Thursday, 18 February 2010

How much is too much?

No-one disputes that the size of the public deficit is an issue, and one which needs to be addressed, but the issue is far more complex than generally appears to be the case. Media coverage, in particular, in what I assume is an attempt to simplify the issue, has reduced it to a 'what will you cut?' debate, which seems to take as a given the need for a rapid elimination of the deficit.

Real life is nowhere near as straightforward as that. There is nothing approaching a consensus on the little questions of 'how', 'when', and 'by how much' the debt needs to be reduced, and many of the pronouncements by economists and experts don't shed a great deal of light either.

To hear some politicians and pundits talking, one would think that this was a settled matter, and that the deficit has to be eliminated; and that seems to be the starting point of much of the questioning of politicians. Yet, in practice, I don't think that any of the parties is actually proposing to eliminate debt - and reduction is not at all the same thing as elimination.

So, if no-one actually is aiming to completely eliminate the debt, what is the level to which it needs to be reduced such that it is no longer 'too large'?

Clearly, there's a difference between structural deficit and cyclical deficit. The cyclical element can be expected to disappear as and when the economy picks up again, as benefit payments drop, and tax income increases. Structural deficit, however, is with us throughout the cycle, and is currently of the order of 6 to 8% of GDP, and that is the element about which we should be most concerned.

What determines an acceptable level, and how? The answer, at its simplest, seems to be 'the markets'. But the markets are not some precise piece of machinery – the 'invisible hand' of Adam Smith – they are composed of people who buy and sell government bonds. As long as they remain 'confident' that governments will be able to repay the money they borrow, governments can go on borrowing.

So, there isn't a 'right' level of debt, set in an objective fashion. The level of acceptable debt is ultimately not set in any transparent objective fashion, but on the basis of the subjective opinions of a particular group of individuals - opinions which can change from day to day even if the underlying objective data doesn't.

There are some politicians whose drive to reduce the deficit is primarily ideological (an innate dislike of any form of government spending), and who are seeing the crisis as an ideal peg to achieve their broader objectives. But for most of us, it's much more about working out how much we need to do to maintain that elusive 'confidence' whilst protecting services, jobs, and the most vulnerable in our society. It sometimes seems to me that none of us really do - or even can - know for certain what the 'right' answer is, but there's an expectation that we speak and act as though we do.

We need a more enlightened and honest discussion around the question, rather than an aggressive 'what will you cut?', but it seems unlikely that we'll get one.

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