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16 June 2011

An economics lesson for David Cameron

Comparing the UK's finances to a maxed-out credit card betrays a poor understanding of basic account

By David Blanchflower

Ed Balls seems to be on track, as he is clearly rattling the coalition’s cage. He made an interesting speech today at the London School of Economics, where he called for a temporary reduction in VAT, which would help to boost spending. This seemed especially apposite on a day when the Office for National Statistics published retail sales numbers that were horrid. A VAT tax cut would have the added benefit that it would immediately lower the CPI, which jumped artificially in January when Slasher raised it.

David Cameron’s response to the Balls speech today apparently suggested that he is against tax cuts as a way to boost the economy. Amazing. A Treasury spokesman even suggested that tax cuts would lead to bankruptcy. “Tax cuts” has traditionally been a right-wing mantra, so that was something of a surprise — and unlikely to go down that well with his backbench MPs.

I am afraid it really is time that Cameron took some lessons in economics before he talks the British economy into the ground. He has been the most unpatriotic Prime Minister we have ever had, with his entirely false claims that the economy was bankrupt when it quite clearly was not (and never has been). He has done this for cheap political gain and it has contributed to a collapse in consumer confidence. He should be ashamed of himself — his job is to boost confidence, not to destroy it.

But most astonishing of all is Cameron’s repetition of Nick Clegg’s idiotic claims that the UK had maxed out its credit card.

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If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse.

Asinine nonsense. Cameron shows no understanding of basic accounting. I guess that isn’t surprising for someone who has never run a business and had to file basic accounts. Folks with silver spoons don’t need to do that. Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament and even Downing Street.

A little example makes clear that Cameron knows not what he is talking about. Suppose an individual receives a bequest from a long-lost uncle and is told it consists of a house with a mortgage on it of £200,000 and the house itself is worth £20m. Cameron would no doubt claim that it would be outrageous for the nephew to accept the gift because he would have to take on a mortgage of £200,000 on it. But that is absurd and the nephew is delighted at his good fortune and happily accepts the gift. The right question for the nephew would be: “How much is the asset (the house) worth, compared to the size of the liability (the mortgage)?”

The next generation will receive not only the debt but also the assets. The nephew and the Prime Minister need to compare the scale of the assets to any liabilities. Only a fool would focus solely on the liabilities.

Cameron is an economic simpleton. Yet everyone from Cameron’s aunt to the family’s pet fish, Eric, and the Conservative deputy, Michael Fallon, agree with Dave’s credit-card anology. Sensible people cringe.