Wednesday, June 16, 2010

Debt and Deficit Confusion and the OBR

Setting up the Office for Budget Responsibility is probably one of the best things that the coalition government has done to date. For some time I have been saying that in terms of forecasting the Treasury simply wasn’t fit for purpose. Whether this was as as a result of political meddling in the figures, Ministers choosing the rosiest of forecasts or plain incompetence we shall never know, but an independent set of forecasts from a specialist organisation can only be a positive thing.

Of course the problem politically, with an independent body that transparently publishes everything (including worst case, best case and confidence levels) is that it makes it rather difficult for you to control the message.

We saw this on Monday whilst the government was trying to talk about the fact that the economic growth forecast for 2011 had been downgraded from the 3.5% set by the last government to 2.6% (quite a large downgrade) the media, ably supported by Alistair Darling, was only interested in the fact that the deficit would not be as big as the last government had predicted.

An obvious knock-on effect of this is that the overall public debt will be lower than expected 62.2% of GDP rather than 63.6%. Now by anyone’s account that is still huge and it doesn’t significantly change the £40bn a year bill we will soon be paying in interest on our borrowing (remember that’s more than we spend on education in a year and approaches our level of spending on defence). It also doesn’t change the fact that even if we manage to cut the deficit in half by the end of this parliament our total public debt will be more than a trillion pounds, ohh and don’t forget that this isn’t a change to the structural deficit, just non structural.

However to hear the media talk about it, and of course the Labour Party you wouldn’t know any of this. Alastair Darling has been demanding apologies from David Cameron and saying that this proves that cuts in public expenditure clearly aren’t needed.

This is rubbish and Darling knows it. We have to cut the deficit, we can’t go on spending 150 plus billion more a year than we get in. It’s not sustainable in any way shape or form and we have to cut it by  reducing spending. Our problem is a structural one not one of economic growth, if we were to cut the deficit as quickly as we need to by economic growth alone (not accounting for inflation remember) we would have to show economic growth of at least 10.5%, which just isn’t going to happen unless we suddenly become China or an emerging economy.

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