Policy Exchange’s false debt claims

Neil O’Brien, of Policy Exchange, has written an article for ConservativeHome on the current deficit situation. Not only is it factually incorrect, its prescriptions are downright dangerous.

O’Brien argues that:

“The interest on all this debt will not be cheap. Soon, 9p in every pound of tax we pay will be spent not on public services, but on servicing debt interest. We will be flushing £50 billion a year down the toilet – more than we spend on schools.  That’s real “government waste” for you.”

However the interest on this debt is cheap. While debt may be higher than in the past, the interest rate paid on government debt is at record lows. As the chart below shows, the percentage of GDP spent on interest payments is projected to be less than 3 per cent to 2011. This is well below levels experienced as recently as the 1990s and less than when Labour came to power in 1997.

O’Brien makes two major claims. First that:

“Sorting out the deficit promotes growth and recovery – particularly by enabling a looser monetary policy than would otherwise have been the case.”

Despite O’Brien’s claims that we currently have overly loose fiscal policy, the Bank of England base rate stands at 0.5 per cent (a record low), the BOE is engaging in a policy of quantitative easing and 10 year government bonds yields are less than 3.75 per cent. It is difficult to see how monetary policy could be any looser.

O’Brien may favour using monetary policy to respond to the crisis but the IMF has argued that:

“during recessions associated with financial crises, fiscal policy tends to have a more significant impact, which is consistent with other studies that find that fiscal policy is more effective when economic agents face tighter liquidity constraints. The lack of a statistically significant effect from monetary policy during financial crises could be a result of the stress experienced by the financial sector, which hampers the effectiveness of the interest-rate and bank-lending channels of the transmission mechanism of monetary policy”

O’Brien’s second claim is that:

“The fiscal correction should be biased towards spending cuts to avoid choking off growth.”

Government spending in the last year was one of the key factors in preventing an outright depression. Significant tax rises or government spending cuts in the next year risk a ‘W shaped’ double dip recession. Does O’Brien seriously believe that removing demand from the economy (which is what spending cuts amount to) is required at this stage? With private consumption weak, export markets sluggish and business investment still falling heavily this is a recipe for economic disaster.

Once again the Conservatives, and their proxies, seek to emulate Ireland.

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12 Responses to “Policy Exchange’s false debt claims”

  1. Joanna

    on debt interest he is simply using the Treasury’s own projections for 2014 – thought you were meant to be evidence based. happily you’re losing the argument – the OECD on Thursday and Richard Lambert today on the front page of the FT. You should ask Goran Persson about deficit reduction – he’s a Swedish Social democrat so you should agree on a lot, and he dealt with Sweden’s massive deficit after a financial crisis and recession in the early 1990s. When he came to the Institute for Government recently he was very clear that the bigger risk for the UK was tightening too late, not tightening too early – you can find the transcript on their website. I fear the left’s fondness for government spending is leading to a lot of complacency about the sustainability of our public finances.

  2. Neil O'Brien

    Point 1

    “Within four years, almost 9p in every pound of tax paid by British individuals and companies will be spent directly on servicing the Government’s debt, rather than on services such as hospitals and police, or the costs of running defence or the welfare state, according to new calculations. At present, the debt interest costs an average of around 5p for every pound in tax.”

    “The National Institute of Economic and Social Research said that costs of servicing government debt will rise from £25.6bn this fiscal year to £50.7bn in 2013/14, due to a combination of higher interest rates and a far greater debt burden. The warning underlines the cost facing taxpayers as the Government debt rises at the fastest rate in peacetime history.”

    Source:

    http://bit.ly/LNedD

    Point 2

    “Despite O’Brien’s claims that we currently have overly loose fiscal policy,”

    I am not saying this. What makes you think I am?

  3. Duncan

    Neil,

    Thanks for responding.

    On point one – I don’t dispute the 9p point. I would say though that the interest burden is not actually very hihg and had been much higher in the past.

    On point 2 – Sorry to assume. If you do not think fiscal policy is too loose, why do we need cut spending in order to allow a loose monetary policy?

  4. Stefan Nyman

    från_google_alert Policy Exchange's false debt claims | Left Foot Forward: Despite O'.. http://tinyurl.com/ydc3ztx

  5. Bob Wiley

    Policy Exchange's false debt claims | Left Foot Forward: Neil O'Brien, of Policy Exchange, has written .. http://bit.ly/7YQDrx

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