Thursday, 15 October 2015

Half a step forward

It was foolish in the extreme for Labour ever to have accepted one of the silliest ideas ever to emerge from the Chancellor.  Passing a law which seeks to – but according to convention cannot – bind the hands of future governments and oblige them to eliminate the budget deficit in a set timetable creates more problems than it solves.  It’s about politics, not economics – both playing to the gallery and seeking to reaffirm and reinforce the grossly over-simplistic message about budget deficits being an inherently bad thing.
The Shadow Chancellor is quite rightly embarrassed about his U-turn – it is after all a hole which he dug for himself.  But how much of a U-turn is it really?  Superficially, it’s a question of saying one thing one week and the opposite the following week, but he doesn’t really seem to have changed his mind much on the substance at all.
In reality, he’s still signed up the deficit fetishism which has come to afflict politicians and parties – his disagreement with the Tories isn’t over whether deficits are bad and should be eliminated, it’s only about how and in what timescale.  He has completely accepted the underlying premise – and many in his party have also accepted the Tory arguments on timescales and methods as well.
The economics is much more complex than the politics.  As long as real interest rates remain negative, borrowing money makes eminent sense – the government will, in effect, have to pay back less than it borrows.  Deficit fetishism also overlooks another important factor – at the moment, people are queueing up to lend money to the government.  What would they do if the government simply stopped borrowing?  The economy doesn’t start and end with the government and the public sector, but political debate seems to assume that that part of the economy can somehow be considered in isolation, independent of what’s happening elsewhere.
Seeing through the politics of the silly suggestion for a new law is one thing – a step forward of sorts.  But they’re still not seeing through the politics of the deficit itself.


Anonymous said...

Borrowing may make 'eminent sense' but borrowing isn't the problem. It's the spending of all the borrowed money that causes the problems.

Spending lots and lots of borrowed money causes price inflation. Think of the London property market. Now, if inflation gets a hold in the public sector interest rates will have to rise and sharply rising interest rates means the government will have to pay back considerably more than it has borrowed. Think Dennis Healey and think the IMF.

Yes, we all appreciate your sentiments but plain daft we cannot be!

John Dixon said...

"Spending lots and lots of borrowed money causes price inflation." Does it? I know that's what the textbooks say, and I understand the economic theory behind the mechanism that is supposed to cause it, but on the whole I prefer to believe the empirical evidence rather than the theory. And, right now, there is nothing to suggest that public expenditure is causing, or is likely to cause, inflation. The best that can be argued is that it might be preventing deflation. Now, that assertion would not hold true at all points in the economic cycle nor in all circumstances - that I'd accept. But in general, when interest rates are negative in real terms, an obsession with eliminating borrowing is a political decision, not an economic one.