Government Deficit: The Success of Framing the Debate
The coming budget has been prefaced by much comment about budget deficits and the national debt. Almost every comment from a government minister includes some variant on the theme of having inherited a massive and catastrophic deficit which must be tackled before we submerge under a sea of debt.
The government have been remarkably successful in framing the scope for debate. They seem to have built a general acceptance that the deficit is the result of the last government's profligacy, and that anyone who doesn't accept this analysis is a "deficit denier" with a tenuous grasp on reality.
The opposition have largely been ineffective in challenging this, though there are recent attempts to win back some ground. The media mostly reflect this narrow sphere of debate, so that for example radio presenters often say that we know we have to reduce the deficit, inviting the interviewee to put forward proposals for doing this.
Coverage of budget strategy may assume that the deficit is unreasonably large, that this is bad, and that it must be reduced by spending cuts. Debate may focus on how quickly debt should be reduced, and which cuts should be made rather than whether these things should happen.
Perhaps it's not surprising that there should be such widespread acceptance of these ideas. Deficit and debt are quite negative ideas, and you wouldn't like your own household budget to be in deficit. Many people easily relate to the idea that what is bad for their family or their firm must also be bad for the nation as a whole. The idea is intuitively plausible, at first sight. But nations are not like households. (1)
A government budget deficit is often inevitable, because a government deficit or surplus is a result of whether the private sector is saving or not. If there is net private saving, there will be a government deficit, and if there is net private investment, there will be a government surplus, other things (like foreign trade) being equal.
In times of recession, households tend to save (or try to repay some of their own debt) where in better times they might have bought more goods and services. Firms also will be likely to invest less, sell less, and keep lower stocks. That is what has been happening recently.
Many people argue that there should be a conscious effort to create a budget deficit, by increasing public spending to help counteract the effects of recession by creating more demand - the opposite of the current government's approach. (2)
Deficits add to the national debt. We are often told that the debt has never been so big, and we should be alarmed. There are two things here. First, there is the question of public debt and private debt, and second, there is the idea of debt in relation to our ability to pay it.
Public debt is high in cash terms. However, debt as a proportion of our gross domestic product gives an indication of whether we can manage to service the debt, and whether it is getting out of hand. For most of the last 40 years, it has been below 50% of GDP, where for the previous 60 years it had been higher, usually much higher. It has increased in the last year or two, as a direct consequence of the recession and the cost of bailing out the banks - but the idea that it is running at unprecedented levels is just plain wrong, in relation to national wealth.
Private debt has also been increasing, but much more significantly (3). This debt also has to be serviced, meaning that people have less to spend on other things. This can dampen economic growth, or even help push the economy into recession. Yet most media discussion of the debt problem seems to focus on public debt.
The financial sector in particular has had big increases in its debt. Financial institutions made bad loans and bought things which were worth only a fraction of what they claimed, and we ended up bailing them out to prevent the whole banking system collapsing - pushing up public debt in the process. These bad debts properly belonged to the owners of the banks.
Banks are a key part of the financial system, and lending money stimulates economic growth, which is central to the government's strategy to get us out of recession. There is clearly a case to be made for having bailed them out. However, there's also a case for letting them fail, breaking up the banks and reconstituting them as smaller, more socially responsible organisations, far more tightly regulated.
Many firms are saying that banks aren't lending, or are offering loans on such poor terms that they can't take them up (4). Perhaps this isn't too surprising. Banks, having massively overvalued their assets, have a problem of solvency, and they may prefer to repair their balance sheets than lend money. They are also seeking to make more money from their customers, for example by increasing the margins between what they pay in interest when borrowing, and the interest they charge on mortgages and loans (5). This overcharging of customers, rather than the exercise of scarce skills, lies behind the banks' return to profitability - as well as the public money they have received.
There's another factor which might work against the government's strategy. Looking at why Japan has struggled in the last few years, many commentators have been puzzled. Interest rates have been extremely low, even zero, yet firms were not borrowing and investing. Why is this?
An explanation is offered by economist Richard Koo. He says that Japan was experiencing a "balance sheet recession", meaning that firms and households had become so concerned that their assets were overvalued, that their main priority was not pursuing wealth, but reducing debt (6).
That is an interesting and worrying concept for us. In the aftermath of the financial crisis and the bursting of the house price bubble, it is likely that many of our firms and households may take the same view. If so, that may mean that the private sector may be less interested than we might hope in investing and generating growth. Koo argues that the best approach in these conditions is to stimulate the economy by public spending - the exact opposite of what the government plans to do.
The way the debate is happening in the wider public sphere has been heavily shaped by the idea that public spending and government deficits are just wrong. The policies which emerge from the coming budget are likely to prolong the recession, damage our prospects for growth, and have serious consequences for very many people.
Should the media accept the terms of debate set out by the government, or should there be a more probing, inquisitive, challenging approach?
1. There are several detailed discussions of the differences between households and nations on the web, such as http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/?author=83
2. A paper by Philip Arestis and Malcolm Sawyer from 2009 explores this and other issues to do with deficits and public spending. http://www.lwbooks.co.uk/journals/renewal/articles/Renewal-17-3-04ArestisSawyer.pdf
3. A study by PricewaterhouseCoopers found that total debt increased from 1.5 times national income in 1987 to three times income in 2009, and most of the increase had been in the private, not the public sector. http://www.guardian.co.uk/business/2010/nov/09/debt-timebomb-harm-economy-decades
4. See for example the Federation of Small Businesses, http://www.mrw.co.uk/news/fsb-cautiously-welcomes-increased-bank-lending/8611261.articles
5. See for example http://www.loansforbadcredit.co.uk/articles/loans/banks-rebuild-balance-sheets-at-publics-expense/
|Categories in which this article appears: Finance | Politics | Conservative Party ||
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|1. Eset NOD32||06 February 2013 12:44|
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