Tuesday, January 06, 2015

I Don't Understand Economics Pt. 4

A few years ago, I posted parts 1, 2 and 3, so I thought it was time for another, as the news has had quite a bit to say about the deficit recently.

The Tories accused Labour of having £21 billion of plans that were not funded. Labour responded by saying the Tories were misrepresenting their commitments and doing the sums on the wrong basis. That's all the usual party political mud-slinging that we expect as an election approaches. Likewise, the Tories have planned tax cuts for the better-off, which are 'funded' from other savings. That left Labour asking the question as to why that money can't be used for the whole of society, rather than benefiting the few.

Putting the debate another way, the Tory attack reveals an assumption that there is a pot of government money, and when it's used up, that's it. The Labour reply is based on the same 'pot' assumption, but that there is enough money in the pot after all. Both parties show that they have a particular view of the deficit.

They both need to be challenged by the fact that there is no 'pot' of money fixed by any absolute standards. Governments have to manage the gap between their income and their spending, and in the majority of recent years, the UK has spent more than it got in (a deficit). In other words, governments nearly always have to borrow to supplement what gets put in the national piggy bank from tax etc. (Incidentally, a lot of recent borrowing has been done quite cheaply by historic standards.) The running total of all these debts (and occasional surpluses) is the national debt.

This makes sense. We know that if our government said it would only spend what it got in during 2015, many essential services would collapse, and the economy would plunge into deep recession, putting many more out of work and doing untold damage to society and the economy. It's also true that if the government didn't address the deficit at all, then confidence would be lost, and it would have a very bad effect on the pound and also our country's ability to borrow money.

Somewhere between those two extremes there is a significant amount of room for manoeuvre. In other words, the amount of money in the government's 'pot' is a set of decisions, not an absolute figure defined by some unassailable authority sitting somewhere else.

It's the result of a series of judgments, such as:

  • how much tax can be gathered, and where from?
  • how much should be spent, and on what?
  • how big a deficit is the system prepared to take?
And, of course, even when you have done all the calculations and plans, sometimes things work out worse than forecast (as they have for George Osborn) or sometimes better than forecast (as they did for Gordon Brown in some of his years at 11, Downing Street).

So it seems to me that the kinds of questions we should be asking over the next few weeks are these:
  • why have you decided on cutting/increasing/freezing _________ tax (fill in the blank)
  • why have you decided on cutting/increasing/freezing spending on _____________?
  • why have you decided that our country can/can't afford more/less deficit in this tax year?
It's actually quite disappointing that there are few significant voices challenging the current assumptions. Labour are committed to cuts as well, albeit a bit gentler than the Tories. Obviously the deficit needs to come down, but I wish more were asking whether our society's present needs don't justify taking a longer view, and giving more time for balance to be achieved.

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