficit, and therefore we are already, in effect, running a substantial stimulus.

There are still high levels of youth unemployment. Some think this means we have room to grow, that the UK economy is many years from the next recession, and we should therefore continue with the stimulus. But is this true? Remember, there was still substantial youth unemployment just prior to the great recession.

What if we hit another recession, with UK government debt having already leapt from around 40% to 80%. How would the markets react if we needed another period of stimulus? Would they lend us the money we needed?

Some believe high debt is not a worry, because higher government debt just leads to lower private debt, so its net effect on total UK finances is neutral. I fear that’s not true.

I fear that a continued government deficit will suck in yet more imports, and increase our trade deficit. I am very concerned that we do not reach a situation where the only way to recover is severe protracted austerity, of a kind that would make the last five years look like a golden age. I don’t want us to risk that.

When do you think is the right time to reduce the deficit?

* George Kendall is vice-chair of the Social Democrat Group. He writes in a personal capacity.

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56 Comments

  • Russell Simpson 19th Jan '16 - 11:12am

    Agreed. Sooner rather than later.

  • Paul Pettinger 19th Jan '16 - 12:03pm

    George – you have spent years posting on economics, but are still failing to grasp some basic concepts. Deficit spending does not automatically equate to a conventional Keynesian stimulus – this much should be obvious. From a mainstream Keynesian perspective, cutting the deficient through cuts in a recession is simply a false choice. You are somehow trying to square a circle by justifying fiscal conservatism in a recession while being social democrat, all when the actual cause of the recession was private debt. I think you have a challenge in your hands, because what you are trying to argue is incoherent. You might find it easier to simply say you are fiscal conservative. The above is a poor advert for social democracy in the Liberal Democrats – if for no other reason than it’s not really social democracy.

  • So do you reduce the deficit by making growth more difficult because you have not made the required infrastructure investment or is the key to reducing the deficit to increase tax revenue by cutting loopholes, encouraging companies to invest in this country and ensuring workers are paid wages that they can live on either by reducing the cost of living or ensuring wages rise.

    I believe low pay and lack of social support for the most vulnerable in our society contributes to Government having a deficit because it provides the safety net that the rest of society is not conscious of.

    Another reason for the deficit I believe is that military intervention costs vast sums of money which then goes up in smoke as soon as a weapon is fired.

    Finally we seem to have forgotten that a very large sum of money was used to bail out the financial services industry and as a voter I do not recall seeing the state getting a large proportion of that money back.

  • Paul , whatever George is arguing , I think your tone a little patronising to a man very able to see , as a social democrat , I am sure ,that as the late Emperor Marcus Aurelius said “all things in moderation , including moderation itself ! ” This could apply to social democracy too ! The whole point of Liberalism and social democracy is flexibility and freedom within a perspective generally widely set ,but understood . Not a one size fits all and for all time .Some now claim President Kennedy was not the Liberal ,in the British sense , which he said he was , but a conservative , precisely because he was something of a fiscal conservative . This is to say five plus five equals twelve , it goes too far !

  • Simon Thorley 19th Jan '16 - 1:59pm

    @Paul Pettinger: Keynesian stimulus doesn’t necessarily lead to real economic growth, either – it all depends on the magnitude of crowding-out effects. There’s a time for monetary stimulus and a time for fiscal stimulus, and unless a recession is deep evidence seems to favour the former.

  • Simon Thorley 19th Jan '16 - 2:05pm

    @petermartin2001: The government doesn’t create units of a currency (or, at least, not very much) – it’s almost all created by private banks.

  • Paul Pettinger 19th Jan '16 - 3:03pm

    Lorenzo – I believe George’s politics (based on what he writes, including also his enthusiasm for centrism) do relate to an inherent desire for moderation. But this is an inherently conservative approach, which runs counter to the instincts of most liberals, social democrats and other reformers. A political party that subscribes to the wisdom of the crowds – as George seems to want us to do – need not exist.

    Simon – I don’t think we are really at odds. George is the one talking about pursuing stimulus when the budget is balanced/ healthy.

  • Joe Otten : “they can print money and suffer hyperinflation.”

    But isn’t that exactly what the Coalition Government did post 2010 with Quantitative Easing amounting to £ 375 billion over the piece by an act of legerdemain ? Fortunately they managed to avoid the hyperinflation.

    At the time they cancelled the school building programme affecting 700 schools and cancelled 1000 flood relief schemes. As I understand it only about 8% of the £ 375 billion ‘trickled down’; the rest went into the stock market and the pockets of the super rich.

    If I’ve got that wrong, please do tell.

  • Simon Thorley 19th Jan '16 - 5:37pm

    @ Peter Martin: this is an academic distinction: for all practical purposes, cash and bank deposits are equally considered currency. M0 is a tiny proportion of that currency, and has no more or less value than bank deposits, anyway – currency has no value beyond that which its users accord it. Therefore money (the medium of exchange, store of value and unit of account) is created by private banks.

  • @ Joe Otten “David, if there was hyperinflation, I must have slept through it… As for the rest, yes you have it all wrong”.

    Sorry Joe, but it was you that mentioned hyperinflation not me. So what, then, is the difference between printing money and quantitative easing ?

    If, as you say, I’ve got the rest of it wrong how come Robert Peston of the BBC in October, 2014 agreed with my figure of £ 375 billion for quantitative easing. It’s on the BBC website if you want to look it up.

  • Barry Snelson 19th Jan '16 - 7:19pm

    I am sorry to intrude on a thread that seems to be economists engaging in their favourite pastime of finding other economists and arguing with them.
    Has anyone else noticed that our wealth creating capability is melting away before our eyes?
    The only response political parties make is to proudly declare that they will create millions of high tech manufacturing jobs. Our own manifesto is the familiar hubris and no worse than all the others. This expansionary phase is just sucking in yet more Asian imports. When and why does our productive capability increase?

  • Lots of comment here using the words currency and money, as if they were interchangeable when they’re not. The very last time actual money was in circulation was in 1971, when $35 was interchangeable with 1 oz of gold. Nixon reneged on giving France its justified quota of gold in payment of USA debt. That was the beginning of the end of actual money. Ever since then each country has been forced to use ‘currency’ [not money]. Understanding the difference is crucial.
    The upside [from 1971], is that ditching the ‘peg’, allowed nations to borrow into the future and enjoy today, …that which had to be paid for into a far distant tomorrow.
    The downside is that greed and hubris allowed unfettered currency to run riot and borrow exponentially [and irrationally], into a future that the borrowers would not even be around, to pay back.
    This un~pegged~currency experiment [since 1971], is not going to end well, because if global exponential debt cannot be paid back, it logically,.. won’t be paid back. And the people expected to pay it back [our grandchildren], will certainly give it short shrift. Forget the currency debt/deficit maelstrom,… its beyond hope. If you don’t want your grandchildren to despise you, you need to convert any residual transient currency you have, back into fungible money which you can pass on as real tradable value. [ IMHO ]

  • Paul Pettinger 19th Jan '16 - 8:10pm

    George – you still do not seem to understand the basic logic of Keynes’s argument, of economic interdependence. It is simple concept, with quite radical implications. What do you think Keynesian analysis would advise when this apparent expansionary phase is slow and drawn out, and inflation and interest rates are almost zero?

  • Barry Snelson 19th Jan '16 - 8:18pm

    Indigo – wise words indeed. I might take out a big Wonga loan and buy gold.

  • Barry Snelson 19th Jan '16 - 9:59pm

    Peter, Thank you and as to your two paragraphs
    1) Or not, as the case may be but this endless ’tis / ’tisn’t of bickering economists is obscuring the view. Both Keynesians and Anti-Keynesians are dependent on the eventual ‘future miracle’ of wealth creation actually happening within our borders, I am just appealing for their powerful brains be deployed in proposals to deliver that.

    2) The LibDem manifesto on economic revival is no better than the others. It is just warmed over leftovers and dependent on those twin miracles – unspecified ‘training’ and ‘green technology’. It has clearly been written by someone whose technological attainments are such that they think Ohms Law is a detective series.

  • Barry Snelson 19th Jan '16 - 10:54pm

    George,
    “suggestions for a faster solution to the trade deficit” are what it’s all about. My belief is that if the LibDem party, or at least a capable and imaginative sub group thereof, can present the British people with a convincing set of proposals on that theme (together with its existing credibility in the areas of fairness and humanity) then it could claim the gap that has opened between dark blue conservatism and bright red labour.
    I have proposals of my own but they are very radical indeed and I would only share them in the right environment and only to an open minded audience (who I would expect to have equally radical ideas of their own to stimulate a creative debate). There are many voices on these blogs but some seem to have their Transmit/Receive buttons firmly welded on “Transmit”.
    The calls for ‘infrastructure’ debate leaves me a little cold. I do not see how we benefit from Japanese trains, running on French metals through holes drilled by German tunnelling machines. Whose economy are we trying to revive, exactly?

  • Paul Pettinger 20th Jan '16 - 3:11am

    George, I wrote:

    ‘George – you still do not seem to understand the basic logic of Keynes’s argument, of economic interdependence.’

    To which you have replied:

    ‘Sorry. I don’t understand. Are you saying the OBR, the IMF, the BofE and Vince Cable don’t understand the basic logic of Keynes’s argument.’

    Funnily enough I meant you still do not seem to understand the basic logic of Keynes’s argument.

    George Kendall wrote ‘You say I am “talking about pursuing stimulus when the budget is balanced/healthy”. I’m confused. Where did I say that.’

    You wrote, in the opening post, ‘If we had a balanced budget, I could understand the argument for more stimulus.’

    George Kendall wrote ‘Regarding my politics, have a read of the following. I regard myself as centre-left.’

    But you have consistently argued, such as in the closed forums, for the Party to continue a centrist approach.

    ‘But why don’t we go back to the question of this thread. I’ve given my opinion. Paul, when should we be reducing the deficit? If not now, in what situation should we?’

    Given the interdependence in the economy it’s not entirely in the Government’s gift.

  • If you have free markets and do not produce your own stuff, then you will have a trade deficit. Imports are not the consequence of governments running a budget deficit. They are a consequence of handing over the manufacturing of everyday items, clothes, pots. pans, pens, etc. to foreign manufacturers. Ghandi understood this when he blocked the importation of British cloth. We on the other hand think Primark and the various manifestations of pound shops are great business models. The only way to get the trade deficit down is actually tariffs and protectionism, but they have their own knock on effects. Most countries who develop their own arms by the way protect their defence manufacturing through heavily backed up protectionist government contracts.

  • Eddie Sammon 20th Jan '16 - 6:15am

    Glenn makes a very good point on trade deficits and exports. We need to boost our exports, which is why I think the #SaveOurSteel campaign is a great one for Lib Dems to take up (but no blank cheques).

    We are losing our steel jobs, our oil jobs, possibly our finance jobs. We need a hard-headed economic policy and not one based on theories about everyone being a rational actor. Instead we have things like government sponsored cartels (Opec) and people treating oil prices as a weapon of war. It’s definitely not profit maximisation at the moment.

  • I know I am adding to the distracting from the core topic but I think a point has been missed in one of the spur discussions.

    David Raw

    “But isn’t that exactly what the Coalition Government did post 2010 with Quantitative Easing”

    Yes, but I think Joe was unclear. I assume he is talking about an un-ending print to spend policy causing hyperinflation. The QE programme did cause inflation but it was limited. It is also worth remembering the intention of the QE programme was to cause inflation to rise (in response to the concern that it would be negative by forecasts). So it did what was intended.

    Your point about how it was done is correct and I would havce suggested that the mechanism would have been better by “helicopter drop” as it would have seen a direct effect and would have been easier to see the immediate effect where it was wanted. That is not to say that the intention of the BoE were wrong, they were just trying to be cautious.

    Funding regular spending via money printing would ultimately result in hyperinflation but a set amount of money printing may just produce a limited bout of inflation (compared to where inflation would have otherwise have been).

  • Eddie Sammon 20th Jan '16 - 4:09pm

    Hi George, to answer your question about the budget deficit: I am happy cutting now, but not much more. It gets to the stage where we know the economy didn’t crash because the public sector was severely over-bloated, so we don’t need many more cuts in it, I don’t think. This was always my problem with Yvette Cooper’s analysis: she would the economy didn’t crash because of public spending and then recommend cutting it.

    To get back to the point on protectionism: I don’t like protectionism either, but we need to know the motives of the actors in the market. It would be a disaster if artificially cheap goods put one of our industries out of business and then they exploited us by raising their prices again in the future.

  • Paul Pettinger 20th Jan '16 - 6:26pm

    George – you continually ignore what I say, but here’s goes!

    “What I meant is what Mark just said: if you’ve out of recession, into the expansionary phase, then you should get your finances under control. Independent report (
    http://independentreport.blogspot.co.uk/2012/03/john-maynard-keynes-was-right-and-not.html ) believes this is what Keynes advocated. Presumably you disagree with them. Is that right?”

    That seems a strange thing to ask. For a country with a growing population we are experiencing a pretty feeble expansionary phase, but why do you presume I would disagree with reduced spending per se? Do you think the Keynesian approach is actually cover for crowbarring in profligate spending, rather than a helpful analysis that better explains reality? I know some people on the right suspect this (accepting that we are economically interrelated, rather than independent, challenges their world-view), as well as others who think managing public finances is akin to managing a house hold budget. I am confused by your question.

    I’m not unconcerned by public debt, but I think it has been unhelpful that there has been so much focus and debate around it, and so relatively little on private debt in the property market (which is what caused the crash). Given that the UK still has spare capacity in its economy; a backlog of much needed infrastructure projects; a growing population, and very low inflation and interest rates, I think it is a mistake to focus on reducing public spending at the moment, and especially reducing capital spending.

    More generally, there are many things we could be doing to promote a healthier economy. I think we need to radically change the tax system, so that over time tax is rebalanced away from labour (hard work) onto land and, more generally, to incentivise greater investment in research and development (the UK invests a lot less of its GDP than the US or Scandinavia). I think we need to continue with an active industrial strategy that helps protect high tech supply chains and allows specialist hubs to grow (the EU should take a greater lead in this). We need to build many more homes – for social and economic reasons.

    I think the narrow focus on the deficit in recent years has impoverished debate on macroeconomic policy, both in the Party and country. To some extent I think this is intentional, to help justify an ideologically motivated reduction in the size of the state that would otherwise be unpopular.

  • petermartin2001

    “Can you just define what you mean by capital spending? What about the education of our young people? Can we define all that as capital spending?”

    No.

    “a hospital building as good capital spending, but paying the salaries of doctors and nurses who may be engaged in saving lives and getting people healthy again as bad current spending?”

    This is the problem where people get in to the habit of classifying:
    Capital = Good
    Current = Bad
    And consequently people like Gordon Brown try and reclassify current spending as capital, debasing language to confuse discussion in the hope of wrong footing their opponents but simply look dishonest.

    If I buy a house it is capital spending, which can be both good or bad as it provides me with a need (shelter) but may cause me significant future costs if it has serious structural problems. It also may restrict my geographical flexibility.

    When I buy food it is current spending, this is good as I need it to live, though can be bad if I buy and consume lots of cream and lard, as it will adversely affect my health.

    Teachers salaries are clearly current spending but doesn’t mean teaching children basic numeracy and literacy is “bad.”

    Both Capital and Current spending can have better and worse uses for particular objectives. Educating adults who lack basic literacy and numeracy skills to bring them up to a better standard will be more useful for economic growth than funding more English Literature PhDs. It depends on what you are spending to achieve. In Health, treatment of the elderly for cancer which extends their life will cause more costs down the line with further treatments so is not producing economic gains but I don’t know any one who wouldn’t describe such spending as “good.”

    Equally capital spending improving transport (road and rail) between the northern cities will produce more economic benefit than building lots of art galleries, but it depends on what you are hoping to achieve.

  • Paul Pettinger 22nd Jan '16 - 8:15pm

    Hi George, focusing just on short periods of recent growth, as you have done, doesn’t make sense. If you compare the last recession with all others in the UK in living memory, the one just gone has had the most anaemic recovery (the UK had a relatively strong Great Depression). Without acknowledging this I don’t know how you can expect me to engage seriously. I am afraid you appear to be being selective to suit your argument, rather than taking in the bigger picture (including looking at unused capacity in the economy).

    You are also being selective in regards to centrism. We have just pursued centrism and it has been an unmitigated disaster. I find your views on economics and lib dem strategy irksome because I think they are flawed and damaging, and because even now when we can see consequences of these approaches (the anaemic growth in productivity and the 2015 election, where the Party got squeezed like a lemon) you don’t seem to change your opinion. Frankly, I find this rather irrational.

    Indeed, you seem to be talking as if Yvette Cooper is someone we should join with or otherwise has the kinds of (authoritarian centrist) views that we should be catering to. Your ideas keep terrifying me!

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