Saturday, 21 March 2015

Liberal-Tory Lies – The Deficit and Labour Profligacy

Source: Daily Telegraph.  The line graph shows net debt
as % of GDP, and bar charts shows Budget Deficit in
£billions.  I have provided a further graph below, which
shows the ratio of the deficit to GDP, for the same period.
The Liberal-Tories came into office on the basis of lies. One of the biggest lies at the time was that the British economy was in as bad a state as Greece. It was, of course, nonsense. Britain is an immensely rich country compared to Greece, with a corresponding ability to be able to cope with high volumes of debt, just as very rich people are able to deal with large amounts of debt, much better than are poor people for whom much lower levels of debt are crippling. In fact, having created this narrative, as the grounds for justifying their policy of austerity, only adopted after they saw it work for the Tea Party in the US, as an electoral means of differentiating themselves from Labour, and appealing to their core, it became an Albatross not just around their neck, but a dead weight around the neck of the British economy.

Consumers took them at their word, of the need for austerity, and drew in their horns in relation to their spending, reducing consumption, which is an important aspect of aggregate demand for the economy. Businesses, for the same reason, and seeing this contraction in consumption, began to scale back their plans for investment. That meant the second element of aggregate demand fell too. The three main elements of aggregate demand in the economy are Consumption, Investment and Government Spending.

The Liberal-Tories had cratered the first two, as a result of their politically motivated narrative, and in their June Budget, they also then announced a reduction in the third element, government spending, which both took money directly out of the pockets of consumers by reducing benefits and increasing taxes, and directly decimated some firms who went bust, as government contracts for construction, I.T. and so on were cancelled. Who could expect any other result than that aggregate demand in the economy would, thereby be slashed, and that the growth that had been created by Labour after 2008, would be brought to a halt? Sure enough, by the end of 2010, the economy had stalled. Whatever the technicalities about whether the economy went into a double or treble dip, the fact is that as a result of the Liberal-Tory policies the recovery that was underway was stopped in its tracks, and it was thrown into an unnecessary recession, or at least a period of stagnation.

But, the Liberal-Tories struck lucky in that the underlying long wave boom that began in 1999 provides a basis for growth, even despite the lunatic economic policy of austerity they, and similar political forces in Europe have inflicted. When the three year cycle of growth within this long wave cycle asserted itself, towards the end of 2012, this brought growth to the UK.

They also struck lucky, again as a consequence of the long wave cycle, as the huge investment in primary production after 1999, began to take effect, bringing huge drops in the prices of copper, oil, and foodstuffs, that has had a dramatic effect on inflation. The Liberal-Tories have then been able to take credit for things that have nothing to do with their policies. It has enabled them to again falsify history, claiming that the economy was in dire straits when they came to office, as a consequence of Labour's policies, and that they have turned it round. Over a series of posts, I will examine this falsification.

Here, I look at the main lie the Liberal-Tories tell. That the 2008 financial crisis, and subsequent economic crisis was a consequence of a huge budget deficit caused by overspending by profligate Labour Governments, after 1997.

I have taken the annual budget deficit from 1975 through to the end of 2012, and compared it with the GDP for each year during that period. On this basis, I have calculated the ratio of deficit to GDP, for each of these years. The graph of these ratios is given below. As can be seen, despite the fact of the second slump that began in 1974, and to which every government in the advanced economies responded with fiscal stimulus, the trend of the deficit to GDP was more or less falling between 1975-79. A period of Labour Government. In fact, in 1981, two years into Maggie Thatcher's government, when she, like the Liberal-Tories today, was embarking on a programme of slashing public spending, the ratio rose to 5.63%, a higher figure than any year during the previous government other than for 1975 and 1976, when the global slump was still at its height.

Taking the average ratio for the 1975-79 period of Labour Government, it comes to 5.41%. Bear in mind this is a relatively short period, and a period almost entirely affected by the global slump that began in 1974. By contrast, the average ratio for the period of Tory Governments from 1979-1997 is 3.48%. That is indeed, significantly less on a percentage basis, but reflects a longer period, and the different economic conditions that existed throughout it.

Even so, it hides a wide variety of ratios in different years. As the graph shows, in the years 1992-1995, the ratio rises to at least the levels seen under the previous Labour government, at the height of the 1970's global slump. In fact, in 1993, the ratio rises to 7.7%, way beyond the ratio of any year during the previous Labour government.

So, how does this record, of the uber austere Thatcher, compare with the record of profligacy of Blair and Brown?

Once again, the graph shows the answer. Far from exhibiting the kind of profligacy the Liberal-Tory lies portray, for several years Labour actually ran a budget surplus! But, even after 2001, when Gordon Brown is supposed to have opened the spigots of public spending, in a mad frenzy of profligacy, the ratio does not rise above that during the period of Thatcher's austerity! The reason is not that Brown did not actually spend, but that the spending on various forms of investment in infrastructure, facilitated enhanced economic growth, at a time when the new Long Wave Boom was getting under way. The low ratio of deficit to GDP, was a consequence of higher growth, rather than lower spending, and the two were not unrelated.

On the contrary, the reason that the Liberal-Tories have not been able to eradicate the deficit, as they promised, is not because they have failed to cut, but because they have cut, and in doing so have choked off the economic recovery that was underway under Labour after 2008! The same thing can be seen in Greece, where although spending has been slashed, the debt to GDP ratio has risen, because the economy has been shrunk by around 25%.  In fact, the picture is clear.  The US, which adopted a policy of fiscal expansion, has seen its economy continue to grow, and that growth has also now acted to reduce its budget deficit.  The UK, and other economies in Europe, choked off growth after 2010 with austerity, and have been unable to significantly reduce their deficit to GDP ratios, whilst seeing their debt to GDP ratio rise!

That can be seen in the first graph, at the top, which shows that not only have the Liberal-Tories failed to get the actual amount of budget deficit down to anything like the average under Labour prior to the financial meltdown, but the debt to gdp ratio under them has soared, from around 40% when they came into government to around 70% now.  That is because they have both failed to reduce the deficit, as the US has done by growing its economy, putting people back to work and thereby increasing its tax revenues, and because, although the economy has now started to grow in the UK, that is after three years in which the Liberal-Tories sent it into recession and slow down, so that the ratio of debt to GDP rose, as happened in Greece.  In fact, the policies of the Liberal-Tories have made the UK more like Greece today, than it ever was in 2010!  The main difference is that whereas the Liberal-Tories have only knocked 30% off the deficit here, Greece is now running a current budget surplus!

Taking the period up to 2008, when the financial meltdown occurred, and when, therefore, Labour, like all other governments, responded to bail out the banks, the average ratio of the deficit to GDP was just 1.57%, or less than half the average ratio under Thatcher and Major. Even if this figure is extended to take into consideration the whole period up to 2010, the average only amounts to 2.85%, still well below the average of the Thatcher/Major years.

The notion that the financial crisis, and subsequent economic crisis was due to Labour profligacy is a Liberal-Tory lie. The only years in which the deficit to GDP ratio was higher under Labour than the average under the previous Thatcher/Major government, was between 2008-2010, due to severe and unusual circumstances caused by external events. If anything, those external events could themselves be put down to the policies of monetary expansion, financial speculation, and deregulation of financial markets, introduced by Thatcher and Reagan at the end of the 1980's.

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