Memo to Osborne: Jobs and growth will cut the deficit. Please listen

Cormac Hollingworth explains to George Osborne how rising unemployment and recession are increasing the deficit, and how jobs and growth will cut it. Simples.

 

Rising unemployment and recession are increasing the deficit. In the fiscal year 2011-12 the government’s policy measures of £19 billion have only cut the deficit by £ 9 billion. Ed Balls has been arguing a very simple point that government action to reverse the slump would reduce the deficit.

Here we present Left Foot Forward’s own research that shows Labour’s five-point plan would cut the deficit by £16 billion.

Within a football idiom government spending is equivalent to the decision of the football board on how much to allow the manager to spend on players. And just like a government, the club’s borrowing is only revealed at the end of the season because club revenues are gathered during the course of the year.

Whether the club qualified for a European place, whether it got relegated to a lower division… it’s only then that the club’s borrowing will be revealed.

So perhaps it’s helpful to describe the argument between George Osborne and Mr Balls in this way:

“George Osborne, as chair of the current board, told the club manager at the start of the season ‘there’s no money to be put into buying players for the team, but as a result of this prudence, the club will break even at the end of the season’.

“Unfortunately the lack of investment is now showing, and the club is currently languishing at the bottom of the table, and the pundits are expecting the club to end the season with a balanced book.

“As a result, Ed Balls, another board member, speaks up arguing the club needs to spend in the mid-season transfer window, because good players will allow the club to finish higher in the table.

“‘It’s only through spending in the mid-season transfer window that the club can have the players to perform well enough to break even,’ says Ed Balls (if only Ed Balls could convince the terraces that there was some hope)…” (etc.)

With their football team languishing at the bottom of the league, there are few football fans that don’t want their board to allow the manager to invest in the team.

Fans don’t believe this spending must lead to wasteful borrowing. On the contrary, they believe spending is the best chance the club has of not going bust. So it is with government spending.

While of course Mr Osborne will say Labour’s five-point plan for increasing spending would increase the deficit, that’s because he is not taking into account the effect on growth on decreasing the deficit, which is what we’ve calculated here.

How government spending affects growth is what economists call the multiplier, and the OBR gave us their estimate (in Table C8 below) of what the multipliers are for various policies in the June 2010 commentary.

Tim Harford explains of multipliers:

“If the fiscal multiplier is 0.5, we’re getting the government project for half price: the government draws half its resources away from private sector activity but other half is just soaking up the slack.”

Table C8:

Estimates-of-fiscal-multipliers
How growth affects borrowing is a little harder, however we’ve been drawing graphs for the past six months. Left Foot Forward, illustrating how growth and borrowing interact (as revealed by the OBR’s Treasury model), and the slope of that relationship between the two gives us the effect. It turns out that an increase in growth of 1.5 percentage points decreases borrowing by 1 percentage point.

Labour’s five-point plan has two large expenditure items, a VAT cut and infrastructure expenditure. The IPPR thinks it’s possible for the UK government to spend £10 billion on infrastructure, so this is the number we’ve used. The VAT cut is estimated to cost £12bn.  he spending cost of these policies is therefore £22bn.

However by the end of the parliament, GDP will be four percentage points higher, and unemployment two percentage points lower (Okun’s law) and together increases receipts and reduces welfare spending by £38 billion. Putting these together, spending £22 billion reduces borrowing by £16 billion.

Within our core simulation, the effect of the stimulus from Labour’s five-point plan is only to increase 2012 growth (by 0.7% we calculated above to 1.4%) and then this stimulus guarantees the OBR’s forecasted growth is achieved for 2013, and 2014.

In particular, the merit of the VAT cut, while having a much lower multiplier effect on growth is that, as it did in 2008/9, it puts desperately needed cash in the hands of small businesses so they don’t go bust.

However, as we saw with the ITEM-club downgrade to growth yesterday, if the economy continues on the austerity policy without a stimulus for the rest of 2012 we can’t avoid a second dip, and so our austerity forecast is to follow Standard Chartered’s growth prediction for 2012 of a recessionary -1.3%, and the shock means growth in 2013 and 2014 is reduced to the lowest forecasts for growth over the life of this parliament from the Treasury collection of economic forecasts.

The two forecasts are shown in Chart 1 below and the OBR’s current forecast is shown for comparison.

Chart 1:

Predictions-for-growth-2012-2013-2014
Labour’s five-point plan should be implemented in 2012 because UK output would be four percentage points higher in 2015, which lowers unemployment by two percentage points, but most importantly lowers borrowing by £16 billion.

So the next time a Liberal Democrat tells you Ed Balls would increase spending by £22 billion, you can calmly look them in the eye and say “yes, and it would also cut the deficit by £16 billion”.

See also:

Balls throws down the gauntlet: “We are going to have to keep all these cuts”Shamik Das, January 14th 2012

Growth revision shows economic recovery is off trackTony Dolphin, January 9th 2012

“We are spiralling into a prolonged and ghastly depression”: The economy in 2012Ann Pettifor, January 6th 2012

Commons to vote today on Labour’s five-point plan for jobsShamik Das, October 12th 2011

Growth cut the 2010-11 deficit as fast as cutsCormac Hollingsworth, September 22nd 2011

34 Responses to “Memo to Osborne: Jobs and growth will cut the deficit. Please listen”

  1. keith ferguson

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  2. Cormac Hollingsworth

    On @leftfootfwd Labour's 5 point plan would cut deficit by £16bn more than Coalition http://t.co/G92KGBCD by @CormacHolly

  3. BevR

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  4. leftlinks

    Left Foot Forward – Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/DoBy3l8Q

  5. Patron Press - #P2

    #UK : Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/WVFdXNmo

  6. Fergus Dyke

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  7. Michael

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen – http://t.co/Q78JMngA

  8. Watching You

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen – http://t.co/Q78JMngA

  9. False Economy

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ii8BG7Hs by @CormacHolly

  10. Lambeth NUT

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ii8BG7Hs by @CormacHolly

  11. Jennifer C Krase

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ii8BG7Hs by @CormacHolly

  12. Annette Carter

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: Within a football idiom government spendin… http://t.co/lvNn8Hsc

  13. Joe Fortune

    On @leftfootfwd Labour's 5 point plan would cut deficit by £16bn more than Coalition http://t.co/G92KGBCD by @CormacHolly

  14. Metacomm 3

    …and a RT for the late risers: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  15. Jane Aitchison

    "@leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/rMWwfqLJ by @CormacHolly" #alternative

  16. Political Planet

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: Cormac Hollingworth explains to George Osb… http://t.co/Hl6bRUev

  17. Theo Blackwell

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/wyF6JaxP

  18. Helen H

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ii8BG7Hs by @CormacHolly

  19. STUC

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/0g2px6qG

  20. A Better Way

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/0g2px6qG

  21. Len Arthur

    …and a RT for the late risers: Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  22. Annette Carter

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: Fans don't believe this spending must lead… http://t.co/I8R0j8vo

  23. Janet Graham

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen: http://t.co/ouVR8em0 by @CormacHolly

  24. Alex Braithwaite

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/NenNCOVc

  25. Cormac Hollingsworth

    On @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. http://t.co/G92KGBCD posted earlier

  26. Kasch Wilder

    RT @leftfootfwd: Memo to Osborne: Jobs and growth will cut the deficit. Please listen http://t.co/jv01XLix

  27. Awake!

    yes, and if you’re wrong, because let’s be honest anything could happen in the next year, you’ll lose the confidence of mkts and drive my mortgage rate against me. You may not care, but my interest payments are down 80% in the last 5 years, and thats MAJORLY contributing in these harsher times- MAJORLY, so whilst it’s great u’ve done the calculations, whilst everyone gets downgraded I’m not sure businesses or many like me need extra interest costs as well.

  28. Newsbot9

    So only the people with houses deserve shelter, food and heating. I see.

  29. No turning back: Balls stays firm on cuts, pay, and the deficit | Left Foot Forward

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  30. Awake!

    obviously not. But I come from and lived in Haiti where people don’t have those things that you so easily make jokes about, yet are available here literally quite freely. Perhaps that is why I am grateful for what I have EVERY day and am very concerned by calls of more of what essentially got this country into a fix- maybe if i was dependant on the state i might not be so concerned about interest rates, but i am where i am.

  31. seuss

    As @CormacHolly wrote, if unemployment drops, growth will follow: http://t.co/Yh8WydQe #PQMs

  32. keith ferguson

    Memo to Osborne: Jobs and growth will cut the deficit. Please listen | Left Foot Forward – http://t.co/fHvYK5sn

  33. Introducing George's Marvellous Deficit Calculator | Left Foot Forward

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

  34. Building social housing would cut the housing benefit bill three times faster than a cap | Left Foot Forward

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