• Rebutting Tina

    Much of the comment on (and criticism of) the budget has focused on the impact of the specific measures designed to rein back the government’s deficit. But, as the dust settles, we can see that the budget’s real failing was not in the specifics. Quite simply, it identified the wrong strategic target.

    A casual observer could be forgiven for assuming, on the basis of what we were told about the budget’s objectives, that the country’s most pressing priority is to cut government spending. But, on the facts, that should be the least of our concerns. As Brian Fallow showed conclusively before the budget, our government’s gross financial liabilities as a percentage of GDP are the third or fourth lowest in the OECD.

    Indeed, we could say that the government’s financial position is, comparatively speaking, one of the few bright spots in an otherwise pretty gloomy scenario – and it is strong because the government’s predecessors ran surpluses and prudently paid off debt over most of the preceding decade.

    So, why is there so much emphasis on the deficit? And why do so many people believe that, because “we” are living beyond our means, the government must therefore cut back?

    The answer is that confusion rules. There is of course a debt problem – but it is not the government’s. It is ours. While the government’s financial position is amongst the strongest, the country’s indebtedness – what we owe to others – places us at the bottom, along with Greece, Ireland, Spain and Portugal.

    So, the budget – and much of public opinion – addressed the wrong problem. Does it matter?

    Yes, it does. It means that, contrary to the story we have been told over recent years, we can and should be using the government’s financial strength to build our recovery. That was the point of paying off debt in the good times.

    We have to assume that our policy-makers understand this perfectly well and that it is not economic rationality but political dogma – the ideology that, whatever the circumstances, government should play a smaller role in the economy – that determines that priority should be given to cuts in public spending.

    But that focus means that our recession drags on for longer than it should. Those who pay the price are the unemployed, the sick and the poor, but it is also bad news for small businesses and producers, for the profitability, productivity and competitiveness of our industry, and for the economy as a whole.

    Paradoxically, it is also a recipe for continuing government deficits, since a contraction in government spending, allied to contraction everywhere else in the economy, makes it virtually certain that the recession will endure and that tax revenues will stay flat.

    Yet many people are persuaded that, until the government cuts back, we cannot afford to expand the economy.

    But both common sense and overseas experience confirm that this is to get things the wrong way round. There is increasing evidence that recovery must come first, and deficit reduction second, and not the other way round.

    Those countries, like Greece, Ireland, and now the UK, which have pursued an austerity programme in the hope that this will build confidence and thus stimulate recovery, have found that contraction is exactly that – contraction – and not the path to expansion through the hoped-for ministrations of the confidence fairy.

    Other countries, like Canada, have demonstrated that getting recovery under way, by stimulating economic activity, is the best and necessary pre-condition for tackling a budget deficit. The Canadians have successfully undertaken – in that order – both exercises.

    Moreover, while it would be good to return to government surpluses as soon as it is sensible to do so, it is not as though debt is itself such a frightening concept. A modern economy depends on debt, largely created by the banking sector; and the debt that really is a cause for concern is not the one we owe to ourselves but the debt we owe to overseas creditors.

    That outsize debt – the one we all, you and I, owe to foreign lenders – is a function of our overall economic failure and our insistence on consuming more than we produce. That is the problem we should prioritise.

    A government that applied common sense rather than ideology would, in other words, have identified quite different strategic targets. They would have focused on substantially reducing our overseas borrowing – the most significant step we could take towards protecting our credit rating.

    As stepping stones towards that goal, they would encourage, not discourage, savings. They would give priority to restoring full employment. They would set about reversing the increase in inequality and the growing poverty in our society. They would halt the selling off of our important assets to foreign owners. And they would back this up with a reformed macro-economic policy that gives priority to the competitiveness and profitability of our productive sector.

    None of these goals featured in the budget. Each should have had a higher priority than the strategic focus that was in fact selected. Shouldn’t we expect better?

    Bryan Gould

    22 May 2011

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