Both George Osborne and Ed Balls are blinded by "fiscal consolidation". Photo: Getty
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Forget our politicians' fixation: growth, not the deficit, is what really matters

The Autumn Statement performances today shows our political leaders on both sides should stop fixating reducing the deficit to zero.

Today’s Autumn Statement performance – George Osborne’s set-piece and Ed Balls’ improvised response – remained stuck in the rut of “fiscal consolidation”. This is the doctrine that reducing “the” deficit – that is, the excess of public spending over tax revenues – is what politicians should concern themselves with above all else.

Osborne and Balls attacked each other’s records, but the bit to worry about is what they agreed on. There are two parts to this.

The first is not just that the deficit needs to be reduced, but that it must be reduced, to zero, in the next parliament. It is true that when Osborne says this, he is including capital spending within his limit, whereas Balls is excluding it. This is an important difference within the terms of “fiscal consolidation”, but both endorse the virtue of zero.

The second is that the key to achieving consolidation is through some combination of cuts to public spending and increases in taxes.

Both of these are wrong and dangerous.

That is not to deny that the public sector deficit (at 5.6 per cent of GDP in the year to March) isn’t still too high. But what should the Chancellor be aiming for? A sensible near-term goal would be a deficit that’s small enough to stop the ratio of debt to GDP growing.

There’s nothing sacrosanct about a steady debt to GDP ratio but as a point on a long recovery from a financial crash, it is an important marker, a sign at least of stability from one year to the next. Simon Wren Lewis and Jonathan Portes note that that point would be reached, given current levels of growth and inflation, with a deficit of around 3 per cent of GDP.

A 3 per cent deficit: if you want a goal, a second base after the first base of starting to bring the deficit down, then that, not zero, should be it. And to reach it, should we favour cuts or tax rises? The answer may well be “neither”. Contrary to the rhetoric of fiscal consolidation, the public sector deficit is not actually “the” deficit, but just one of several imbalances across the economy – surpluses or deficits – which between them always add to zero in the national accounts.

The point is that the 5.6 per cent public sector deficit has counterparts in other sectors, around 1 per cent for the corporate sector and 4.5 per cent for the foreign sector (the rest of the world’s surplus with the UK). The fourth, household, sector was close to zero last year.

So it is not just a question of getting the public sector deficit down but of getting the foreign surplus down and the corporate surplus turned back into a deficit (probably its normal state pre-2003 on the way it is now calculated). But in a laissez faire world, with free trade, no capital controls, and big business ruling the roost, policies to address these wider imbalances are barely conceivable.

Instead of the same-old Autumn Statement show rehashing the script of fiscal consolidation, what we need is one that presents an alternative view of where our economic priorities really lie.

First, instead of singling out the public sector deficit, this alternative would point to all the imbalances in the economy, surpluses and deficits, as integral parts of the problem. When this happens, a debate about how to reform the corporate sector and improve our economic performance in relation to the rest of the world can begin.

Second, it would stress that what matters most for debt sustainability is that the economy should keep growing – that is, higher real growth and inflation. Here is a statistic with which Balls quite rightly berated Osborne. In Labour’s last year, to June 2010, the economy grew in nominal terms by an impressive 6.3 per cent.

As Osborne slammed on the brakes, the recovery slowed sharply: 2.8 per cent to June 2011, 2.3 per cent to June 2012. Osborne has never bettered that 6.3 per cent. Avoiding such a slowdown after June 2015 is the top priority.

Peter Kenway is the Director of the New Policy Institute

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The UK is suffering from an extreme case of generational inequality

Millennials across the developed world are struggling. But the UK stands out. 


“Don’t it always seem to go, that you don’t know what you’ve got till it’s gone”

Joni Mitchell’s lyrics may refer to her first trip to Hawaii, but they could just as easily apply to UK trends in generational living standards that the Resolution Foundation’s Intergenerational Commission has uncovered. That’s particularly so in light of new analysis comparing these trends internationally.

While there are huge living standards differences between high-income countries, there is also much shared ground, with the financial crisis and demographic patterns putting pressure on younger generations’ living standards everywhere. But the UK stands out. With the partial exception of Spain, no other country in living memory has experienced as large a “boom and bust” in generation-on-generation progress across both incomes and home ownership rates.

On incomes, the millennials (born 1980-2000) who have reached their early 30s are just 6 per cent better off than generation X (born 1966-80) when they were the same age. This is very small progress indeed when compared with the progress older generations are enjoying – baby boomers (born 1946-65) in their late 60s are 29 per cent better off than the silent generation (born 1926-1945).

These sorts of slowdowns have occurred in most countries, but not to the same extent. In the US, millennials in their early 30s are doing 5 per cent worse than their predecessors, but this compares to relatively modest 11 per cent gains for generation X relative to the baby boomers. In fact, in the US – despite higher levels of income – the absence of generational progress is what stands out. Typical incomes in the US for those aged 45-49 are no higher for those born in the late 1960s than they were for those born in the early 1920s.

Back to the UK. The “had it then lost it” story is also clear when we look at housing. Our previous research has shown that young people in the UK face much higher housing costs (relative to incomes) than older generations did when they were making their way in the world. In a large part this is driven by the rise and fall of home ownership.UK home ownership rates surged by 29 percentage points between the greatest generation (born 1911-1926) and the baby boomers, but this generation-on-generation progress has been all but wiped out for millennials. Their home ownership rate in their late 20s, at 33 per cent, is 27 percentage points lower than the rate for the baby boomers at the same age (60 per cent).

This fall between generations is much smaller in other countries in which housing is a key areas of concern such as Australia (a 12 percentage points fall from boomers to millennials) and the US (a 6 percentage point fall). As with incomes, the UK shows the strongest boom and bust – large generation-on-generation gains for today’s older cohorts followed by stagnation or declines for younger ones.

Let’s be clear though, the UK is a relatively good place to grow up. Ours is one of the most advanced economies in the world, with high employment rates for all age groups. In other advanced economies, young people have suffered immensely as a result of the financial crisis. For example, in Greece millennials in their early 30s are a shocking 31 per cent worse off than generation X were at the same age. In Spain today the youth (15-30) unemployment rate is still above 30 per cent, over three times higher than it is in the UK.

But, if everything is relative – before the parking lot came the paradise – then the UK’s situation isn’t one to brush away. Small income gains are, obviously, better than big income falls. But what matters for a young person in the UK today probably isn’t how well they’re doing relative to a young person in Italy but how this compares with their expectations, which have been shaped by the outcomes of their parents and grandparents. It’s no surprise that the UK is one of the most pessimistic countries about the prospects for today’s young.

The good news, though, is that it doesn’t have to be like this. In other parts of the world and at other times, large generation-on-generation progress has happened. Building more homes, having strong collective bargaining and delivering active labour market policies that incentivise work are things we know make a difference. As politicians attempt to tackle the UK’s intergenerational challenges, they should remember to look overseas for lessons.