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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Why isn't Labour putting forward Corbynite candidates?

Despite his successes as a candidate, the organisational victories have gone the way of Corbyn's opponents. 

The contest changes, but the result remains the same: Jeremy Corbyn’s preferred candidate defeated in a parliamentary selection. Afzhal Khan is Labour’s candidate in the Manchester Gorton by-election and the overwhelming favourite to be the seat’s next MP.

Although Khan, an MEP, was one of  the minority of Labour’s European MPs to dissent from a letter from the European parliamentary Labour party calling for Jeremy Corbyn to go in the summer of 2016, he backed Andy Burnham and Tom Watson in 2015, and it is widely believed, fairly or unfairly, that Khan had, as one local activist put it, “the brains to know which way the wind was blowing” rather than being a pukka Corbynite.

For the leader’s office, it was a double defeat;  their preferred candidate, Sam Wheeler, was kept off the longlist, when the party’s Corbynsceptics allied with the party’s BAME leadership to draw up an all ethnic minority shortlist, and Yasmine Dar, their back-up option, was narrowly defeated by Khan among members in Manchester Gorton.

But even when the leadership has got its preferred candidate to the contest, they have been defeated. That even happened in Copeland, where the shortlist was drawn up by Corbynites and designed to advantage Rachel Holliday, the leader’s office preferred candidate.

Why does the Labour left keep losing? Supporters combination of bad luck and bad decisions for the defeat.

In Oldham West, where Michael Meacher, a committed supporter of Jeremy Corbyn’s, was succeeded by Jim McMahon, who voted for Liz Kendall, McMahon was seen to be so far ahead that they had no credible chance of stopping him. Rosena Allin-Khan was a near-perfect candidate to hold the seat of Tooting: a doctor at the local hospital, the seat’s largest employer, with links to both the Polish and Pakistani communities that make up the seat’s biggest minority blocs.  Gillian Troughton, who won the Copeland selection, is a respected local councillor.

But the leadership has also made bad decisions, some claim.  The failure to get a candidate in Manchester Gorton was particularly egregious, as one trade unionist puts it: “We all knew that Gerald was not going to make it [until 2020], they had a local boy with good connections to the trade unions, that contest should have been theirs for the taking”. Instead, they lost control of the selection panel because Jeremy Corbyn missed an NEC meeting – the NEC is hung at present as the Corbynsceptics sacrificed their majority of one to retain the chair – and with it their best chance of taking the seat.

Others close to the leadership point out that for the first year of Corbyn’s leadership, the leader’s office was more preoccupied with the struggle for survival than it was with getting more of its people in. Decisions in by-elections were taken on the hop and often in a way that led to problems later down the line. It made sense to keep Mo Azam, from the party’s left, off the shortlist in Oldham West when Labour MPs were worried for their own seats and about the Ukip effect if Labour selected a minority candidate. But that enraged the party’s minority politicians and led directly to the all-ethnic-minority shortlist in Manchester Gorton.

They also point out that the party's councillor base, from where many candidates are drawn, is still largely Corbynsceptic, though they hope that this will change in the next round of local government selections. (Councillors must go through a reselection process at every election.)

But the biggest shift has very little to do with the Labour leadership. The big victories for the Labour left in internal battles under Ed Miliband were the result of Unite and the GMB working together. Now they are, for various reasons, at odds and the GMB has proven significantly better at working shortlists and campaigning for its members to become MPs.  That helps Corbynsceptics. “The reason why so many of the unions supported Jeremy the first time,” one senior Corbynite argues, “Is they wanted to move the Labour party a little bit to the left. They didn’t want a socialist transformation of the Labour party. And actually if you look at the people getting selected they are not Corbynites, but they are not Blairites either, and that’s what the unions wanted.”

Regardless of why, it means that, two years into Corbyn’s leadership, the Labour left finds itself smaller in parliament than it was at the beginning.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.