The public are being led to believe that the UK’s public debt is somehow worse than anywhere else. This is a barefaced lie. George Osborne says the UK was “on the brink of bankruptcy” when the coalition took over and that “we have the largest budget deficit in the developed world”. Sounds apocalyptic doesn’t it? And of course if his assertions about government debt were true it would help Osborne to argue for ‘savage cuts’.
But the truth is very different. Look at the USA. Last Friday the Washington Post said ‘Total U.S. government debt exceeded 84 percent of gross domestic product (GDP) in 2009, and most observers expect that percentage to keep growing.’ In Britain it’s just over 60%.
The truth is that many countries have a far higher government debt as a % of their GDP. Take Europe …
The following European countries have a higher debt level (as % of GDP) than the UK:
Measures of the annual ‘structural deficits’ of different countries as opposed to their total accumulated debts, suggest that the UK is indeed in a poor position, but it is by no means the worst of all the developed world as Osborne implied on the Andrew Marr programme on BBC 1 yesterday. In fact recent analysis by the IMF shows that the United States’ structural deficit is far worse.
Budget deficits are split into structural and cyclical elements by economists. They estimate that a part of the deficit will be corrected as an economy grows and tax revenues roll in. This is the ‘cyclical’ portion. But there’s also a ‘structural’ portion to the deficit which won’t be corrected just by growth. Of course lots of assumptions have to be made in order to make the estimates of the two different portions of the deficit.
A Warning from Hungary
One thing is clear – if the coalition’s austerity measures stifle growth (as is pretty certain) or worse still if they tip us back into recession, then we could well go the way of Hungary and Ireland – the economic situation will get a LOT worse and the coalition will be to blame.
This warning appeared in a report last week by Eversheds International ‘Hungary acts as a warning for others now considering how quickly to reduce their deficits. It was in an austerity-induced slump in 2007, even before the global downturn, and since being rescued from insolvency by the EU and IMF in 2008 it has been forced to renegotiate budget targets with them because it found that the spending cuts and tax hikes pushed its economy into much deeper recession than expected.’
Savage cuts will weaken the prospects for economic growth, leading to less tax revenue and weakening the ‘cyclical’ portion of the equation. That’s the main reason why the coalition’s economic plans are so flawed.
A Positive Alternative
There is an alternative approach comprising much more modest cuts in government spending; maintaining and significantly increasing major infrastructure projects; massive investment in green technologies (which could in time create hundreds of thousands of jobs) and international action to levy a ‘Robin Hood Tax’ on the banking sector. Before we all get locked into the madness of ‘savage cuts’ let’s consider these alternatives and take heed of the warnings coming from the economic disasters of Ireland and Hungary where ‘savage cuts’ have bled their economies dry.