I have yet to blog on the cuts in general, although I have passed comment on child benefit which forms a tiny part of the overall package of cuts currently proposed. This is for two reasons. The first being that there is so much existing commentary on this subject that anyone interested has not been short of material. The second is that this debate is not easy to summarise. There are so many facets, and so many differing opinions to this debate that trying to take on the whole subject in one go would likely result in a life's work, and for some academics it almost certainly will.
However, I recently received a request to do exactly that (a doff of my proverbial hat to the supportive individual who made it), and so with some trepidation I shall give it my best shot. Wish me luck! I will try my best to keep on point as the deficit reduction debate is full of wormholes which can lead one into a series of digressions, which I believe could leave the author experiencing a psychological break, or at the least a migraine.
To my mind, this debate is comprised of two main elements which, taken together, only serve to confuse. The first is primarily an economic question: what should be done about large government deficits? The second a more political debate: if reducing the deficit, what should be cut?
Turning to the first point (should the deficit be cut?), we must start with an admission. We are very much in uncharted territory in the current predicament; humans do not have a textbook for the current economic situation. There is no right answer. Modern economic history provides a number of examples of situations similar to ours, or involving some of the problems, but none that are good enough to definitively point the way. As Mark Twain said, history never repeats itself, it rhymes.
In the 1930s Keynes developed an economic understanding suitable for his times and not too dissimilar from our own, including lessons which have subsequently been accepted into general economic thought. More recently a more laissez-faire approach was developed revolving around the concept that 'the market is always right'. After the banking crisis of 2008 some were quick to proclaim that Capitalism was dead. However, whilst some of the modern laissez-faire thinking has been debunked, real lessons were also gleaned that will endure current criticism and go on to form accepted economic thought. The bases of these two schools of thought largely describe the two sides of this particular argument. The Keynesians who warn of deficit reduction too severely, or too quickly, and the Free Marketeers who support balanced budgets and deficit reduction. I fear even this is too simplistic a description but I'll run with it for now.
Economists in the US, the UK, and in Europe have been debating furiously for the last two years on the right course of action, and I'm afraid they are still debating even as I write. Often economic lessons are only understood some time after the fact, when sufficient data exists to resolve the debate either way. Nonetheless, we must move forward, and can't wait for economists to agree, if they ever will. The UK has decided to reduce the deficit, and as quickly as possible without tipping us back into recession. Deficit reduction was proposed by all political parties going into the recent election. Therefore, I think I can say with a reasonable amount of confidence that eliminating a government’s deficit is generally accepted to be a good thing. The question really is when do we cut? And how quickly?
For anyone still wondering why we need to cut at all, and whether this represents a significant reduction in the State, backed by ideological reasons or any other, the following chart showing both former and projected government expenditure illustrates in correct proportion the size of the problem.
(please note that the 'cost' of bailing out the banks is not included in these figures!)
As is evident, government expenditure from circa 2005 onwards experienced an almost unprecedented growth above trend. One should remember that this growth in budget was not really debated at the time. I suspect that had vast new government programmes been commissioned, the budget implications would have been raised, but in fact much of this additional spending was pumped into existing programmes in the form of better pay for civil servants, increased welfare payments, and significant capital expenditure. Some would say that existing programmes were historically underfunded which this chart also supports, but between 1997 and 2005 this shortfall was rectified.
The effects of this above trend growth are too numerous to detail but must include a contribution to the bubble which caused the crisis, a factor not often cited in media commentary. The government deficit is simply a result of a government spending every penny of its inflated tax returns, only to be left short when the real tax revenues are revealed after the crisis. In such a circumstance it seems only logical to suggest that the government is going to have to reduce its expenditure at some point to match its income.
The Conservatives believe that taking the pain as quickly as possible, without crippling the patient, is the best medicine. This certainly sounds like a reasonable position and given that we are now competing in a globalised marketplace there are advantages to a swift return to health. However, Keynes taught us that cutting government expenditure can be self defeating. No one knows if the Tory medicine will cripple the patient, only time will tell. But at present the economy seems to have taken the news without going into a nosedive. Of course the opposition argue that economic data can lag behind announcements, and that given the seriousness of the current problem, more caution would be wise. This sounds an equally reasonable point and only with hindsight will we know which approach would have been the better choice.
This leads me on nicely however to the second problem: if cutting expenditure, what is to be cut? We encounter here my main objection to the British voices currently calling for caution. To oppose a cut, one must believe the expenditure being cut is already useful. If you can't defend the expenditure, your only real position vis-à-vis stimulating the economy must be to agree but insist that the savings are reinvested in more useful government expenditure rather than reducing the deficit. I am still aghast that some have suggested that now is the wrong time to cut 'waste'!!! Is there ever a wrong time to cut waste? This sort of thinking is the worst example of our debate's two elements crossing and producing a twisted outcome, and an example of the confusion I warned of earlier.
If we are to reinvest savings in the quest for economic stimulus, Keynes comes into his element. Keynes found that capital expenditure had a multiplier effect on stimulating the economy and could help kick-start an ailing economy. For example, paying a doctor an increased salary does not stimulate the economy because any additional money paid to the doctor has to be taken from someone else in the form of taxes. However, paying a builder to construct a new motorway achieves the same zero sum wage transfer, but also provides society with a new road!
The Keynesians therefore should be arguing for reduced non-capital expenditure in favour of increased spending on new capital projects, such as new government buildings, transport infrastructure, and other public works. This is not where we find British opposition arguments, however. Amazingly we find arguments against cutting child benefit for the top 15% of income earners on the basis that it will undermine the economy, not a debate as to whether the top 15% should be getting benefits in the first place. That the left makes this argument is an added bizarre dimension, one that I believe can only be caused by the complexity of this issue.
Of the details of the cuts so far announced, of which there have been few, I have yet to hear many with which I disagree. Housing benefit limited to £400 per week, my mortgage is only £365 per month!, benefits removed from those who don't need them, a two year public sector pay freeze, raising the retirement age, a leaner armed forces, and a market for higher education. These all sound like reasonable ideas to me, whose merits would certainly be worthy of a discussion whether we needed to make cuts or not. I am disappointed by some of the capital projects cut - I mentioned that building new schools and infrastructure would have added benefits at a time like this. At least the government has acknowledged this by retaining some projects like the M25 expansion, and Crossrail, albeit they seem a little London-centric.
Until the opposition can argue how better they would spend the money to ensure a strong economy, it seems prudent at least to take the opportunity to seek out ineffective or wasteful government expenditure and to reduce the deficit, safe in the knowledge that we can always spend it if the economy starts to bomb. This is why the Tories have made such progress, their position whilst possibly not entirely correct, is not currently opposed by an equally credible argument. Cutting less quickly does nothing to stimulate the economy, it only reduces the pain in the short run. The government should be careful in this respect, however, and have plans ready for increasing expenditure if the pain becomes too acute.
If you take anything away from this blog, I hope it’s that when reading commentary on deficit reduction you can identify the two differing arguments: namely whether in economic terms the deficit should be cut or politically whether the cut in question is the correct use of government spending. The two are often confused with one another, and by clearly separating them we can see the inconsistencies in some popular arguments.
If you are interested in more information I can recommend Stephanie Flanders blog for the BBC which I think explains some of the numbers in more detail and a collection of her recent blogs explain this subject further.
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