Monday, 11 April 2011

The great debt lie & the myth of the structural deficit

The case for austerity measures rests on these two stories. Firstly, some facts which blow apart the fallacy that the present economic crisis is the result of excessive spending leading to unsustainable debt:

• Average annual spending and taxation were both lower as a proportion of GDP under the last 3 Labour Governments (38% and 35.4%) than under the 4 Conservative governments which preceded them (40% and 35.5%).

• National debt was lower as a proportion of GDP at the start of the financial crisis in 2008 (36%) than in 1997, the last year of John Major’s Conservative government (42%).

• In 2010, the UK’s national debt as a proportion of GDP (52%) was the second lowest of the G7 countries.

Secondly, the budget deficit is no more “structural” than an overdraft in your bank account when you spend more than you earn. There is either a real deficit or not, and if there is, then it is due to either excessive spending or an inadequate tax take.

Since it can easily be demonstrated that the problem is not the former, then it must be the latter – caused by the financial crisis and consequent recession and likely to be aggravated when taxes are cut later during this parliament to the benefit of high earners, corporations and banks.

As The Investors Chronicle put it (15th February 2010): “The idea of a structural deficit serves a political rather than analytical function. It's a pseudo-scientific concept which serves to legitimate what is in fact a pure judgment call - that borrowing needs cutting.”

Osborne began to revive the myth of the structural deficit in June 2010, when it was becoming clear that the deficit would be under £155 billion, well below the Treasury's £178 billion estimate made six months earlier. In other words, the deficit was narrowing after Labour increased spending in 2009.

The fact that the US, which has made no serious deficit reductions, has suffered almost the smallest recession of any major developed economy whereas Ireland and Greece have suffered the worst because of drastic spending cuts further undermines the government's claim that radical austerity measures are needed – and shows that Osborne’s main aim is not to reduce the deficit but to accelerate the transfer of wealth to the already rich.

And if anyone still wants to talk about a “structural” deficit, then they should remember that the last 3 Labour governments managed to earn enough to cover their spending for 4 of their 13 years in office, whereas Thatcher and Major only managed balance the books for 2 out of 17 years.

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