Monday, July 20, 2015

Labour and the Structural Deficit

On a recent leadership hustings hosted by Andrew Neil, the charge was made that the UK under Labour was running the largest structural deficit in Europe apart from Greece. The candidates answers unfortunately missed a very important point.

The large structural deficit in question only appeared as a result of taking into account data from after the crash. Before the crash, it was assumed that the UK economy was running at close to but slightly below capacity. With the arrival of the crash and the resulting deficit, that view was revised to assume that in fact the UK economy must have been running significantly above capacity.

The point here is that the structural deficit was the result of the way that estimates were constructed based on post crash data, not on estimates that were available before the crash. This is, I think something that should be emphasised by leadership contenders.

There are those who will say that we should nevertheless run a surplus on a just in case basis. To those people I would point out that running a surplus unnecessarily could have a serious cost in lost output and also that the UK national debt was low in 2007 and that despite the crash the UK never had any problem financing it's debts, the UK governments finances were in a good secure position before the crash.

As a final note I'll point out that, inflation, the traditional sign of an overheating economy was not present in 2007. The state of the UK economy in 2007 is something that has not been examined closely enough and does warrant further study.

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