Is Britain suffering under the strain of too high a deficit?

Is Britain suffering under the strain of too high a deficit?

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Britain, it turns out, is staying together, at least for now.

It did appear at least for a moment that Scotland wanted out. But, at least for now, we can return to more prosaic matters like public policy and government finance. 

Nick Robinson — slated by the "Yes" campaign for his controversial performance in Scotland — clearly cares dearly about the national debt. And he thinks — as does the vast majority of the political class, it should be said — that we just have too much of it. Indeed, Nick Robinson is calling Ed Miliband's lack of anti-deficit rhetoric in the Labour Party conference speech a "deficit slip". It is, according to Mr. Robinson a mistake to not be talking about deficit reduction. An error.

Robinson writes: "When I spoke to the Labour leader this morning, I asked him how big a problem he believed the deficit was." Ed Miliband's reply: "I think it is a problem and it has to come down but I think the biggest problem for our country is that our economy does not work for most working people and only works for a few people at the top - that is the election question."

So just what is the problem with the deficit, according to Robinson? Why is it such a big "slip" that Miliband is not obsessing over the details of deficit reduction? Robinson doesn't tell us. He just argues by assertion, calling it "the disease still ailing the British patient". 

Now, borrowing may appear to be a "disease" to Robinson. But it is by no means a disease to the people involved in the matter. Lenders to the British government receive a return on their investment. And the British government itself gets to spend more than it can raise in tax revenues without spending any new money into circulation. In a depressed economy, being able to run deficits is not a disease. It is a countercyclical stabiliser that in a slump allows the government to boost the economy and get the economy back toward growth.

So, how much is too borrowing much? Reinhart and Rogoff claimed debt above 90 percent of GDP. But that was debunked by a team at U-Mass. And that seems logical. Different governments of different countries at different times are all different, and therefore can all carry different levels of debt and borrowing. 100 percent might be too much for one government. 200 percent might be manageable for others. Britain managed to service and pay down a national debt of over 200 percent of GDP after the Napoleonic wars while on the gold standard! 

So what of our present situation? The public deficit is still higher than it was before the financial crisis, but it has gradually fallen and continues to fall. Other indicators of fiscal health such as interest rates on government borrowing are very low by historical standards. The 10-year gilt as of today, the 25th of September, is at 2.48 percent, and the 30-year at just 3.07 percent. Before the financial crisis, the 10-year was hovering just under 5 percent. And this has come at no inflationary cost. Inflation remains at just 1.5 percent, 0.5 percent below the Bank of England's target.

So, why the panic? The only deficit strain, at this point, exists in the speeches of austerity-mongering politicians and commentators. Borrowing is cheap, inflation is low and there is still some slack in the economy in terms of people out of work and spare capacity even after a slow, painful six-year climb out of the trough. That suggests the real disease Britain has suffered from was not too much borrowing but a huge economic slump and mass unemployment. These economic indicators suggest that the British government could comfortably borrow a lot more to stimulate the economy and put people back to work. Investors are offering the money for them to do it! Borrow and spend until the yield on the 10-year hits 4 percent, or unemployment falls below 5 percent, whichever comes first. Build solar and wind and nuclear capacity, fix the roads, build out fibre optic broadband, build new bridges and railways.

Now, clearly Ed Miliband is not of my view, and if he is he is hiding it very well. Neither he nor his shadow chancellor are making the case that the deficit should be higher. Indeed, Ed Balls put deficit reduction front and centre on the Labour agenda in his speech at the same conference. 

Labour, in other words, is closer to Nick Robinson than it is to John Maynard Keynes. And that is bad news, ultimately, for an economy still crying out for public stimulus.


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