All this Talk About Balancing the Budget is - - -

December 22nd, 2014
in Op Ed

by Colin Talbot, The Conversation

Remember the Maastricht criteria? No, I didn’t think so. Nor apparently do Britain’s political leaders, based on their manifestos for tackling the UK’s deficit.

Follow up:

The Maastricht Criteria were the convergence criteria for European countries that wanted to join the Euro. Agreed in 1992 (including by John Major’s Conservative government) it covered inflation, deficits, debt, exchange rate stability and interest rates – and what constituted a healthy economy. It’s the deficit and debt bits that our politicians seem to have now forgotten.

In 1992, conventional wisdom for good government proscribed that the deficit shouldn’t normally go above 3% of GDP and the debt above 60%. (The “normally” bit was there to allow some wriggle room for countries – like Germany – that might have problems with overly tight criteria.)

Why does this matter? Because the political class in Britain has suddenly become converted to the idea we should have a “balanced budget” (that is, that the size of the deficit should be zero), or even a surplus – but certainly not anything as outrageous as 3% of GDP.

Party differences

True, the parties differ significantly on what they mean by a balanced budget – and when they’d deliver it by. They also, by implication, differ on how to tackle the debt, not just the deficit.

The Tories want to run a substantial surplus by the end of the next parliament so they can “pay down the debt” (as David Cameron wrongly claimed they were already doing).

The fight over the budget is more political than economic. Anthony Devlin/PA Archive

Labour is saying just balance the current spending budget, leaving out investment, or capital, spending.

The Lib Dems want to – well no-one really seems clear about what they want to do. They signed up to the Autumn Statement, which implies a surplus by the end of the parliament, only to have Vince Cable denounce it, Nick Clegg defend it and Danny Alexander agree with both of them and George Osborne.

So, back to Maastricht. Were all those European politicians mad when they agreed that a 3% of GDP annual deficit wasn’t a problem? Surely, Mr Micawber in David Copperfield taught us that spending exceeding income is ruinous? For households, possibly, but for countries it doesn’t work like that.

A modest deficit is perfectly OK

One of the little noticed aspects of the Office for Budget Responsibility’s analysis that came alongside the Autumn Statement was its figures for UK deficits since 1948. What they show is that we have on average run a deficit of 2.4% over the past 66 years, with only a handful of years where we had a balanced budget or surplus. Did the skies fall in? No. Did national debt relentlessly rise? No.

The reason the annual 2.4% average deficits didn’t automatically create a debt mountain is simple – national debt gets eaten up by growth and inflation over time. It continually shrinks except in exceptional circumstances such as wars (1914 and 1939) and massive economic crashes (1929 and 2008).

That is why it is perfectly OK to run a modest deficit – and 3% was seen as a reasonable amount for the designers of the Maastricht criteria.

So what has changed since 1992 that has converted our political leaders – red, blue and yellow (and now purple too) – to obsess over a balanced budget? Well, nothing except politics.

No mention of the debt

The one great achievement of the coalition government – and especially George Osborne – was to turn the Global Financial Crisis into Labour’s Fiscal Crisis. Never mind that prior to it, Labour never exceeded either the deficit (3%) or debt (60%) criteria. In fact the highest the debt got to was 40% and the deficit just 3%. Never mind that until October 2008 the Tories pledged to match Labour spending plans (so much for “fixing the roof while the sun was shining”).

Labour has accepted too much of the Tory narrative that there is a deficit and debt crisis, rather than these being simply a symptom of the financial crisis and its aftermath. Yes, both need addressing, but – in the context of wider economic policy – not through some narrow, spurious, balanced budget balderdash.

Crucially, although Labour is denouncing Tory plans to reduce state spending to 35% of GDP, it still refuses to say what it thinks it should be. (Research I’ve been working on looking at UK and OECD figures suggests about 40% of GDP would be a sensible long-term policy aim.)

Despite all the balanced budget talk it is noticeable that none of the main parties say anything much about the £1.5 trillion national debt. None of them say when they see it coming down, by how much or when. This illustrates how much the balanced budget talk is merely political manoeuvring, rather than serious economic and fiscal policy thinking.The Conversation

This article was originally published on The Conversation. Read the original article.

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