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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The Tory-DUP deal has left Scotland and Wales seething

It is quite something to threaten the Northern Irish peace process and set the various nations of the UK at loggerheads with merely one act.

Politics in the UK is rarely quite this crude, or this blatant. The deal agreed between the Conservatives and Northern Ireland's Democratic Unionist Party has – finally – been delivered. But both the deal and much of the opposition to it come with barely even the pretence of principled behaviour.

The Conservatives are looking to shore up their parliamentary and broader political position after a nightmare month. The DUP deal gives the Tories some parliamentary security, and some political breathing space. It is not yet clear what they as a party will do with this – whether, for instance, there will be an attempt to seek new leadership for the party now that the immediate parliamentary position has been secured.

But while some stability has been achieved, the deal does not provide the Tories with much additional strength. Indeed, the DUP deal emphasises their weakness. To finalise the agreement the government has had to throw money at Northern Ireland and align with a deeply socially conservative political force. At a stroke, the last of what remained of the entire Cameron project – the Conservative’s rebuilt reputation as the better party for the economy and fiscal stability, and their development as a much more socially inclusive and liberal party – has been thrown overboard.

Read more: Theresa May's magic money tree is growing in Northern Ireland

For the DUP, the reasoning behind the deal is as obvious as it is for the Conservatives. The DUP has maximised the leverage that the parliamentary arithmetic gives it. As a socially conservative and unionist party, it has absolutely no wish to see Jeremy Corbyn in Downing Street. But it has kept the Conservatives waiting, and used the current position to get as good a deal as possible. Why should we expect it to do anything else? Still, it is hardly seemly for votes to be bought quite so blatantly.

The politics behind much of the criticism of the deal has been equally obvious. Welsh First Minister Carwyn Jones – representing not only the Labour party, but also a nation whose relative needs are at least as great as those of the six counties – abandoned his normally restrained tone to describe the deal as a "bung" for Northern Ireland. Scotland’s First Minister Nicola Sturgeon was also sharply critical of the deal’s lack of concern for financial fairness across the UK. In doing so, she rather blithely ignored the fact that the Barnett Formula, out of which Scotland has long done rather well, never had much to do with fairness anyway. But we could hardly expect the Scottish National Party First Minister to do anything but criticise both the Conservatives and the current functioning of the UK.

Beyond the depressingly predictable short-term politics, the long-term consequences of the Tory-DUP deal are much less foreseeable. It is quite something to threaten the integrity of the Northern Irish peace process and set the various nations of the UK at loggerheads with merely one act. Perhaps everything will work out OK. But it is concerning that, for the current government, short-term political survival appears all-important, even at potential cost to the long-term stability and integrity of the state.

But one thing is clear. The political unity of the UK is breaking down. British party politics is in retreat, possibly even existential decay. This not to say that political parties as a whole are in decline. But the political ties that bind across the UK are.

The DUP deal comes after the second general election in a row where four different parties have come first in the four nations of the UK, something which had never happened before 2015. But perhaps even more significantly, the 2017 election was one where the campaigns across the four nations were perhaps less connected than ever before.

Of course, Northern Ireland’s party and electoral politics have long been largely separate from those on the mainland. But Ulster Unionist MPs long took the Tory whip at Westminster. Even after that practice ceased in the 1970s, some vestigial links between the parties remained, while there were also loose ties between the Social Democratic and Labour Party and Labour. But in 2017, both these Northern Irish parties had their last Commons representation eliminated.

In Scotland, 2017 saw the SNP lose some ground; the main unionist parties are, it seems, back in the game. But even to stage their partial comeback, the unionist parties had to fight – albeit with some success – on the SNP’s turf, focusing the general election campaign in Scotland heavily around the issue of a potential second independence referendum.

Even in Wales, Labour’s 26th successive general election victory was achieved in a very different way to the previous 25. The party campaigned almost exclusively as Welsh Labour. The main face and voice of the campaign was Carwyn Jones, with Jeremy Corbyn almost invisible in official campaign materials. Immediately post-election, Conservatives responded to their failure by calling for the creation of a clear Welsh Conservative leader.

Read more: Did Carwyn Jones win Wales for Labour  - or Jeremy Corbyn?

Yet these four increasingly separate political arenas still exist within one state. The UK was always an odd entity: what James Mitchell astutely termed a "state of unions", with the minority nations grafted on in distinct and even contradictory ways to the English core. The politics of the four nations are drifting apart, yet circumstances will still sometimes mean that they have to intersect. In the current instance, the parliamentary arithmetic means the Tories having to work with a party that celebrates a form of "Britishness" viewed increasingly with baffled incomprehension, if not outright revulsion, by the majority of Conservatives, even, on the British mainland. In turn, the Tories and other parties, as well as the news-media, are having to deal with sudden relevance of a party whose concerns and traditions they understand very little of.

Expect more of this incomprehension, not less, in the post-2017 general election world. 

Roger Scully is Professor of Political Science in the Wales Governance Centre at Cardiff University.

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