Debt, Deficit and Deceit

Chris Waller - March 2013
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The other evening on BBC2's 'Newsnight', a government spokesman asserted that the government 'had already reduced the deficit by 25 percent'. While there is ample evidence of reduced economic activity - cafs and shops closing, office blocks wreathed with 'To Let' signs - I was curious to know by just how much the government deficit had been reduced.

The problem with any such quest is that of finding reliable figures. Those of us outside the gilded circle of Westminster and Whitehall find it difficult to find the figures and, even less,, be able to verify them. One has to rely on second-hand figures, gleaned from trustworthy intermediaries.

First, there is the question of the difference between deficit and debt. The deficit is the shortfall between what the government collects in taxes and what it spends: this varies year by year and requires borrowing by the government to make up the shortfall. Gordon Brown, when chancellor, asserted his aim as that of borrowing during the economic downturn and then repaying the debt during the upswing, famously stated as, "No more boom and bust." In reality, the idea that a government 'balances its books' has been consigned to the dustbin of history.

The situation is further clouded by the profusion of terminology: what used to be called 'the budget deficit', then became 'the public sector borrowing requirement' (PSBR), then it morphed into the 'public sector net cash requirement' (PSNCR) in order to distinguish it from the 'public sector net borrowing' (PSNB). By now, you probably do not know your PSBR from your PSNB, and just in case you do, then the denizens of Westminster and Whitehall can soon change that. The deficit has two components, the cyclical deficit which varies with the state of the economy, and the structural deficit, which, like the poor, is always with us. Clear? Of course not. One can always rely on this: when a problem arises, every effort will be made by government to obfuscate.

The debt - the national debt - is the amount which the country owes to lenders, both domestic and foreign, and changes only slowly over decades, and even centuries. The national debt began in the reign of William III when the Bank of England was formed to finance Britain's wars against the French, the Spanish and the colonial rebels in America, and reached an alarming 250% of GDP around 1820 in the aftermath of the Napoleonic Wars. The national debt then gradually declined during the 'Pax Britannica' as Britain became the world's pre-eminent economic power, then rising again to over 150% of GDP after the First World War. The national debt remained at this level, dipping slightly in the late 1930s, until it once again soared to around 230% of GDP following the Second World War. The national debt then reduced steadily until, by the early 1970s, it was below 50% of GDP, dropping to as low as 25% of GDP by 1990. Since 2008, it has been rising again, following the financial crisis and the bailing out of the banks.

At the end of 2009, the national debt stood at 71% of GDP; by the end of 2010 it had reached 82% of GDP. Dambisa Moyo, writing in 'How the West Was Lost' (2011), warned that national debt might reach 98% of GDP by 2013. In the event, the national debt was a whisker short of this figure by the end of 2011. Back to the deficit. Writing in May 2012, Dr Tim Morgan (Head of Global Research at Tullett-Prebon), studied the Treasury's own figures and concluded that: "Official Treasury numbers show that real public spending was just 8bn (1.1%) lower in 2011-12 than in 2009-10." He ffurther notes that: "Public spending did fall in 2011-12, but only by a pretty modest 10.3bn, or 1.5%."

This is a long way from the 25% reduction claimed by the government, so we need to look further.

Tim Morgan delves deeper into the figures and concludes:-

"To be sure, the deficit has been reduced, from 161bn (at 2010-11 values) in 2009-10 to 123bn in 2011-12.

But some very serious qualifications need to be made even over this seemingly-positive out-turn:

  • At 123bn, the deficit remains higher than it was in 2008-09 (100bn), the year which preceded the Labour government's 31bn pre-election hike in spending.
  • Of the 38bn fiscal consolidation achieved since 2009-10, three-quarters has resulted from higher taxes and only one quarter (8bn) from spending cuts.
  • At constant (2010-11) values, taxes have increased by 30bn since 2009-10, absorbing three quarters of the entire increase in real GDP real GDP (40bn) over that period.
  • Far from driving down indebtedness, public debt (on the Maastricht Treaty definition) has increased from 1,032bn in March 2010 to 1,250bn in March 2012, and the ratio of debt to GDP has risen from 71% to 84%." (My emphasis above.)

In summary, then, for the period 2008/09 to 2011-12, Tim Morgan gives the following figures:-

  • Real GDP has increased by a statistically-immaterial 5bn.
  • The overall tax take has declined by a nominal 1bn.
  • State spending has increased by 22bn.
  • Public debt has increased by 413bn. (My emphasis once again.)

These figures do not filter out to the general public. Only by determined digging can one find these figures. However, the numbers are becoming known to the international bond markets despite the government's attempts to obfuscate and dissemble, hence our recent loss o loss of our AAA credit-rating.

At the end of February, a further 25 billion of money was injected into the economy under the banner of quantitative easing, taking the total of QE up to 400 billion, and yet there is little if anything to show for it. Interest rates remain at a historically low 0.5% and yet the Bank of England has reduced its growth forecast once again for 2013. The pound has fallen in value, but while that might make British exports more competitive, the effect will be short-lived as higher global commodity prices enter the equation. Manufacturing output fell by 1.5% in January of this year but Britain is not alone in this as output in the Eurozone also fell by 0.4%. This is doubly alarming since the Eurozone is the market for 56% of our output and if their economies are faltering, then so will ours.

In conclusion, I quote from a paper, published in 2010 by Prof. Victoria Chick (Emeritus Professor of Economics at University College London) and Ann Pettifor, which studidied a hundred years' worth of data on fiscal retrenchments and concluded:

"The empirical evidence runs exactly counter to conventional thinking. Fiscal consolidations have not improved the public finances. This is true of all the episodes examined, except at the end of the consolidation after World War II, where action was taken to bolster private demand in parallel to public retrenchment."



'The Pocket World in Figures', Economist (2011, 2012, 2013)

Tullett Prebon, Strategy Notes, Issue 39, Monday 14th May 2012 (Author: Dr Tim Morgan, Head of Global Research)

'The Economic Consequences of Mr Osborne. Fiscal consolidation: Lessons from a century of UK macroeconomic statistics.' - Chick & Pettifor, 2010). Eurostat

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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