I don't believe, Mehdi, that you really approach the deficit as an economic issue but as a political one, exactly as Darling did and Osborne is doing. Thus you seek out the views of economists who appear to support views you already hold, as do all political animals.

The chancellor is a political appointee to a political job, and budgets are political events. The current government can tap into public feeling against those who live out of the taxpayer's pocket and at the same time cut down the numbers of those who have a direct financial interest in the election of a Labour government; that's good politics, and economic arguments hold no real sway. Of course Labour figures will say the economy would recover faster under their regime, and Conservatives will say the opposite, but neither will be able to prove their case.

If the economy is showing significant growth by 2015, as it is highly likely to do, then the Conservative will be able to cash their political chips as votes. If not, they'll be stuffed. Either way, it's politics, and nothing to do with dead economists.

You need a public sector just as much as a private sector - not as a last resort, but as a proper foundation to work from. Without public, private goes under. This seems to have been forgotten at the moment, but the problem will reveal itself before long.

Let's also remember that the private sector is the main culprit in the production of a whole lot of 'flexible' zero-security jobs which Britain suffers from an excess of. Not a worthy model for the future.

The Budget was rotten at the core and we are all going to suffer from it.

Why don't you tell us why Germany, Italy, America and Greece are/will be making huge cuts in public spending, like Sweden and Canada before them? Obama tried the Keynesian approach, it failed.

I'm a deficit denier too. I think we should all be very cautious about accepting any statistically generated estimate. In the estimating of a structural deficit, every input has to be statistically generated. First they have to estimate the cyclical deficit so that they can subtract it from an overall projected (ie estimated) deficit. Then they estimate future non-cyclical expenditure and finally estimate income. The difference is the structural deficit! Talk about hypothesis based on hypothetical assumptions ... and for this the ConDems are justifying their economic risk taking and making 1.5M unemployed.....

In other words, the structural deficit is the con that we are invited to buy into.

I am an austerity denier also
There is a class war going on never as sharply focussed

As when that Francis Maude comes on Newsnight telling us to empty our own bins
Hazel Blears then pipes up with what a great Idea
Economics of monetartism is mad and inhumane
Keynes at the very least

Some of the best moments of PMQs!..."dupes",“deficit denier” and don't forget the "deficit activist" Marvellous!

I assume all you deficit deniers get free membership of the Flat Earth Society as well.

Should we not change the BOE target from 2% inflation to something more sophisticated and humane like the US FED target of "goals of maximum employment, stable prices, and moderate long-term interest rates"?
Do the Tories want to see a repeat of the social unrest caused the last time they ignored unemployment?

Ah, now I understand. All that I need to do is to "contextualise" my overdraft. Thanks for the advice, I'll discuss it with my bank manager.

"Forlonehope" - I'm sorry to break it to you but the budget deficit and the national debt are not like household debts or your personal "overdraft". But how can I criticize you, when the Chancellor and the Prime Minister have as loose a grasp of macroeconomics as you do?

Rob,
I dont think Keynes suffered from "economic illiteracy". And, his theories have been proved right time and time again since the 1930's.

How about you tell us why this time it wont work?

I don't know if you've heard "Tom", but Herbert Hoover's dead too, but that hasn't stopped Cameron and Osborne from behaving like latter-day Hooverites and we all know what happened in the late 1920s, early 1930s. Or have you not read the history of the Great Depression?

Well said Mehdi but be careful when using the term Hooverite. Amazingly there are those on the right who think that Hoover was a proto-Keynesian. See the comments in this article for an example:
http://www.leftfutures.org/2010/06/a-budget-based-on-six-right-wing-myths/

I accept my grasp of macroeconomics isn't anything near perfect, but could the Keynesian approach not lead to a repeat of slagflation?

Whilst the General Theory has merits to it, it is far from being a perfect model.

Tom,
Keynes might be dead, but luckily he left behind several really interesting books, telling us about his theories on money, economics and finance. Ad do you know the really weird thing? He's been right every time, even though he is dead! Lucky or what?!

"JohnRuddy
14 July 2010 at 18:45
Rob,

I dont think Keynes suffered from "economic illiteracy". And, his theories have been proved right time and time again since the 1930's. "

It's not Keynes that's the economic illiterate", it's the silly people like Hasan that invoke his name and employ a selective quote about paying folk to dig holes and fill them up again, to justify the continuation of the madcap policies of NULab. Incidentally, Keynes's theories have not been "proved right time and time again since the 1930's". Even with the best empirical data/models, no economic theory - particularly Keynes's macroeconomic speculations - is capable of being proved right or wrong.
You don't need to be an up-your-own-arse post-modernist to realise that economics isn't the sort of discipline that's amenable to rigorous empirical testing of macro-theories...specific models, say debt pricing, yes.
In the interests of educating NS readers re the economics of debt and why Hasan is a twit, the class can start with the following article from today's Indi:

http://www.independent.co.uk/news/uk/politics/britainrsquos-debt-the-unt...

"We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step."

Mmm.... Callaghan 1976.

That's the problem with government stimulus.

The issue here is the ability of the private sector and taxpayers to pay for government stimulus. It is a simple opportunity cost, divert their spending and their consumption to government.

In other words, diversion of aggregate demand from private to public consumption.

There are two ways to fund a stimulus, one through reserves, another through borrowing.

The UK had to go down the borrowing route because this government threw Keynesian economics out of the window from 1997 to 2008.

If you borrow money for government to spend it, you are effective taking money from the productive parts of the economy and spending it through an unproductive part. You are also mortgaging aggregate demand in the medium term because private consumption denied through taxation (to repay the deficit borrowing) affects economic growth by reducing propensity to save and hence private investment.

Public services have not been productive in their outputs since 1997, in fact for every £1 spent, only 97p has been returned.

It is throwing good money after bad.

Perhaps you should read:-
http://www.independent.co.uk/news/uk/politics/britainrsquos-debt-the-unt...
and try again. Are you seriously suggesting economic growth alone will solve this problem? Anmd are you seriously suggesting the Labour government were not largely responsible for this state of affairs?

Mehdi,

great article. Though I think you are wrong on one point. David Milliband agrees with Alistair Darling's last Budget.

"The public finances need addressing. Labour’s plans {ie Darling's last Budget] would halve the budget deficit and remove the bulk of the structural deficit in four years. It is the sensible, credible middle-ground between extreme cuts and unchecked spending. But the government’s proposals, designed without an escape hatch in the event of slowing growth, reflect ideology, not realism." - David Milliband

http://www.ft.com/cms/s/0/d72f4ce8-95c5-11df-b5ad-00144feab49a.html

@aardvark10

"Are you seriously suggesting the Labour government were not largely responsible for this state of affairs?"

The financial crisis was international in nature, but mainly originating in the USA. The incompetence of British bankers (e.g. Adam Applegarth, Fred Goodwin) in managing risk in their own companies was the major cause of our problems here.

National Audit Office report December 2009

"The National Audit Office has concluded that the public support provided to UK banks by the Treasury was justified, given the scale of the economic and social costs if one or more major banks had collapsed. ... The final cost to the taxpayer will not, however, be known for a number of years.

"Today’s overview of the government’s response to the crisis shows that the purchases of shares by the public sector together with offers of guarantees, insurance and loans made to banks reached £850 billion, an unprecedented level of support."

http://bit.ly/7OMtKZ