An economics lesson for the growth deniers

Ken Livingstone, Labour candidate for London Mayor 2012, rebuts the right wing rhetoric about the deficit, and explains the importance of the March for the Alternative.

By Ken Livingstone, Labour candidate for London Mayor 2012


This Thursday on Question Time there was what Mrs Merton used to call a ‘Heated Debate’ over the scale of the British economy’s debt under Labour. Niall Ferguson and I disagreed about the scale of the national debt and what should be done about it. Niall argued that the scale of the debt when Labour left office was over seventy per cent. The right wing writer Toby Young was quick to praise Ferguson’s view on his Telegraph blog.

Here’s why they are wrong. The only way to get to the 70%-plus figure is to use the Maastricht Treaty criteria which is ‘general government debt’. That is an inflated figure arising from the Maastricht process. It excludes government assets – such as departmental balances, central bank reserves, pre-funded liabilities, and so on.

The more useful measure, certainly the one focused on in this country, is the government net debt. That is because it is sensible and logical to include government assets in the calculation.

For example, Ireland was not allowed to count its national pension fund against general government debt. But that turned out to be real money – it was the first thing they raided when the EU and IMF came calling. And government net debt allows long-term comparisons. Indeed for most of the time prior to the Maastricht treaty this odd measure of debt was of course not recorded.

In truth Labour inherited a public sector net debt of 42.5% of GDP. This fell steadily to below 30% in 2002 and then started to rise. It was 43.3% in 2009 before the recession and only with the most severe global recession since the 1930s did it rise to 52.7% in 2010 when Labour left office. [Source: http://www.statistics.gov.uk/cci/nugget.asp?id=206]

Deficits always rise in recessions – that’s unavoidable. But the deficit actually rose by a far greater amount during John Major’s much milder recession of the early 1990s.

Quoting lots of odd sources is an old trick of the right, for example relying on future pensions liabilities but neglecting to mention pension assets, such as the pay of the people contributing towards them. Why is this important? It is not a dry academic debate about economic figures. The right uses rhetoric about government debt to justify its assault on the public services and public spending.

Specifically, the fact that between 1997 up to the point of the recession debt as a proportion of GDP was relatively stable and in fact fell over part of the period – and was lower than in many other developed countries – shows that it is not public spending that is the enemy. The right don’t want you to believe that. They want to say that it is profligacy in Britain under the last Labour government that has to be dealt with. Hence ‘deficit denial’. Thus whether debt was out of control prior to the recession is key.

A narrative in which public spending is the problem leads inevitably to making ordinary people pay through fares, VAT, student fees, and cuts to services – rather than an alternative narrative in which the economy is made to work for those people, putting investment, fairer taxes and growth ahead of austerity for the majority.

The problem for the right is this. In the name of reducing the deficit they are pursuing policies that cut spending, reduce employment, remove demand from the economy and therefore worsen the deficit. Initially the Office for Budget Responsibility had projected a public sector net borrowing requirement of 7.5% and 5.5% of GDP in what was then the next financial year and in the following financial year 2011/12.

Now these have risen to 7.9% and 6.2%. This gives the lie to the central claim of government policy – that all these cuts are necessary to reduce the public sector deficit. Their policies have led to a renewed widening of the deficit.

These are among the main reasons why I will be marching – along with London Young Labour and other London Labour colleagues – today. There are clear alternatives to the right’s case. The growth deniers need to understand there is widespread public concern about what the government is doing in the name of deficit reduction.

108 Responses to “An economics lesson for the growth deniers”

  1. 13eastie

    So, Ken, why DID the debt start to grow in 2002?

    Anticipating the banking crisis by six years?

    When asset prices, and tax revenues were booming?

    During an un-pree-cee-dented period of continuous growth?

    And not even bothering to count the off-balance-sheet borrowing?

    Was it Mrs Thatcher’s fault, Ken?

  2. Richard

    “1.Some of us actually contribute to economic growth by creating wealth generating enterprises”

    Whose headquarters you register in tax havens.

  3. Richard

    Ian, you’re right to fear for the pupils at Toby Young’s school. He couldn’t even get the Latin of his school motto correct.

  4. mathew

    13eastie

    It rose because after 4 years of non deficit spending Labour ran at a modest 2 – 3% deficit. This was dropping pre Global Financial Crisis and would of been balance around 2011 – 2012. The Tories supported this spending plan and the Liberals wanted more spending. The Spending was to improve the public services so run down by the last Tory Government.

    Toby

    Like everyone else I feel for the kids who will end up at your school.

  5. mathew

    Also Toby,

    I hope you do a better job of reading your school children’s work than you did of kens article.

  6. Josh

    An economics lesson for the deficit deniers on Left Foot Forward. If any of you pseudo-intellectuals had read your Keynes, you’d know that Keynes would be apopleptic at 10-14% deficits, especially with structural deficits running at 7-9%. When you guys propose fiscal stimulus and discretionary government expenditure and then use Keynes as intellectual justification for the theory, you (Ken especially) conveniently forget 50% of Keynesian theory. In the boom times, Keynes said that public spending should be cut and kept low, and taxes should be high, and that a budget surplus should be developed. Taxes were certainly high under Brown, but so was public spending, and we had a large deficit BEFORE the crisis hit. So you can’t enact Keynesian policies because you ignored 50% of his wisdom. I know Will Straw desperately wants to be thought of as a liberal socialist intellectual, but if he makes basic, elementary errors on simple economics, then he will forever be known as Will ‘Clutching at’ Straws.*

    *I apologise for the worst pun joke in the world. I really am sorry

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