The Great Debt Lie and the Myth of the Structural Deficit

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The case for austerity measures rests on the Great Debt Lie and the myth of the structural deficit.

The 2008-9 recession was the worst we have experienced globally, for sixty years, and it was predicted by no-one. The Labour Government responded to the global crisis with fiscal stimulus. From the start of the financial crisis, Labour took decisive and clear action (including temporarily cutting VAT to boost demand), and it has become increasingly clear that it was this decisive action that brought about the green shoots of recovery by the last quarter of 2009. (Radeke, 2009).

This, combined with the usual effects on GDP of a recession, meant that the budget deficit rose. But without such swift action we simply would not have the signs of tentative recovery that we saw as a result. So what went wrong? What happened to the green shoots of recovery that were carefully nurtured by the last Labour Government?

That would be the Tory-led Coaliton. The difference between the recession that happened under Labour, and the one under the Tories, is that the global banking crisis would have caused recession no matter which party was in Office at the time, whereas the current recession is a “homegrown” one that can be directly attributed to Conservative economic policy. Tories always cause recession, Thatcher did, Major did, and now, Cameron has.

This Government is cutting the very measures that would ensure not only growth in the short-term, but economic security in the future, too. They are portraying their cuts as eliminating “waste” and “necessary”, when in fact they are seriously jeopardising our future economic prosperity: cuts in funding for Regional Development Agencies; scrapping the Future Jobs Fund, which was a success and supported at least 200,000 people back into work through the recession; withdrawing industrial support, for example.

That is before we even begin to discuss the damning, detrimental economic and social implications of the welfare “reforms” (CUTS), and the Localism Bill (more CUTS), and Legal Aid Bill (even more coordinated and carefully planned Tory CUTS that will serve to keep quiet and hide away evidence of the rising numbers of impoverished, destitute and starving victims of all of the other CUTS and subsequent human rights abuses).

And there seems to be very little evidence to support their decisions. No facts, no consultation, no listening to expert advice. Just the ideology of the small state, propped up by notions of “self-reliance” –  but only for the poorest of course –  being pursued by the Tory right and the Orange Book Liberals.

The Tory budget is highly regressive, hitting the poorest the hardest whilst asking for very little from those at the top.

Here are some facts which demolish the fallacy that the present economic crisis is the result of excessive spending, leading to unsustainable debt:

  •  Analysis by the Institute of Fiscal Studies has concluded that on the eve of the financial crisis ‘the public finances were in a stronger position than they had been when Labour first came to power in 1997.
  •  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%).  The national debt is forecast to hit 74.7% of GDP this year and peak at 79.9 per cent in 2015-16.
  • In 2010, the UK’s national debt as a proportion of GDP (52%) was the second lowest of the G7 countries.

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 states (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 judgement 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 very 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 to balance the books for 2 out of 17 years.

The Coalition continue to deny that alternatives to austerity are viable. As a Tory lie repetition strategy, this is based on the idea Goebbels had –  repeated lies will somehow convince people that they are true. Cameron was busted when he repeatedly told the lie “We are paying down the debt.” Despite being rumbled, the Coalition have stuck with this lie doggedly.

The bonus of the lie is that it may undermine the Opposition’s economic credibility, and the Tories particularly delight in the lie that it’s all Labour’s fault because they “overspent” as it further justifies austerity measures and starving public services of Government funding, with our paid taxes, as well as stripping our welfare provision away.

It was the Tories that lost the Moody’s Investors Service triple A grade, despite pledges to keep it secure. Moody’s credit ratings represent a rank-ordering of creditworthiness, or expected loss. The Fitch credit rating was also downgraded due to increased borrowing by the Tories, who have borrowed more in 4 years than Labour did in 13.

The Coalition have REALLY messed up the economy. We know it’s a big fat Tory lie that cutting spending at a time of economic recession will re-balance public finances. As many academics and economists have stated, cutting spending when the economy is flat is likely to cause further contraction to the economy, and that will negatively affect public finances, rather than help at all.

The Government will never confess to this because they are so tightly ideologically bound to an übertreiben Neo-Liberalism, no matter what the cost is in human terms, or even in economic terms. What we need is Labour’s expansionary fiscal policies, not contractionary ones.

Real, sensible economists know that the only way to address a recession is to grow the economy, and that means more public spending in the short term, to stimulate economic activity, and cutting if needed when the economy is back on the up (which needn’t mean absolute cuts, but relative cuts because the economy is growing).

Further reading:

The OBR rebukes Cameron for claiming that austerity has not hit growth

The Tories continue to blame the previous Labour Government for its own actions  – The Blame Game

Letter from Chair of the UK Statistics Authority, Andrew Dilnot to Labour’s Rachel Reeves – Public sector net debt and net borrowing

Cameron rebuked by the UK Statistics Agency chief Andrew Dilnot – Dear Prime Minister

Investors around the world are putting their trust in the only Labour government in the UK – Investors give thumbs up to Labour

Tory Coalition set to borrow more in five years than Labour in 13. Conservative Mark Field confirms.

A list of official rebukes for Tory lies .

Labour’s economic record given clean bill of health at home and abroad

Excellent capture and work by Robert Livingstone:

“The economic situation explained in 3 minutes. Tory austerity has given us the slowest recovery since the South Sea Bubble. Professor David Blanchflower absolutely slaughters Cameron over his pre-excuse warning over the world economy, he blames Tory austerity for tanking Britain’s economy and preventing a recovery, and states that any recovery we do have is simply part of the cycle as long as you don’t wreck it with austerity, and confirms that our economy was on the RISE in 2009 / 2010.” From The World At One, Radio 4, 17th November, 2014.

539627_450600381676162_486601053_n (2)     Many thanks to Robert Livingstone for his excellent art work

Thanks to Factcheck for the facts and figures.

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35 thoughts on “The Great Debt Lie and the Myth of the Structural Deficit

  1. Absolutely right, Sue , thanks for a great piece.
    One thing though; Ed Balls knows his economics but Labour seem to be pro-austerity.
    I don’t blame the media for this impression, because if it were otherwise, labour would be educating the public about an expansionary alternative.

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    1. Labour do things properly, and will gather evidence to justify that any policy changes they propose to make will be to make things better.

      That’s what governments are meant to do, though we know the Coalition suits itself. Liam Byrne mentioned the other day that Labour now have the evidence of the hardship and damage that the bedroom tax is inflicting on so many, and he demanded it’s dropped now. I am sure they will repeal it, once they are in office.

      Andy Burnham has been working hard to gather evidence of the harm that the Tory Health and Social Care Bill has done, and Labour have committed to repealing that Bill. But they won’t make promises they may not be able to keep , especially since they won’t know yet how the landscape will be by 2015.

      The media is entirely controlled by our authoritarian Tory government. If you want to know what Labour are going to do, listen to parliamentary debate, read the Hansard records, or contact the party directly. I know that even the Guardian have refused to publish Labour’s press releases, and they also LIED about Labour regarding their alleged support with IDS’s retro Bill earlier this year. I know this because i contacted the Labour party directly, and spoke to Liam Byrne and other MPs

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  2. There were some very good heartfelt contributions by Labour members in the debate on Weds regarding the impact of policies on the disabled.That was encouraging, and so are your points about Byrne and Burnham above.
    The economic principles that tell us that these cuts are self-defeating isn’t going to change, whatever the state of the 2015 economy. There’s tons of evidence that austerity can’t work.
    It never was true that ” there is no money left”, and it still won’t be true in 2 yr’s time.There’s a danger of unite breaking away and joining with other major unions to support anti-austerity candidates.

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    1. They have before now. But as I said, they won’t be making any promises that they may not be able to keep, they have been consulting with the public regarding future policy, also. That’s a part of democracy, after all

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