Monday, June 7, 2010

Our way of life...

... is under threat. According to David Cameron, our PM.

 We must now start to cut public spending, because otherwise we will be spending 10p for every pound in taxes on interest - £70 billion a year to finance our 'staggering debt'. The problem, Cameron states, is that the size of the public sector got 'way out of step' with that of the private sector.


First point to make is that obviously, if you can avoid paying £70 billion a year in interest, that is £70 billion you could spend on something else. But cutting spending to reduce the deficit doesn't just free up money spent on interest for other purposes - it also has other effects, which can be counter-productive to the purpose of balancing the government's books.

First, cutting the deficit could slow economic activity (think of all those sacked public sector workers no longer spending money on goods and services) and reduce government revenue, so just cutting spending doesn't automatically translate into cutting the deficit. In a worst case scenario, output could shrink so much that the deficit would remain just as big.

Second, £70 billion sounds like a lot of money, to those of us who struggle to think of numbers bigger than what we carry in our wallet. But GDP last year was £1396 billion, so that's just over 5% of total output. That's still a horrible number, but it wouldn't be that exceptional in historic or comparative perspective. After all, with interest rates at their lowest for centuries, there's never been a better time to be a debtor. This doesn't mean that we shouldn't worry about the deficit; it just means that we shouldn't panic into adopting masochistic policies just because of it.

The other slightly ludricrous statement Cameron made was that the deficit problem was the result of the public sector getting too big compared to the private sector. Trouble is, the deficit is the result of the private sector shrinking, more than the public sector growing. The shortfall in revenues is the result of the collapse of an unsustainable private sector boom, which in turn left the public sector rather bigger than a shrunken private sector could sustain. Not quite the same thing. Sure, Labour should have been more cautious spending the proceeds of the boom, but its critics - such as Cameron and Osbourne - were not exactly warning of the unsustainable housing bubble at the time.

Sure we have a deficit, and sure, this is a problem. But my fear is that Cameron wants to use this problem to redefine the role of the state in Britain, in a way which wouldn't be possible without the economic crisis as a pretext.

Same old Tories?