Economic Policy

Growth, not the deficit, is what really matters

  • Published: Dec 04, 2014
  • Category: Economic Policy

The Autumn Statement performances today shows our political leaders on both sides should stop fixating reducing the deficit to zero.

Today’s Autumn Statement performance – George Osborne’s set-piece and Ed Balls’ improvised response – remained stuck in the rut of “fiscal consolidation”. This is the doctrine that reducing “the” deficit – that is, the excess of public spending over tax revenues – is what politicians should concern themselves with above all else.

Osborne and Balls attacked each other’s records, but the bit to worry about is what they agreed on. There are two parts to this.

The first is not just that the deficit needs to be reduced, but that it must be reduced, to zero, in the next parliament. It is true that when Osborne says this, he is including capital spending within his limit, whereas Balls is excluding it. This is an important difference within the terms of “fiscal consolidation”, but both endorse the virtue of zero.

The second is that the key to achieving consolidation is through some combination of cuts to public spending and increases in taxes.

Both of these are wrong and dangerous.

That is not to deny that the public sector deficit (at 5.6 per cent of GDP in the year to March) isn’t still too high. But what should the Chancellor be aiming for? A sensible near-term goal would be a deficit that’s small enough to stop the ratio of debt to GDP growing.

There’s nothing sacrosanct about a steady debt to GDP ratio but as a point on a long recovery from a financial crash, it is an important marker, a sign at least of stability from one year to the next. Simon Wren Lewis and Jonathan Portesnote that that point would be reached, given current levels of growth and inflation, with a deficit of around 3 per cent of GDP.

A 3 per cent deficit: if you want a goal, a second base after the first base of starting to bring the deficit down, then that, not zero, should be it. And to reach it, should we favour cuts or tax rises? The answer may well be “neither”. Contrary to the rhetoric of fiscal consolidation, the public sector deficit is not actually “the” deficit, but just one of several imbalances across the economy – surpluses or deficits – which between them always add to zero in the national accounts.

The point is that the 5.6 per cent public sector deficit has counterparts in other sectors, around 1 per cent for the corporate sector and 4.5 per cent for the foreign sector (the rest of the world’s surplus with the UK). The fourth, household, sector was close to zero last year.

So it is not just a question of getting the public sector deficit down but of getting the foreign surplus down and the corporate surplus turned back into a deficit (probably its normal state pre-2003 on the way it is now calculated). But in a laissez faire world, with free trade, no capital controls, and big business ruling the roost, policies to address these wider imbalances are barely conceivable.

Instead of the same-old Autumn Statement show rehashing the script of fiscal consolidation, what we need is one that presents an alternative view of where our economic priorities really lie.

First, instead of singling out the public sector deficit, this alternative would point to all the imbalances in the economy, surpluses and deficits, as integral parts of the problem. When this happens, a debate about how to reform the corporate sector and improve our economic performance in relation to the rest of the world can begin.

Second, it would stress that what matters most for debt sustainability is that the economy should keep growing – that is, higher real growth and inflation. Here is a statistic with which Balls quite rightly berated Osborne. In Labour’s last year, to June 2010, the economy grew in nominal terms by an impressive 6.3 per cent.

As Osborne slammed on the brakes, the recovery slowed sharply: 2.8 per cent to June 2011, 2.3 per cent to June 2012. Osborne has never bettered that 6.3 per cent. Avoiding such a slowdown after June 2015 is the top priority.

This blog first appeared on The Staggers, the New Statesman's politics blog, on 3 December 2014.



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