I’m proud to be a “deficit denier”

The Tories have no empirical or historical basis for their hysteria over the debt.

I've spent the past year on this blog mocking and riling so-called climate-change sceptics or "deniers", so I'm amused to find myself for the first time included in a different list of "deniers". According to the Prime Minister, those of us on who are critical of his government's austerity measures, and prefer to delay spending cuts and tax rises, are "deficit deniers". Hilarious.

Let me be clear: I'd much rather be a so-called deficit denier than succumb, as the Tories and their allies in the media and the business world have, to "deficit hysteria". Those of us who oppose the coalition's fiscal sadism do not deny the existence of this country's largest Budget deficit since the war, nor do we pretend that cuts will never come. We prefer, however, to contextualise the deficit and to point out that, for example:

  1. the national debt as a proportion of GDP is much lower than at other periods in our recent history,
  2. the national debt as a proportion of GDP is lower in the UK than in the United States, Japan, Italy and other industrialised nations,
  3. the UK and Greek economies are not at all comparable,
  4. deep and early spending cuts don't guarantee the retention of our much-lauded triple-A credit rating,
  5. the deficit is a result of a collapse in tax revenues after a recession caused by the bankers, rather than Labour's "profligacy", and
  6. the best route out of debt and deficit is economic growth and fiscal stimulus rather than Hooverite cuts and premature fiscal consolidation.

This last point is perhaps the most important. I'm amazed that some senior Labour Party figures seem to have bought in to this Tory narrative of the deficit and the importance of deficit reduction.

The shadow industry secretary, Pat McFadden, said in a speech this morning that Labour's current opposition to cuts risks exposing the party to accusations by voters of "wishing the problem away".

Peter Mandelson says in his new memoir that the party's biggest mistake in its final years in office was "allowing ourselves to be characterised as indifferent to the deficit or in denial about the consequences as to what was happening in our public finances".

This is a load of rubbish. Labour figures should be at the forefront of explaining the importance of deficits in rescuing fragile economies from double-dip recessions. Labour figures should be, as David Miliband has said, making the "moral" case for deficits. Labour figures should be excavating their copies of J M Keynes's General Theory of Employment, Interest and Money.

As the economists Ann Pettifor and Victoria Chick argue, in a brilliant contribution on the Bloomberg website:

It may seem obvious that if you want to cut debt, you cut expenditure, but Keynes showed that the government finances were very different from a household budget. For him, macroeconomic outcomes were often the reverse of outcomes based on microeconomic reasoning.

Keynes was instrumental in the development of national accounts, which give us the opportunity to test his conclusions. Combining the official estimates with British economist Charles Feinstein's invaluable historical estimates permits an analysis of the impacts of fiscal policy over the past century.

They point out that there are "eight episodes over which changes in the public debt (as a percentage of gross domestic product) can be compared with those in public expenditure" and they report that "the results stand wholly opposed to the conventional wisdom". As Pettifor and Chick write:

Comparing for each episode the average annual change in the public debt as a share of GDP and the average annual growth in government expenditure in cash terms, we have results that are perhaps even more remarkable than Keynes might have imagined. There is a very strong relationship between changes in government expenditure and the public debt.

But, outside the two world wars, the relationship goes in the opposite direction to that predicted by most commentators: increases in public expenditure are associated with reductions in public debt. Very roughly, so long as there is unemployment, for every percentage rise in government expenditure, the public debt falls by half a per cent, and vice versa. This is very compelling evidence in favour of Keynes's insights.

Even Simon Jenkins -- no friend of Gordon Brown or Alistair Darling! -- argues in today's Guardian::

Worst of all for Osborne is that, were it not for the continued rise in public spending, Britain would still be in recession. The ONS was quoted today on the crucial role of government spending in the first three months of this year in underpinning the economy. Private wages have been falling by 1.9 per cent and state wages rising by 3.6 per cent. Osborne is right to assert that this dependency on government is unwise and unstable. But it is one thing to accuse the patient of being a drug addict, quite another to send him cold turkey overnight.

Everyone professes not to want a double-dip recession, yet every bit of news, from home and abroad, suggests that this is now a real prospect.

He adds:

Why the west's economic leaders seem so trapped in a pre-Keynesian time warp is intellectually intriguing. An answer recently given by the economist Paul Krugman in the New York Times is that they care more about their "institutional credibility" in financial markets than about refloating a depressed economy. They are like statesmen who prefer to rattle sabres than avert war.

Another answer, closer to home, is that politicians seek to curry favour from their immediate circle. In the crises of the 1960s and 1970s, Britain's rulers spent their time with trade unionists and businessmen. They neglected the "supply side" and generated raging inflation. Now they associate with bankers obsessed with the security of bonds, and therefore with budgetary asceticism. In this respect, Osborne is no different from Darling. Both ignore Keynes's simple insight that businessmen will not invest and the economy will not grow if there is no consumer demand for products.

Hear, hear!

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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