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.

Getty
Show Hide image

Has Arlene Foster saved power-sharing in Northern Ireland?

The DUP leader's decision to attend Martin McGuinness' funeral was much more than symbolic. But is Gerry Adams willing to make a deal?

After some prevarication, DUP leader Arlene Foster chose to attend the funeral of Martin McGuinness in Derry today. Her decision to do so cannot have been an easy one.

A substantial part of her loyalist base has noisily resisted attempts to memorialise the late deputy first minister as anything other than an inveterate killer. Foster herself notes in today’s Belfast Telegraph that the former IRA commander was responsible for the deaths of “many neighbours and friends”. And in 1979 – aged just eight – she bore witness to the bloody aftermath of an IRA attack in her own home: her father, a reservist police officer, was shot in the head by a gunman later eulogised by McGuinness.

Her attendance at today’s funeral is thus noteworthy and has been the subject of due praise. She was twice applauded by the congregation: as she took her seat, and after Bill Clinton singled her out in his eulogy. It is, however, much more than the symbolic gesture it might appear.

Last month’s election, which saw the DUP lose 10 seats and unionist parties lose their Stormont majority for the first time in nearly a century, proved Foster to be damaged goods. She was – and remains – tarnished by the RHI scandal but also by her crass behaviour towards the nationalist community, particularly on Irish language issues.

Her carelessly won reputation as a truculent bigot will therefore not be easily lost. Her departure remains a red line for Sinn Fein. But with just four days until the deadline for a new devolution settlement, Foster’s presence at McGuinness’ funeral is the clearest indication yet of the DUP’s carefully calculated strategy. It isn’t quite a resignation, but is nonetheless indicative of the new manner in which Foster has carried herself since her party’s chastening collapse.

She has demonstrated some contrition and offered tacit acknowledgement that her election shtick was misjudged and incendiary. Her statement on McGuinness’ death was delicately pitched and made only oblique reference to his IRA past. In the absence of a willingness to allow Foster to step down, the decision instead has been taken to detoxify her brand.

The conciliatory Foster the DUP will nominate for First Minister on Monday will as such at least appear to be apart from the dogwhistling Foster who fought the election – and her attendance today is the superlative indication of that careful transition. There has been talk that this increases the chance of a deal on a new executive. This is premature – not least because the onus is now almost entirely on Sinn Fein.

Theirs is just as much a mandate to reject Stormont as we know it as it is to return and right the DUP’s wrongs. Gerry Adams, the last member of the Armalite generation standing, has made this abundantly clear – and has hardened his line just as Foster has made sure to be seen magnanimously softening hers. He said last night that he would not tolerate any extension of power-sharing talks beyond Monday’s deadline, and called on Dublin to prevent the UK government from re-instating direct rule.

Though Adams also maintained a deal was still possible in the coming days, his statement augurs badly. As the former UUP leader Lord Empey told me on the day McGuinness died, the Sinn Fein president – the ideologue to McGuinness’ Stormont pragmatist – is now entirely without equal within his party. Though he has set the transition to a new generation of female leaders in train, he remains in total control. His demand for Dublin’s involvement is also telling: as the leader of the third-biggest party in the Dail, his is an all-Ireland long game. Enda Kenny will soon depart, offering Fianna Fail – riding high in the polls – a useful pretext to renegotiate or scrap their confidence and supply arrangement with his minority government. Sinn Fein are on course to make gains, but implementing Brexit and austerity as partners in a Stormont executive would undermine their populist anti-austerity platform.

As such, Empey predicted McGuinness’ death would allow Adams to exert a disruptive influence on the talks to come. “I don’t think it’ll be positive because for all his faults, Martin was actually committed to making the institutions work,” he said. “I don’t think Gerry Adams is as committed – and it was obvious from the latter part of last year that Gerry was reinstating his significant influence in the party. For that reason I think it will make matters more difficult.  I hope I’m wrong, but that’s my sense.”

He is not alone. There was, earlier this week, growing confidence in Westminster that some fudge could be reached on the most contentious issues. It isn't impossible - but Adams’ renewed dominance and rejection of the extended timeframe such negotiations would undoubtedly require suggests a new executive is as unlikely a prospect as it has ever been. With Foster quietly reinventing herself, the DUP could be the big winners come the next election (which could come this year and reinstate a unionist majority) – and the resurgent republicans might well rue the day they squandered their big chance.

Patrick Maguire writes about politics and is the 2016 winner of the Anthony Howard Award.