Mehdi Hasan

Mehdi Hasan’s polemical take on politics, economics and foreign affairs

Borrowing is bad. Unless Gideon's doing it

Not only has growth stalled and austerity failed but the Tories can't even win the economic argument

By Mehdi Hasan Published 30 November 2011 14:42

As I watched the Chancellor deliver his Autumn Statement to MPs yesterday, I couldn't help but remember his 2010 conference speech in Birmingham and, in particular, this bit of the speech:

Imagine, if I were to stand up in the House of Commons in two weeks time and say: I'm cancelling the deficit plan.

I agree with Ed Miliband.

Let's delay the tough decisions.

Let's borrow more.

Let's go on adding to our debt.

Imagine if I said that.

Now imagine what would follow.

The market turmoil.

The flight of investors.

The dismay of business.

The loss of confidence.

The credit downgrade.

The sharp rise in real interest rates.

The extra debt interest.

The lost jobs. The cancelled investment. The businesses destroyed. The recovery halted.

The return of crippling economic instability.

Britain back on the brink.

Hmm. Yesterday, George Osborne stood up in the Commons to reluctantly reveal that he would indeed be borrowing more - an astonishing £158bn more than he had planned to in last October's Spending Review and an embarrassing £37bn more than the much-mocked Labour plan (or "Darling plan") to cut the deficit in half over the lifetime of this parliament (as outlined in the March 2010 budget).

The Opposition has put together these two tables below, based on yesterday's OBR figures:

OBR's forecasts for public sector net borrowing (£bn)
	2011/12	2012/13	2013/14	2014/15	2015/16
November 2010	117	91	60	35	18
November 2011	127	120	100	79	53
Change since Nov 2010	+10	+29	+40	+44	+35

OBR's forecasts for public sector net borrowing (£ bn)
	2011/12	2012/13	2013/14	2014/15	2015/16
June 2010 (pre-Emergency Budget)	127	106	85	71	n/a
November 2011	127	120	100	79	53
Change since before Emergency Budget	0	+14	+15	+8	n/a

Then there is the graph (number 2) put together by our friends at the Spectator which shows that public sector net debt, as a percentage of GPD, will be higher in 2014/2015 than it was forecast to have been under - yep, you guessed it! - the afore-mentioned Darling plan. ("We are sinking in a sea of debt," shrieked the Chancellor in his conference speech in 2009. Now we know that, despite his savage cuts, we'll still be "sinking" in an ever-greater "sea of debt" at the next election.)

So what I'm wondering is: why isn't "Britain back on the brink"? If the country was on the verge of defaulting on its debts and being downgraded by the credit rating agencies when borrowing was forecast to be lower and growth higher - under the Darling plan - back in 2009 and 2010, why don't the latest OBR figures - which also downgrade growth for the fourth (!) time since Osborne took over at the Treasury - presage financial and economic armageddon? Isn't this the best evidence for the claim by Joseph Stiglitz, the Nobel Prize-winning economist, that the then shadow chancellor was guilty of "scaremongering" about borrowing and debt in an interview in the New Statesman in February 2010?

Referring to Cameron and Osborne as modern-day "Hooverites", Stiglitz said:

I say you're crazy -- economically you clearly have the capacity to pay. The debt situation has been worse in other countries at other times. This is all scaremongering, perhaps linked to politics, perhaps rigged to an economic agenda, but it's out of touch with reality.

Before the Tory trolls arrive below the line to shout about bond markets, confidence and low interest rates, I don't deny Osborne's contention that "debt interest payments over the Parliament are forecast to be £22 billion less than predicted". But I do dispute his description of Britain as a "safe haven". And I ask the deficit fetishists: if low rates are a sign of economic success and market confidence, why then did Japan enjoy such low rates in the mid-90s, during its "lost decade"? Why have borrowing costs in the United States, in the aftermath of its fiscal stimulus, the failure to sign off on spending cuts and its credit-downgrade by Standard & Poors, plummeted to historic lows?

Sticking with the subject of "confidence, the eminent economist, former Tory frontbencher and biographer of Keynes, Robert Skidelsky, writes in today's Guardian:

We come to the question of confidence. The chancellor has repeatedly claimed the deficit reduction programme was, and is, necessary to maintain investor confidence in government finances. Confidence is very important, but also mysterious: the bond markets can believe a dozen contradictory things before breakfast. The main point is that confidence cannot be separated from the economy's performance. As it stalls, the creditworthiness of governments declines as their debt increases, raising the likelihood of default.

A year ago bond traders, having forgotten what little economic theory they knew, were inclined to believe that deficit reduction would in itself generate recovery. For several months the Osbornites fed them the fantasy of "expansionary fiscal contraction", the idea that as the deficit falls the economy would expand. This story is now exploded. It's the economy that determines the size of the deficit, not the deficit that determines the size of the economy.

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Tags: Autumn Statement OBR budget deficit George Osborne

More from Mehdi Hasan

View the discussion thread.

16 comments

Wed, 2011-11-30 16:30 — Des Demona (not verified)

@ Indu Pedant
'Who funds Labour?'

Largely the unions, who in turn are funded by their millions of members, all who have an opt out from the political levy.

Who funds the Tories?
Largely a select bunch of bankers wankers and chancers.

Next.

Mon, 2012-02-20 07:57 — Abraham2

The situation can easily deterirate though- see global central bank cutting dollar discount windows today. we ain't seen nothing yet... as u keep rocking (or trying to rock the Uk boat with your band of merry pranksters) u will come to understand why commanding a respect in th bond market will indeed prove useful in 2012. U ain't got it, most of the banks still haven't got it and definitely the peole are not being told it.

Wed, 2011-11-30 19:20 — Chesty Cough (not verified)

Gordon's boom and bust was better than just bust.

Tue, 2011-12-06 13:33 — Mr Danger

Sorry Phil, but that's wrong. ECB and Fed are both buying sovereign debt, so the UK is not alone. And it doesn't explain prices in the secondary market.

Also you link works about as well as your logic.

Wed, 2011-11-30 21:11 — Mr. Divine (not verified)

Mehdi: There will come a time when people will realise that GDP growth is a stupid goal. There are only so many plastic pop corn makers you can stuff in the attic. The idea that you should borrow even more money to buy more pop corn makers will laughed at like there is no tomorrow.

The one dimensional thought patterns about what should be done applies both to Labour and the Tories. Forget about growth ... work out how to improve different things. Please, no more advisory councils. Take a look at what Germany is doing with regards to alternative energy. The Health System needs improving as does the rail network. Forget about the roads. Concentrate on value and stop listening to one dimensional economists.

Wed, 2011-11-30 21:13 — Mr. Divine (not verified)

Ps Have you converted to Christianity yet?
Told you I was a Muslim.

Wed, 2011-11-30 22:13 — Mr. Divine (not verified)

The 4000 virgins are in our 'sub-consciousness'. There are different 'stages' that you go through when you are being 'psychotic'. Lots of women mounting you is one of them. When you go past the 'Muslim' stage you end up needing Jesus for it is him that saves you from complete insanity by his sacrifice and his love. Mohammed was a prophet in the sense that there were certain laws that were needed at the time to unify and help people. Jesus is the saviour for he represents the ultimate, and that is love.

Wed, 2011-11-30 22:56 — Politico (not verified)

Can we have another political editor of News Statesman please.

It is clear Medhi hasn't the capacity to engage his readers in genuine and fruitful debate. His articles are somewhat bizarre and peculiar.

He appears to copy and paste other peoples comments and quotes and adds a little bit of his own.

Pretty poor and puts me off subscribing to New Statesman which I would if there was balanced political debate.

Arrogance and ignorance

Wed, 2011-11-30 23:16 — capt-price (not verified)

Balanced political debate would put you off subscribing?

To keep you subscribing you need biased, one dimensional debate then?

Thu, 2011-12-01 00:36 — Graeme Hancocks (not verified)

The tory trolls appear to have already arrived! Freaks.

Thu, 2011-12-01 00:59 — Awake!

'if low rates are a sign of economic success and market confidence, why then did Japan enjoy such low rates in the mid-90s, during its "lost decade"? Why have borrowing costs in the United States, in the aftermath of its fiscal stimulus, the failure to sign off on spending cuts and its credit-downgrade by Standard & Poors, plummeted to historic lows?'
Mehdi u have to be careful talking about japan and the US unles u know your onions- which u don't. U can't 'learn' about bond markets just as u can't 'learn' to be a brain surgeon- it's experience in the end as each situation is different, which is why I;ve argued on this site so much before that economics is NOT a science, and the markets, although scientific in approach aren't always consistent.
Japan I've written about before, the US is reserve currency of the world and that entails quite a lot. They got downgraded and you're right, yields dropped- buy not cos they got downgraded, it's just there relative position improved as the euroclowns refused to follow thru the logic of integration and associated fiscal transfers. Japan? no one buys jap stocks for dividend, its was historivcally always a PE trade, and this and the fact that they are regarded as safe because the people there woudn't DREAM of striking, they are worker ants.. well it means u will get your money back.
U will disagre about Uk being a safe haven even as europe falls apart, even if u go back and look at the last years data and eurozone govt bond price action it's clear to see turning points where bond investors took fright at eurozone and piled into Uk gilts- u do it probably cos blanchflower quotes Krugman who in turn is motivated bt his realisation of his failed theories the last 25 years.
Whatverer the reason, one thing is for sure-bond mkts , DEBT markets, although predicated on some basic math also have to price intangibles, name credit if u like, and the Uk name is good right now- look at cds spreads mehdi. Why do u keep arguing with the mkt?
The situation can easily deterirate though- see global central bank cutting dollar discount windows today. we ain't seen nothing yet... as u keep rocking (or trying to rock the Uk boat with your band of merry pranksters) u will come to understand why commanding a respect in th bond market will indeed prove useful in 2012. U ain't got it, most of the banks still haven't got it and definitely the peole are not being told it.
unicredito needs to raise 50bn next year I believe. what u reckon gonna happen there?? i wrote 4 months ago, 25% of the worlds banks are bust- gettit??

Sat, 2011-12-03 18:04 — Phil Daniels (not verified)

As noted here, (with links to the speech in Hansard) http://www.newstatesman.com/blogs/the-staggers/2011/12/osborne-economic-..., David Miliband concisely and clearly demonstrated that Osborne's assertion that international markets had voted with their feet in buying UK gilts and driving down yields over the last 18 months was a load of codswallop because the biggest buyer of gilts in recent years has been not the international markets but the Bank of England.

Fri, 2011-12-02 13:59 — Drowsy! (not verified)

@Awake: You certainly seem to be an intelligent fella/lady but unfortunately you're arguent is all over place. Less strange sentence construction and more clear argument and people may listen to you. (Whatever the F*ck it is you're saying)

Thu, 2011-12-01 13:41 — Smiler (not verified)

Surely, the point here is that Keynesian economic thinking is critically flawed.

Fri, 2011-12-02 18:20 — rob andersen (not verified)

Drowsy
srry- it's just frustrating and boring having to re quote facts at people who are wilfully (and i realise its wilfully now) denying facts.
A CDS is a credit default swap- it's insurance against someone defaulting on an obligation or debt- the uk cds are MUCH MUCH cheaper that european counterparts, there is much much less demand for insuring againtst a UK govt default vs the euroclowns... Yet Mehdi insists this is not the case...and Balls, milliband etc. Thats politics, but the electorate can see thru that-it's why labour lost the argument on the economy (nothing to do with a leadership contest, they just pissed people off with blatent lies)
So whilst the idiot political wannabes and their attendant 'economist' friends jockey for position (i.e. lie blatently to electorate making inane promises), it becomes even more frustrating to watch the lies-EVERYTHING that has happened since 2007 was PLAIN to see- bond schedules are published, banks once a year have to publish accounts- yet which of the economists who so often are cited here, which of them warned?? Blanchflower now is trying to tell us 'told u so!' But he didn't tell us anything, just shouted that austerity woudn't work or wasn't working even before it had started... GDP growth next year- try -10%/+1% . u think i'm kidding...