Halving the deficit
There has been something of a storm in a teacup over the Prime Minister’s claim, repeated in the Conservatives’ election poster that the deficit has been halved. Fraser Nelson, in particular, is very exercised about this, claiming that only economists think about the deficit as a percentage of GDP as opposed to the deficit in cash terms.
Well, I plead guilty: we economists think about the deficit as a percentage of GDP because, as ToryTreasury has repeatedly and correctly pointed out, for most purposes that is the most economically significant measure. My main criticism of the Conservatives (and, I have no doubt, the other parties) on this score is the obvious inconsistency. At the same time, they have also been pointing to the fact that a record number of people are in work: yes, but this is not particularly remarkable, since there are a record number of people in the country. The employment rate, that is the ratio of the number of people in work to the population, is not at record levels. ToryTreasury would of course like to have it both ways, which is fine for politicians, but not from anybody who wants to be taken seriously on economics.
The much more important point is that halving the deficit – however measured – was not the government’s plan; not even close. Eliminating it (the cyclically adjusted current deficit, to be precise, was). Fraser's first graph here shows just how far off track the government is. Now deviating from plans is not a criticism – as I will explain below - but it’s worth noting, in retrospect, the ridicule that government Ministers, including the Chancellor, showered on those of us who suggested that a more measured and economically sensible approach to fiscal consolidation might be appropriate. It’s worth reading some Parliamentary exchanges from March 2011 to understand what the government view was at the time:
Mark Lancaster: The Government’s plan to eliminate the deficit by 2015 is in stark contrast to the Darling plan, which was simply to reduce it by half. What assessment has the Minister made of the likely impact of the Darling plan on the level of debt and the cost of servicing it?
Mr Hoban: If we had continued with the previous Government’s deficit reduction plan, debt would still be rising in 2015, not falling, meaning that we would have to spend an extra £3 billion in one year on debt interest while still having to make spending cuts. The lack of ambition in the previous Government’s plan put our credit rating at risk, thus threatening the prospect of higher interest rates and putting a brake on the recovery.
Apparently, the government plan to eliminate the deficit had widespread support:
Mr Hoban: My hon. and learned Friend is absolutely right, and a number of organisations, both at home and abroad, have criticised the lack of ambition of the previous Chancellor’s plans. That is why the Obama Administration, the International Monetary Fund, the OECD, the Institute for Fiscal Studies, the CBI, the Governor of the Bank of England, 35 leaders of British businesses, the European Commission, the World Bank, three major credit rating agencies and the world’s biggest bond trader have been backing our plans.
So, if eliminating the deficit was supported by these supposedly credible organisations, whose idea was halving the deficit? The Chancellor was happy to give credit where, it now appears, it was due:
Richard Harrington (Watford) (Con): Would my right hon. Friend the Chancellor like to inform the House which organisations have made representations to him that the deficit should be halved over the course of this Parliament?
Mr Osborne: The Guardian newspaper.
It’s a shame the Conservative election poster doesn’t give credit to the Guardian for giving the Chancellor the (relatively) sound advice that he, eventually, chose to follow. Finally, I should note that I am not in any way criticising the government for ditching its original, misconceived strategy and adopting the “Guardian plan”. Quite the opposite: doing so has supported recovery, as I explain here.