Debt, deficit, and economic incompetence

I was nearly about to post some of my own thoughts on this Fiscal Charter guff, then realised Richard Murphy has again said it for me. Annoying man, what with being reasonable, and right, and all that.

His brief point on the debt being only payable through growth is important -- the debt is £1.5 trillion. Trillion. In a super-optimistic scenario where the govt manages to run a surplus of £15 bn every year, it would take more than a century to pay that off. It's not going to happen. Even substantial reduction would require decades of consistent budget surplus. And "optimistic" here is debateable -- "surplus" sounds good, but I wonder if people would be so keen on "responsibility" if Labour started pushing the actually quite right-wing/centrist message that a government surplus means the state taking more from them in tax than it pays back into the economy?

Saying that we need to fix the roof while the sun shines (a motherhood & apple pie truism) is disingenuous if taken, as clearly implied, to mean now -- we just announced a second quarter of negative inflation. Amazingly, the Tory policy of repeatedly saying that we are in strong recovery is being parrotted by the media just like the "Labour caused the crash" message, so plenty of people do actually believe that the UK is right now living the economic high life. And simultaneously believing that we need to cut public services at the same time as we are "booming" -- I sense a psychological parallel with self-flagellating pilgrims, loudly declaring penitence for our sinful overspending. That and the mistaken belief that it's some Other scroungers who are going to take the hit.

Anyway, effectively the national debt is so large that its repayment is orthogonal to the annual deficit: direct repayments (as if we are sending a cheque to... who? every month) are not a means by which it will ever be significantly reduced. I think an important factor in understanding the debt is that it is not like the UK took out a bank loan and has a single fixed rate of repayment in perpetuity. Instead, we acquire public debt by issuing gilt bonds to buyers (typically banks). We choose how many gilts to issue, their expiry dates, and the repayment terms. If the economy is growing, the UK is a very safe investment, and we can sell plenty of gilts despite offering paltry interest rates -- thus the size of the debt (i.e. number of active gilts) could be maintained, but the interest bill (currently £43 bn / yr) can be reduced. It's even better than that -- only about 25% of gilts are index-linked to inflation (cf. the Government Debt Management Office) so not only does economic growth allow issuing of gilts at more favourable rates, it allows the debt to be "inflated away". Provided that wages grow with that mild (few-percent) inflation, all is well. But this strategy requires an economic committment to growth, which is not what's being offered.

We can't aim to really reduce the debt through cuts. The state supports business. The state _does_ business. Cutting the services that support the people who do the work and generate economic activity is a great way to stagnate that activity. The logical end-point of cuts is for the government to do nothing and the whole economy to grind to a halt -- hurrah, no deficit, but boo, no _anything_. Just about every independent economist under the sun agrees that publicly-stimulated growth rather than cuts is the best way to address economic stagnation -- that's completely standard economic policy that everyone somehow forgot via a collective brain fart in the last 5 years.

I now have a horse of my own in this race, since anticipation of severe research council cuts after the comprehensive spending review (perhaps coupled with an expensive re-organisation of research councils cf. PPARC/CCLRC -> STFC, just for irony value) has led to STFC cutting particle physics rolling grant funding by 10%. Many excellent postdocs have already lost their funding, and the UK brain drain has begun -- what took many years to build up can be squandered in an instant. This would be bad enough if it were necessary -- that it's because of an economically illiterate policy being pursued for the personal power ambitions of the Conservative Party in general, and George Osborne in particular, is inexcusable.

Oh look, I did write something after all. Catharsis.

POSTSCRIPT: Oh look, another Murphy piece making the same points, but better.


Comments powered by Disqus