Wednesday 6 May 2015

Conceding the narrative

Amongst the more useful things that I’ve learned over the years are that that which is obvious isn’t necessarily true, and that that which is true isn’t necessarily obvious.  Assuming the obvious to be true is a common mistake, but in this election the failure to challenge the ‘truth’ of the obvious has allowed the Tories to frame the debate and win the argument on economic narratives.  To describe that as disappointing is an understatement.
When it comes to the budget deficit, all three of the main UK parties are committed to the view that it needs to be eliminated; any disagreement is solely about the method by which that is achieved and the timing.  Even the self-styled ‘anti-austerity’ parties, despite calling for an increase in borrowing to fund infrastructure in the short term, seem to have bought into the ‘truth’ of the ‘obvious’ need to eliminate the deficit.  In her piece for the Western Mail on Saturday, Plaid’s leader said “The Party of Wales wants to see the fiscal deficit eliminated”, going on to argue that it just doesn’t have to be done so quickly.
Deficit elimination as a necessity is a narrative which the Tories, aided by their friends in the media, have set, and which has gone unchallenged.  It is, after all ‘obvious’ that a government cannot run a deficit forever.  But is it true?
As the chart on this page shows, deficits have been the norm over a very lengthy period.  Where there have been surpluses, they’ve been short-lived and very much smaller than the deficits.  The simple conclusion is that countries are not like households; the budget really doesn’t have to be balanced, even over the long term.  Governments really can run deficits more or less indefinitely if they choose, however counter-intuitive that may seem.  And because it’s so counter-intuitive, it’s a point which simply hasn’t been made effectively during the election campaign.
The extent to which it’s possible to run a deficit indefinitely depends on a number of factors, most notable perhaps inflation and the level of economic growth, although it’s important to remember the importance of international comparisons as well – relative security of funds is more relevant than absolute security.  That’s why a more useful measure than the existence of a deficit per se is the relationship between that deficit and the overall size of the economy over time. 
If they’d all talked about ‘reducing’ the deficit, rather than eliminating it, I’d be a good deal less critical, because there probably is an upper limit to the size of the deficit.  However, I don’t know what that limit is, even if I suspect that the UK got closer to it than was wise.  But here’s the thing – neither does anyone else know what that limit is. 
For sure, any number of different economists will tell you with apparent certitude what the limit is, and justify setting it at that level by reference to all sorts of economic theories based on what’s happened in the past.  But none of them can be, whatever they may say, certain.  In effect, governments can go on borrowing until people won’t lend them money any more – not a sensible thing to do, but the only way anyone will ever know what the limit is.  Everything else said about the deficit is simply opinion, not fact.
One of the few things which are certain is that the existence of a deficit per se is not a problem – which is precisely the opposite of what all the politicians are telling us.  It’s clear enough why the Tories are telling us the reverse of the truth.  Using the ‘obvious’ comparisons with household debt or ‘maxing out the credit card’ provides them with the cover they need for an ideologically based desire to shrink the state and further redistribute power and wealth from the many to the few.  What’s a good deal less clear is why the rest of them have allowed the Tories to get away with this unchallenged.

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