Monday, August 24, 2009

Darling is Wrong...In every possible way

According to the Mail on Sunday, Alistair Darling is going to "talk sense into that man [Gordon Brown]" on the subject of public spending and the subject of Tory cuts, I think he is very very wrong. The debate about debt and spending is a complex one, but there is a very good case for not making cuts that revolves around the following arguments:

  • The macroeconomic effects of such a move, there's little evidence that a rise in private spending will replace the fall in public spending. The demand side consequences of this could drag us further into recession.
  • It's not known whether the fall in tax revenues is temporary or permanent, if tax revenues rebound then the current (large) deficit will not be so much of a problem.
  • The long term effects of debt are exaggerated and ignore the twin effects of inflation and growth on the real value of debt. Additionally, the cost of servicing debt is low and investors are still keen to buy government debt.

The case for cuts is all about fear of future debts, but personally I don't think it's one that Labour should accept. It relies heavily on what could be called called the common sense case, most people's experience of budgets comes from their household finances, this leads to a view that both debt and living beyond your means are a bad thing.

The Conservatives have pushed their "cuts are inevitable" line, because they know it has a common sense appeal, it sounds like a calm and level headed approach to the recession and has gained traction with the general public (even if the economics behind it are highly questionable).

What Darling has done is not only publicly disagree with his party leader, he has disagreed in such a way that it assists the Tory line of attack. Phrases such as "the voter's aren't stupid" and "talk sense" are just the kind of phrases that will help reinforce the Tories "cuts are inevitable" argument. An argument which is both highly questionable economically and will help justify policies with devastating social consequences.


crabbydog said...

The government can only increase debt if people will buy it. There have been several cases in the last few months where the government has struggled to get its debt bought and the same with the USA.

You also have to pay interest on debt, and the higher the debt the higher the interest. The more investors doubt your ability or willingness to pay the higher the premium (interest) they will demand.

Out of control public spending will eventually bankrupt the nation and we have to have plans in place to control and reduce debt.

Too much government debt ad borrowing will require both extra taxes and higher interest rates ultimately. There is a finite amount of credit available and eventually the government will be competing with business for it.

Most government spending is of limited productive value and we crowd out business to the overall detriment of the national economy.

Its hard to say WHEN we have to cut back, but cut back we will. We would be in a healthier position if we had not been on a credit fuelled spending binge in the good years.

Andreas Paterson said...

Hi Crabbydog,

Apologies for not publishing your comment earlier, bit of a cock up on the moderation front I'm afraid. Anyway...

Yes, you can't run a large deficit forever, but the position we are in at the moment is in my view exaggerated. The cost of debt is not high and the gilt auction problems have been overhyped. For now, I'm going with making cuts much later. Another point to consider is the effect of government debt and non government debt, historically a rise in government debt has been matched by a fall in business/personal debt.

I personally don't buy the crowding out argument for a whole host of reasons. I would also argue that in fact government spending is highly productive but not in a way that can be easliy measured.

Finally, I think a lot depends on whether tax revenues rebound or not, the deficit was originally just 3% of GDP which I would think is a far better ballpark figure for the kind of cuts/tax rises we should be making.