The public sector deficit through the looking-glass

The government is ignoring the flip side of the its deficit reduction targets: they require us all to spend more.

Reducing the public sector deficit has been the Coalition's number one economic goal from the start. Inheriting a record deficit in 2009/10 – Labour’s last year – equal to almost 11 per cent of GDP, no new government, even if had wanted to, could have done anything else. 

The underlying reasoning – that a deficit this big is a sign of a something seriously amiss in the economy – was and is completely correct. Since the late 1980s, this deficit had averaged 2.5 per cent. In that period, the biggest it ever got was 7.5 per cent in 1993/4 as the economy began its recovery from the early 1990s recession.

But the approach of trying to reduce that deficit by cutting spending and putting up taxes alone is wrong. The reason why is that the public sector deficit does not exist in isolation. Instead, it is part of a chain of 'imbalances' linking the public sector with the household, corporate and overseas sectors. By definition (and measurement errors aside), these four imbalances, some surpluses and some deficits, always add up to zero.

The graph below shows the public sector deficit as a percentage of GDP, year by year from 1993/4 (the previous record deficit year). The figures up to 2011/12 are actual figures. Those for 2012/3 and beyond are the OBR’s latest forecast published last week. The odd-looking 2012/3 figures themselves are due to some one-off financial transfers between the corporate and public sectors. In the big picture they can be ignored.

Sources: ONS Quarterly National Accounts (to 2011/2) and Office for Budget Responsibility, March 2013 Economy Supplementary Tables, table 1.8, (from 2012/3)

Since there is nothing on the graph labelled ‘public sector deficit’ how can it be a picture of it? On the face of it, the graph shows the other three sector balances, with surpluses above the line and deficits below it. The public sector deficit is the total of these three. In years when all three are themselves surpluses, the public sector deficit is measured by the top of the bar stack: for example, just under 11 per cent in 2009/10. In years when one or more of the other balances is itself a deficit, this has to be subtracted from the top of the stack to get the measure of the public sector: for example, just under 7 per cent in 2008/9. This is a picture of the public sector deficit as Alice might find it, through the looking-glass.

This picture provokes questions. Let’s take three of them here. First, if the public sector deficit has this double life, as both itself and as this mirror image of the other three sectors, can we say which causes which? In simple terms, the answer is no; both sides of the mirror have a life of their own. This answer is enough to undermine the basic idea of ‘austerity’; that if only a government bears down on the public sector hard enough, all, eventually, will be well.

Second, what should we make of the economy in 2017/8, the last year of the OBR’s forecast? With a public sector deficit projected at 2.5 per cent (the long term average) and (though this cannot be seen in the graph) public sector debt at last falling as a percentage of GDP. Osborne would regard this as vindication. But by looking at the reflection of the deficit in the mirror, we see that 2017/8 bears an unfortunate resemblance not to the boom years either side of 1997 but to 2002/3, the year when things started going wrong under Labour as the economy came to be sustained by public and household borrowing. 

Third, if this is where austerity gets us, where do we need to go instead? The answer is that we must concentrate as well on the problematic surpluses, both the chronic corporate sector surplus (into its consecutive 16th year by the end of the OBR forecast) and overseas surplus with the UK – better known as ‘our’ balance of payments deficit. To the extent that there is a debate about alternatives to austerity they are for the most part about how to ‘kick start’ the economy. Without a programme for dealing with the twin surpluses, however, kick-start may turn into stop-start before we get anywhere near a sufficient level of economic activity.

And she looked from Tweedledum to Tweedledee, and from Tweedledee to Tweedledum, and from Tweedledum to Tweedledee again; but already it was impossible to say which was which.
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Theresa May condemns Big Ben’s silence – but stays silent on Donald Trump’s Nazi defence

Priorities.

You know what it’s like when you get back from your summer holiday. You have the inbox from hell, your laundry schedule is a nightmare, you’ve put on a few pounds, and you receive the harrowing news that a loud bell will chime slightly less often.

Well, Theresa May is currently experiencing this bummer of a homecoming. Imagine it: Philip’s taking out the bins, she’s putting the third load on (carefully separating shirt dresses from leathers), she switches on Radio 4 and is suddenly struck by the cruel realisation that Big Ben’s bongs will fall silent for a few years.

It takes a while for the full extent of the atrocity to sink in. A big old clock will have to be fixed. For a bit. Its bell will not chime. But sometimes it will.

God, is there no end to this pain.

“It can’t be right,” she thinks.

Meanwhile, the President of the United States Donald Trump is busy excusing a literal Nazi rally which is so violent someone was killed. Instead of condemning the fascists, Trump insisted there was violence on both sides – causing resignations and disgust in his own administration and outrage across the world.

At first, May’s spokesperson commented that “what the President says is a matter for him” and condemned the far right, and then the PM continued in the same vein – denouncing the fascists but not directing any criticism at the President himself:

“I see no equivalence between those who profound fascists views and those who oppose them.

“I think it is important for all those in positions of responsibility to condemn far-right views wherever we hear them.”

Unlike May, other politicians here – including senior Tories – immediately explicitly criticised Trump. The Scottish Tory leader Ruth Davidson said Trump had “turned his face to the world to defend Nazis, fascists and racists. For shame”, while justice minister Sam Gyimah said the President has lost “moral authority”.

So our Right Honourable leader, the head of Her Majesty’s Government, the Prime Minister of the United Kingdom of Great Britain and Northern Ireland, made another statement:

“Of course we want to ensure people’s safety at work but it can’t be right for Big Ben to be silent for four years.

“And I hope that the speaker, as the chairman of the House of Commons commission, will look into this urgently so that we can ensure that we can continue to hear Big Ben through those four years.”

Nailed it. The years ahead hang in the balance, and it was her duty to speak up.

I'm a mole, innit.