The Daily Mail are debt dunces

Michael Burke discusses how the coalition's economic policies represent a transfer of income from poor to rich, and how the Daily Mail are deficit dunces.

UPDATE: Left Foot Forward gives its sincere apologies. The piece is entirely accurate about the status of debt, however the headline had previously stated that the issue on hand was the deficit and for that our sub-editing skills deserve a dunce’s hat like the Daily Mail.

The national debt level has passed the £1 trillion psychological mark – and on cue the Tory press has manufactured a sense of alarm and outrage. Typical is the Daily Mail, whose headline screamed:

“£1 TRILLION: Our National Debt pushes through barrier to reach £40,000 per household”

But, then again, when do Daily Mail headline writers do anything other than scream?

To gauge the importance of large numbers requires meaningful comparisons. The chart below shows the level of public debt in the British economy in relation to GDP. This represents the income from which public debt must be financed, both the interest and the debt repayments as they fall due. Under the impact of the most severe recession since the 1930s public sector debt as a proportion of GDP rose from 35.5% to a projected 60% this year. This compares to a peak on the debt of 178% of GDP during the Great Depression, under Tory-led administrations.

The much milder recession under John Major was not a global phenomenon, but a uniquely British disaster of Tory policymaking. Yet the downturn then, just a fraction of the recent slump, produced a comparable rise in the debt level from 26.2% of GDP to 42.5%.

The policy pursued in the Great Depression, and under both Major and Thatcher, was to reduce government spending in response to rising deficit and accumulating debts. In all cases, the effect was to exacerbate the downturn – causing unemployment (and reducing income taxes), while providing tax breaks for companies and the rich. In every case the deficits rose and (apart from the windfall of North Sea oil under Thatcher), so did the national debt. This Tory-led government will produce the same result.

The debt level of £1trillion needs to be seen in light of the fact that the annualised level of GDP is currently £1.46trillion.

Even so, £40,000 debt per household does seem like a lot of debt, which comprises the other part of the Mail headline. Especially as households’ average wage incomes are not much more than £26,000. Except that this is a government debt, not a household one. Government revenues arise from both the household sector (direct taxes like income tax and indirect ones like VAT) and the business sector (corporation taxes, etc.).

But the effect of government policy is increasingly to shift the burden of taxation away from companies and towards individuals, especially the poor. While VAT was hiked, a string of other taxes were cut including corporation tax while the upper earnings limit on National Insurance was frozen. The amount gained from raising VAT is almost exactly equal to the amount lost from these tax cuts which benefit companies and the rich, £13bn compared to £12bn. These measures are therefore not about debt or deficit reduction at all. Together they represent a transfer of incomes from the poor to the rich.

The Office for Budget Responsibility recently forecast falling real incomes over several years, at the same time as modest real GDP growth. The Tory-dominated coalition does not dispute this. Logically, if total real incomes rise but the majority experience falling real incomes, then this must mean that a tiny minority will experience very strong income growth.

It is the falling incomes of the poor that are being saddled with the burden of the debt, while the rising incomes of the rich have tax cuts. This will prevent any significant reduction in either the deficit or the debt levels.

There is an alternative: The national debt was even higher after the costs of WWII. A Labour government which nationalised industries, introduced the welfare state and had a massive housebuilding programme was able to produce a sharp fall in the national debt, as the chart shows. Above all it is the commitment to full employment which rescued the economy and government finances in the process.

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