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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Jeremy Corbyn faces a dilemma as Brexit solidifies: which half of his voters should he disappoint?

He comes from a tradition on the left that sees the EU as a capitalist club.

Imagine a man who voted to leave the European Economic Community in 1975. A man who spoke out against the Maastricht Treaty in 1993, saying that it “takes away from national parliaments the power to set economic policy and hands it over to an unelected set of bankers”. A man who voted against the Lisbon Treaty in 2008.

You don’t have to imagine very hard, because that man is Jeremy Corbyn. When campaigning for the Labour leadership in 2015, he told a GMB hustings, “I would ­advocate a No vote if we are going to get an imposition of free-market policies across Europe.”

When Labour’s Brexiteers gathered to launch their campaign in 2016, several seemed hurt that Corbyn and his shadow chancellor, John McDonnell, were not there with them. “It is surprising, when we voted against the advice of the chief whip on a number of European issues over the last decades, that Jeremy and John, who have always been in that lobby with us, that they would want to lead a campaign that isn’t even asking for a renegotiated position,” said the MP Graham Stringer.

I mention this because since the election campaign started in April, I keep having an odd experience – people insisting that Corbyn is not a Eurosceptic, and that he will use Labour’s new-found strength to argue for a softer Brexit. Others claim that Labour’s current position on freedom of movement (ending it) is the obvious, common-sense – even progressive – choice.

This matters. Look, if the evidence above doesn’t convince you that the Labour leader is intensely relaxed about exiting the European Union, I don’t know what else would. Yet it’s clear that some Labour activists strongly identify personally with Corbyn: they find it hard to believe that he holds different opinions from them.

The second factor is the remaking of Brexit as a culture war, where to say that someone is a Eurosceptic is seen as a kind of slur. Perhaps without realising it, some on the left do associate Euroscepticism with Little Englanderism or even flat-out racism, and see it as a moral failing rather than a political position.

But I’m not impugning Jeremy Corbyn’s character or morals by saying that he is an instinctive Brexiteer. He comes from a tradition on the left that sees the EU as a capitalist club. You can disagree with that premise but it’s a respectable line of reasoning.

Also, the Euroscepticism of Corbyn and his allies will undoubtedly give them an advantage in the months ahead; they are not consumed by fatalism, and the members of McDonnell’s shadow Treasury team feel that the removal of European state aid restrictions can help revive ailing bits of the British economy. They have a vision of what an ideal “Labour Brexit” would be – and it’s not just sobbing and begging Emmanuel Macron and Angela Merkel to take us back.

We do, however, need a reality check. Now that the necessary humble pie has been eaten, Labour’s unexpected revival at the ballot box means we can begin to treat Corbyn as a normal politician – with the emphasis on the second word. He’s not the Messiah, but he’s not a joke either. He is a charismatic campaigner who is willing to compromise on second-tier issues to achieve his main objectives.

From the general election, we can see just how good a campaigner Corbyn is: he can fire up a crowd, give disciplined answers to interviewers and chat amiably on a sofa. That throws into sharp relief just how limp his performances were last year.

He might have little else in common with Theresa May, but they both looked at the EU referendum and thought: yeah, I’m going to sit this one out. He called on activists to accept the EU “warts and all”; and said he was “seven, or seven and a half” out of ten in favour of staying in it.

For both leaders, this was a pragmatic decision. May did not want to be overtly disloyal to David Cameron, but neither did she wish to risk her career if the result went the other way.

Anyone in Labour would have been equally sane to look north of the border and back to 2014, and remember just how much credibility the party immolated by sharing stages with the Conservatives and allowing itself to be seen as the establishment. By limiting his involvement in the Remain campaign and whipping his MPs to trigger Article 50, Corbyn ended up with a fudge that gave Labour some cover in heavily pro-Brexit regions of the country.

That’s the politics, but what about the principle? I can’t shake the feeling that if Corbyn campaigned as hard for Remain in 2016 as he did for Labour in 2017, we would still be members of the European Union. And that matters to me, as much as left-wing policies or a change in the rhetoric around migrants and welfare claimants, because I think leaving the EU is going to make us poorer and meaner.

That’s why I worry that many of my friends, and the activists I talk to, are about to be disappointed, after waiting and waiting for Labour to start making the case for a softer Brexit and for the single market being more important than border controls. As Michael Chessum, a long-standing Momentum organiser, wrote on the New Statesman website, “Recognising the fact that immigration enriches society is all very well, but that narrative is inevitably undermined if you then choose to abolish the best policy for allowing immigration to happen.”

Labour’s success on 8 June was driven by its ambiguous stance on Brexit. To Leavers, it could wink at ending freedom of movement when they worried about immigration; to Remainers, it offered a critique of the immigrant-bashing rhetoric of recent times. But can that coalition hold as the true shape of Brexit solidifies? Over the next few months, Jeremy Corbyn’s biggest decision will be this: which half of my voters should I disappoint?

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

This article first appeared in the 22 June 2017 issue of the New Statesman, The zombie PM

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