Introducing George’s Marvellous Deficit Calculator

With George's Marvellous Deficit Calculator you can predict the deficit in 2012/3 from growth in 2012

On Monday, yet more disappointing growth forecasts came in for the economy. Ernst and Young’s ITEM club predicted 0.2 per cent growth in GDP for UK in 2012, down from their previous forecast, while the manufacturing organisation EEF plumped for a meagre 1 per cent.

Such downgrades barely make news anymore, and it was a long way down the news bulletins’ running orders. But low or non-existent growth in the economy is a double tragedy.

Not only does it mean fewer jobs and less well-paid jobs, but also makes it even harder to bring down the deficit.

The government and its supporters continue to insist that what we face is, at bottom, a crisis of debts and deficit. Therefore, if we cut discretionary spending (i.e. spending on the things we like) we can rebalance the books and the economy will recover.

However, as right-wing commentators have helpfully pointed out “there are no cuts” – or at least there is a relatively small fall in overall spending.

That’s because as discretionary spending falls it takes demand out of the economy leading to fewer tax receipts and more mandatory spending – spending on things we would rather not be spending on but have no choice as to do so, like Jobseekers’ Allowance and debt interest.

Given how hard it is to translate cuts in discretionary spending to reducing the deficit, it would suggest that an analysis that puts a lack of growth at the heart of understanding the economic crisis is more helpful.

As Left Foot Forward has consistently argued, the deficit is largely a symptom, lack of growth is largely the cause. And, as you would imagine, the Office for Budget Responsibility’s (OBR) forecasts for growth and the deficit are closely correlated.

Let’s take the OBR’s predictions of growth for 2011 and its predictions of the deficit for 2011/2 – made on the Osborne plan for the June 2010 budget, and in November 2010, March 2011 and November 2011:

As can be seen from a scatterplot, the two are clearly related:

And indeed, when we run the main statistical test for correllation between two continuous variables – Pearson’s Correlation Co-efficient, we find a rating of -0.99 out of a range of 1 to -1. That means that they are almost perfectly negatively correlated – as growth declines, the deficit goes up.

Statistical significance tells us what the chances are that this relationship came out by random chance. With only four data points, one might not expect the correlation to be statistically significant.

However, growth and debt forecasts are so well correlated that the statistical signicance is (p<0.001) – that is there is a less than 0.1 per cent chance that the relationship was produced by random variation.

We can even generate an equation to describe the relationship between the OBR’s predictions of growth in 2011 and the deficit in 2011/2, using an ordinary least squares regression. It calculates that the Deficit = 8.9913 – (0.6522 x growth).

We can perform a similar analysis for estimations for growth in 2012 and the deficit in 2012/3. The four sets of predictions that the OBR  for 2012 growth and the 2012/3  are as follows:

It can be seen from the scatterplot, that while not as strongly correlated as the 2011 figures, there is still a clear relationship between growth in 2012 and the deficit in 2012/3, according to the Office for Budget Responsibility:

These figures are almost as strongly correlated as the 2011 figures, given a Pearson’s Correllation Co-efficient of -0.97. The strong correlation means that the relationship is still statistically significant at (p<0.05). That is, the chance that the relationship between the two is due to random variation is less than 5 per cent.

The equation produced for predicting the 2012/3 deficit from 2012 growth is Deficit =  8.3033  – (0.9667 x growth). And thus we can create George’s Marvellous Deficit Calculator.

So for example, given the EEF’s prediction of 1 per cent growth for 2012, we can predict a deficit of 8.3033 – (0.9667 x 1) = 7.4 per cent, and Ernst and Young’s prediction of 0.2 per cent growth forecast  forecasts an even more dire 8.3033 – (0.9667 x 0.2) = 8.1 per cent – higher than its been at any point since 2009/10.

Two notes of caution are needed here. Firstly, this predictor specifically says that “If the Office for Budget of Responsibility predicted such a figure for growth in 2012, we would forecast that the OBR would predict this figure for the deficit in 2012/3.” Its credibility stands and falls with the Office for Budget Responsibility.

Secondly, as the OBR releases more predictions of growth and deficit, we will update the model accordingly. The predictor will live in our sidebar, where you can enter your prediction for growth in 2012, and see what deficit is likely to be produced.

See also:

• Memo to Osborne: Jobs and growth will cut the deficit. Please listen – Cormac Hollingsworth, January 17th 2012

• The Perversity of Dan Hannan and “There are no cuts” brigade Daniel Elton, December 3rd 2012

• Without growth will we even halve the deficit Cormac Hollingsworth, September 20th 2011

The consequences of Mr Osborne: More deficitAnn Pettifor, May 24th 2011

• The Source of the DeficitMichael Burke, September 3rd 2010

33 Responses to “Introducing George’s Marvellous Deficit Calculator”

  1. Political Planet

    Introducing George’s Marvellous Deficit Calculator: With George's Marvellous Deficit Calculator you can predict … //t.co/W7aJYCJD

  2. Patron Press - #P2

    #UK : Introducing George ’s Marvellous Deficit Calculator //t.co/iQQUV9O2

  3. leftlinks

    Left Foot Forward – Introducing George’s Marvellous Deficit Calculator //t.co/3nWqzDA5

  4. A Cog of Change

    Introducing George's Marvellous Deficit Calculator: //t.co/yzilJrLq explains @danielelton

  5. Pulp Ark

    Introducing George’s Marvellous Deficit Calculator //t.co/iOXAHY2e #Sustainable_Economy #Debt #deficit #muslim #tcot #sioa

  6. Michael

    Osborne's Marvellous Deficit Calculator I Left Foot Forward – //t.co/VOhfeAu0

  7. Innerwisdom

    Introducing George's Marvellous Deficit Calculator: //t.co/yzilJrLq explains @danielelton

  8. Anonymous

    How about telling the full story.

    If you can analyse the deficit, you can analyse the debt, all of it.

    7,000 bn when you include the pension, on taxation of 550 bn.

    Very simply, the UK government is bust.

  9. Anonymous

    However, as right-wing commentators have helpfully pointed out “there are no cuts” – or at least there is a relatively small fall in overall spending.

    =============

    You will have to do better. Look in the red book. SPENDING IS UP. Both years, spending has increased. You have no evidence for overall government spending cuts, because there is none.

    The major cause of the deficit is government spending.

    After all, taxation has increased, so by your mantra, if we tax people more the government has more to spend. Unless that assumption of the left is also a lie.

    You need to produce the figures on debts. Then you can analyse whether or not growth fixes the debt problem, and what level of growth you need to do it.

    However, since the Left and Labour doesn’t dare put a number to the debts, I won’t hold my breath.

  10. BevR

    Introducing George's Marvellous Deficit Calculator: //t.co/yzilJrLq explains @danielelton

  11. BevR

    Introducing George's Marvellous Deficit Calculator: //t.co/yzilJrLq explains @danielelton

  12. Watching You

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  13. sean bastable

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  14. Sharon Thompson

    Introducing George's Marvellous Deficit Calculator | Left Foot Forward //t.co/YdWzFL7f

  15. BevR

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  16. BevR

    RT @leftfootfwd: Introducing George's Marvellous Deficit Calculator //t.co/8fCTe8Bm #spartacusreport

  17. Kyron Hodgetts

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  18. Shamik Das

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  19. Shamik Das

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  20. Shamik Das

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  21. cameronsfollys

    Just imagine ware we'd b if we kept our far-eastern interests [from good olde days!] Plan-A George’s DEFICIT calculator //t.co/uQ9gvpsw

  22. Daniel Elton

    .@markfergusonUK @marcusaroberts @timjhorton @OllyParkers Gr8 toy4policy wonks George's marvelous deficit calculator: //t.co/SHPKAHcI

  23. Cormac Hollingsworth

    RT @leftfootfwd: Introducing George's Marvellous Deficit Calculator //t.co/PKjkhWnC art by @MartinRowson economics by @CormacHolly

  24. George Hallam

    Great. That means anything better that 8.6 percent growth in 2012 wipes out the defict.

    Now I see the power of the slogan, “go for growth”.

  25. Newsbot9

    There are no cuts if you’re have a pathological aversion to the truth.

    Spending is up because of additional spending. This does NOT mean that there are not cuts. It means many of the cuts (as the Government were warned) COST MONEY.

  26. Look Left – The human cost of the government’s inhumane welfare reforms | Left Foot Forward

    […] repositioning of Labour’s policy on cuts and the deficit, here and here, and check out our deficit calculator, where you can enter your prediction for growth in 2012, and see what deficit is likely to be […]

  27. Brnch Sec Ruth H

    RT for the late risers, we introduce George’s Marvellous Deficit Calculator: //t.co/Mb2bn7bv

  28. H. O.

    RT @leftfootfwd: Introducing George's Marvellous Deficit Calculator //t.co/tzOdhiqp

  29. Ed's Talking Balls

    I reckon Labour would have achieved 10% growth had they been re-elected. Ed Balls told me so. Why oh why didn’t we recognise the brilliance of Gordon Brown when we had the chance?!

  30. Look Left – The hate-filled Right hone in on their next target: Disabled people | Left Foot Forward

    […] we have reported before, the size of the deficit is almost perfectly correlated with the level of […]

  31. UK’s public debt is about to exceed that of the US for the first time | Left Foot Forward

    […] also: • Introducing George’s Marvellous Deficit Calculator – Daniel Elton, January 20th […]

  32. New growth figures point to 2012/3 deficit 50 per cent bigger than originally projected | Left Foot Forward

    […] between growth and the deficit using the Office for Budget Responsibility’s (OBR) own figures, such a contraction will increase the […]

  33. robert morgan

    RT @leftfootfwd: Introducing George's Marvellous Deficit Calculator //t.co/Rh55xKuJ

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