Debt and Reality

Here is my response to this recent Twitter exchange with my MP John Glen

debtandinterestrates
Unfortunately I did not make myself clear – I am not interested in point scoring between MPs  or defending the Blair – Brown government’s complicity in allowing big finance to wreck our economy.  But I am concerned that after everything that has happened, my MP is still allowing spin to obscure reality.  So here are a few facts to keep us on track.

Despite New Labour’s love affair with big money they were not responsible for the financial crisis, nor were immigrants, “welfare scroungers”, the disabled, unmarried mothers, Polish lesbian plumbers or any of the other groups that the Tories and right wing press  would like us to blame.

The graphs below show that, in the period up 2007/8, the National Debt and the annual deficit were not out of the ordinary.  The deficit and debt went ballistic when the financial crash meant that we had to bail out the banks with billions of pounds of tax payer’s money and the ensuing recession meant that welfare payments went up as tax receipts fell. Yes New Labour were complicit in that they enthusiastically followed the “light touch” regulation of financial services started under Thatcher but the Tories are on record as aggressively arguing for even further deregulation.

national-debt-percent-1900-12

 

Note how big the post war debt was in the late 1940s and yet that was when the NHS was introduced, a massive house and school building programme was started, further and higher education were free and there was full employment.  Oh and interest rates  were less than 3%.  Not a fair comparison to today perhaps, but food for thought.

 

This is an expanded version of the chart showing clearly that the debt takes off at the moment (2007/8) the banks start to collapse and the tax payer has to bail them out.public-sector-debt-perc-gdp-hmTuk-debt

The graph below also shows how the annual deficit was not excessive until the financial crash and the need to bail out the banks.  (Unfortunately, the figures are not corrected for inflation and so this chart exaggerates the size of recent deficits compared with earlier deficits.)

Deficits by chancellor

So John, lets cut the spin.  The recession and the level of debt are due to the crisis in our banks and a combination of greed and incompetence in our financial services in general. If you want to look for a root cause then I suggest the neo libertarian / Thatcher / Reagan governments would be a good starting point.

Let’s now turn to John Glen’s original Tweet warning about increased borrowing (although he does not explain why the increase in borrowing we have seen under  George Osborne is any different to an increase under Ed Balls)

To the rational layman it would seem that the obvious answer to a recession is to kick start the economy with a modest increase in spending.  For example,  immediately starting a house building programme,  a general infrastructure improvement programme and energy efficiency improvement programme etc – all desperately needed anyway and quick and easy ways to inject money into the economy as well as benefiting ordinary people. The kick started economy will generate tax income, reduce welfare expenditure and hence bring down borrowing.  Lets remember that entrepreneurs and business mangers are useless without the real job creators – ordinary people with the money and confidence to go out and buy stuff. We really are all in this together. (Of course this should go hand in hand with a rigorous look at government spending –  tax payers want to know that every penny is well spent particularly when they are striving to make ends meet themselves.  But they do not want the government to exploit this opportunity by forcing through ideologically driven cuts that have no democratic mandate and will change our country irrevocably in ways that have not been open to any debate.

How will the extra spending be paid for. Well before I answer, remember that austerity means recession/stagnation  which means extra borrowing with no useful outcome.  Borrowing to fund infrastructure investment on the other hand has a useful outcome – kick started economy and increased employment with resulting decrease in borrowing. But if just a portion of the over £40 billion of unpaid taxes were collected (just concentrate on the big corporations that currently pay no tax) we would not need to borrow anything extra.

The government’s irrational, evidence free and intellectually discredited alternative[1] is to start an austerity programme in which the people who were not responsible for the crisis bear the brunt of government cuts.  These include cuts in support to hard working families, striving to make ends meet. This results in borrowing more money to pay for increased welfare benefits due to the resulting recession and reduced income from taxation. For some reason the increased borrowing is also used  to pay for tax cuts for the wealthiest and to flood the banks with money that they refuse to lend but do manage to pass on to their top people as bonuses (while shedding their work forces).  Ordinary people, hit by reducing real income,  greater insecurity and prospects of poverty in old age, understandably enough stop spending and the recession / stagnation becomes permanent 10, 20 years, a generation wasted.  This is particularly crazy if  other countries are following the same policy.

What ordinary people  want is evidence based, rational, reasoned policy not ideology and spin, whatever the government in power.

The price of this financial crisis is being borne by people who absolutely did not cause it” “Now is the period when the cost is being paid, I’m surprised that the degree of public anger has not been greater than it has.— Mervyn King, former Governor of the Bank of England

NB Please let me know if I have made errors or am guilty of spin or ideology – I am happy to correct or debate as appropriate. CL

[1] Austerity after Reinhart and Rogoff. By Robert Pollin and Michael Ash A main policy plank is riddled with faults, write Robert Pollin and Michael Ash

From Reinhart & Rogoff’s own data: UK GDP increased fastest when debt-to-GDP ratio was highest – and the debt ratio came down!  By Jeremy Smith, 20th April 2013

A letter to the FT: A modest test for debt/GDP in the UK postwar experience. By Ann Pettifor and Jeremy Smith, 21st April 2013

Shock research finding: high debt-to-GDP ratio leads to faster increase in GDP! By Jeremy Smith, 16th April 2013 

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