An economics lesson for David Cameron

Comparing the UK's finances to a maxed-out credit card betrays a poor understanding of basic account

Ed Balls seems to be on track, as he is clearly rattling the coalition's cage. He made an interesting speech today at the London School of Economics, where he called for a temporary reduction in VAT, which would help to boost spending. This seemed especially apposite on a day when the Office for National Statistics published retail sales numbers that were horrid. A VAT tax cut would have the added benefit that it would immediately lower the CPI, which jumped artificially in January when Slasher raised it.

David Cameron's response to the Balls speech today apparently suggested that he is against tax cuts as a way to boost the economy. Amazing. A Treasury spokesman even suggested that tax cuts would lead to bankruptcy. "Tax cuts" has traditionally been a right-wing mantra, so that was something of a surprise -- and unlikely to go down that well with his backbench MPs.

I am afraid it really is time that Cameron took some lessons in economics before he talks the British economy into the ground. He has been the most unpatriotic Prime Minister we have ever had, with his entirely false claims that the economy was bankrupt when it quite clearly was not (and never has been). He has done this for cheap political gain and it has contributed to a collapse in consumer confidence. He should be ashamed of himself -- his job is to boost confidence, not to destroy it.

But most astonishing of all is Cameron's repetition of Nick Clegg's idiotic claims that the UK had maxed out its credit card.

If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse.

Asinine nonsense. Cameron shows no understanding of basic accounting. I guess that isn't surprising for someone who has never run a business and had to file basic accounts. Folks with silver spoons don't need to do that. Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament and even Downing Street.

A little example makes clear that Cameron knows not what he is talking about. Suppose an individual receives a bequest from a long-lost uncle and is told it consists of a house with a mortgage on it of £200,000 and the house itself is worth £20m. Cameron would no doubt claim that it would be outrageous for the nephew to accept the gift because he would have to take on a mortgage of £200,000 on it. But that is absurd and the nephew is delighted at his good fortune and happily accepts the gift. The right question for the nephew would be: "How much is the asset (the house) worth, compared to the size of the liability (the mortgage)?"

The next generation will receive not only the debt but also the assets. The nephew and the Prime Minister need to compare the scale of the assets to any liabilities. Only a fool would focus solely on the liabilities.

Cameron is an economic simpleton. Yet everyone from Cameron's aunt to the family's pet fish, Eric, and the Conservative deputy, Michael Fallon, agree with Dave's credit-card anology. Sensible people cringe.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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The Brexiteers have lost battles but they are still set to win the war

The prospect of the UK avoiding Brexit, or even a “hard” version, remains doubtful. 

Before the general election, the Brexiteers would boast that everything had gone their way. Parliament had voted to trigger Article 50 by a majority of 372. The Treasury-forecast recession hadn't occurred. And polls showed the public backing Brexit by a comfortable margin

But since the Conservatives' electoral humbling, the Leavers have been forced to retreat on multiple fronts. After promising in May that the dispute over the timetable for the Brexit talks would be "the fight of the summer", David Davis capitulated on the first day.

The UK will be forced to settle matters such as EU citizens' rights, the Irish border and the divorce bill before discussions begin on a future relationship. Having previously insisted that a new trade deal could agreed by 29 March 2019 (Britain's scheduled departure date), the Brexiteers have now conceded that this is, in Liam Fox's words, "optimistic" (translation: deluded). 

That means the transitional arrangement the Leavers once resisted is now regarded as inevitable. After the eradication of the Conservatives' majority, the insistence that "no deal is better than a bad deal" is no longer credible. No deal would mean the immediate return of a hard Northern Irish border (to the consternation of the Tories' partners the DUP) and, in a hung parliament, there are no longer the votes required to pursue a radical deregulatory, free market agenda (for the purpose of undercutting the EU). As importantly for the Conservatives, an apocalyptic exit could pave the way for a Jeremy Corbyn premiership (a figure they previously regarded as irretrievably doomed). 

Philip Hammond, emboldened by the humiliation of the Prime Minister who planned to sack him, has today outlined an alternative. After formally departing the EU in 2019, Britain will continue to abide by the rules of the single market and the customs union: the acceptance of free movement, European legal supremacy, continued budget contributions and a prohibition on independent trade deals. Faced with the obstacles described above, even hard Brexiteers such as Liam Fox and Michael Gove have recognised that the game is up.

But though they have lost battles, the Leavers are still set to win the war. There is no parliamentary majority for a second referendum (with the pro-Remain Liberal Democrats still enfeebled), Hammond has conceded that any transitional arrangement would end by June 2022 (the scheduled date of the next election) and most MPs are prepared to accept single market withdrawal. The prospect of Britain avoiding Brexit, or even a "hard" version, remains doubtful. 

George Eaton is political editor of the New Statesman.