The FT tears apart austerity economics (again)

Martin Wolf has a blistering piece in today's Financial Times (£) challenging David Cameron's stubborn adherence to austerity economics.

Martin Wolf has a blistering piece in today’s Financial Times (£) challenging David Cameron’s stubborn adherence to austerity economics.
He begins by quoting Cameron:
[Labour] think that by borrowing more they would miraculously end up borrowing less … Yes, it really is as incredible as that.
And here is Wolf’s response:
What truly is incredible is that Mr Cameron cannot understand that, if an entity that spends close to half of gross domestic product retrenches as the private sector is also retrenching, the decline in overall output may be so large that its finances end up worse than when it started.

Wolf then turns to the argument repeatedly put forward by the coalition as well as a rabble of right-wing interest groups that spending under Labour was “out of control”.

This deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years.

Wolf busts this myth in a single blow:

In 2007, according to the IMF, UK net debt – at 38 per cent of GDP – was the second-lowest in the Group of Seven leading economies. These levels were also exceptionally low by UK historical standards (see bottom left graph).

So what caused the “record deficit” cited by Cameron?
Some think reckless spending explains the jump in government spending from 40.7 per cent of GDP in 2007-08 to 47.4 per cent two years later…No: the collapse in GDP, relative to expectations, caused the jump in spending and decline in receipts, relative to GDP.
Debt as a percentage of GDP
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16 Responses to “The FT tears apart austerity economics (again)”

  1. LB

    Still misses out the debts such as the 5,300 bn pension debts.

    Until you own up to that you, the tories and the lib dems will carry on screwing people and making them destitute.

  2. Gareth Millward

    I’ll bite. Could you provide a link to where you keep getting this £5.3t figure from?

  3. LB

    http://www.ons.gov.uk/ons/dcp171766_263808.pdf

    Bottom of page 4.

    Two years ago, it was 5,010 bn.

    Since the state pension is a complex derivative, it’s growth since is at least 2.5%.

    So scale up the number for two years increase.

  4. Gareth Millward

    OK, but how much is the government actually expected to pay each year? Surely that’s a more important figure? What will the growth be, year on year, in social security spending as a result of these liabilities?

    The £5.3t doesn’t have to be paid in one go. It cannot continue to grow exponentially, and something must be done. But the idea that somehow pensions should be dispensed with is not borne out by these figures.

    You need to show how much those liabilities are actually going to cost, and offer a concrete proposal of how to get them down. Again, it’s not the gross level of debt which is NECESSARILY the issue – it’s whether you can eventually pay it off.

    With pensions the way they are now, we will hit a crisis in a few years, because too many people will be claiming and not enough contributing. But that will always be the case with something like pensions when some are paying in and some are taking out.

    You called my argument useless in another comment thread for not providing statistics. Since then, this blog has provided those statistics. I said at the time that I was careful not to pull out IRRELEVANT statistics to further my own agenda. I feel this is what you are doing, spamming every article on this site with this irrelevant tripe.

    It’s a problem, yes. But contextualise it. And provide some sort of solution.

  5. LB

    1. It isn’t paid on demand. Neither is the debt. However, if you converted the pensions into debts, it would cost at least that, 5.3 trillion.

    2. As it stands, with the current rules, it will grow exponentially. There is a triple lock. Max of wage inflation, price inflation or 2.5%. That means it is exponential growth.

    Now that won’t happen, and it won’t happen because the state won’t pay because it can’t. What makes you think the state can pay 14 times its level of taxes when its spending .130% of its tax?

    “Again, it’s not the gross level of debt” Really? So you can borrow 100 times your earnings – no problem? Hmmm

    “it’s whether you can eventually pay it off.”. Quite. They can’t. Now consider the consequences. No state pension. Hmm what are people going to do? Welfare? Er, if they can’t pay pensions they can’t pay it if you change the label.

    “But that will always be the case with something like pensions when some are paying in and some are taking out.”

    “Since then, this blog has provided those statistics”

    And why then has it missed the pension debt off? No doubt its been lost down the back of the sofa. Someone’s be hidding the reminders.

    The debt figures are manipulated to make the debt ratio smaller. eg. % of GDP figures are a ratio.

    So if you want to manipulate debt / income, you need to make the denominator smaller.

    1. Omit debts

    2. Pick a large discount rate. eg. Use an asset rate for a liability even when you don’t have any assets.

    For the numerator

    3. Include other people’s income to inflation your income. GDP instead of taxes.”

    “spamming every article on this site with this irrelevant tripe.”

    The article is about debt, and its based on the premise that debt is low. Pointing out the lies on the debts, because that’s exactly what it is, a lie, in order to justify spending more is far from tripe.

    That’s what its all about. Lets spend people’s pensions now, and in the process make them destitute. You might think that’s a great idea, perhaps because you’re one of the people getting their money

    Personally making people destitute I put in the evil category.

  6. Gareth Millward

    But with pensions there will always be a liability or debt because money has to be paid out while new money is coming in. The issue we have at the moment is that during people’s working lives they aren’t putting enough in for the state to cover its costs in the long run.

    You solve that by a) making the economy grow so tax revenues increase, b) making people work longer (a necessary side-effect of living longer) so that they contribute more over their lifetimes and c) regulating pensions in such a way that they become sustainable. That final one isn’t easy, but you’ve not convinced me the answer is simply to ditch them.

    Again, you’re using the 5.3 trillion figure as if it will be paid up front. The state will never have to pay “14 times its level of taxes”, because that £5.3t will be paid over decades.

    You make out that the pensions is “debt” and “borrowing” but that is disingenuous. That £5.3t is contributed to every year. It will only ever have to be paid in full if everyone retired tomorrow and expected 15 years of pension to be paid up front. That’s not how it works. People continue to pay their tax and national insurance while others are drawing out. What if every citizen and employer was told to pay its next 15 years of contributions up front?

    We have a demographic problem, and one that will get worse. We will inevitably be forced to contribute more as we have an ageing population. But this will be the case regardless of whether the state provides pensions or not. It’s simple maths – the more dependents you have in a country versus workers, the more workers will have to pay to maintain them. That’s not the making of any government – that’s simply the fact that fewer people are dying and not enough are being born.

    The relevant figure is how much pension payments are going to rise over the next 20 years versus income from workers. Yes, this is problematic, and something we need to pay more attention to. You won’t get any arguments there. But this is the relevant figure. Please provide it.

    I’m not going to bother debating this any more, because you’ve shown yourself quite unwilling to engage with the argument. It’s clear you want to simply “prove” with irrelevant statistics that we would all be better if we just cut welfare and allowed people to pay no tax at all. I should have learnt by now that feeding a troll is stupid.

  7. LB

    But with pensions there will always be a liability or debt because money has to be paid out while new money is coming in

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

    Not if you run a funded scheme. However, if you run an unfunded or Ponzi, then there will be a net liability or debt.

    =============
    The issue we have at the moment is that during people’s working lives they aren’t putting enough in for the state to cover its costs in the long run.

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

    No. The issue is that people are putting enough in, but the state is spending it, leaving the liability.

    For example, if a 26K a year worker had been allowed to invest their money, they would have a fund bigger than 560K. The unafordable state pensions costs 130K. 560K funds a 19K a year inflation linked, joint life pension from 65.

    So people are paying in enough, its the state that’s stripped the assets.

    ===========

    That final one isn’t easy, but you’ve not convinced me the answer is simply to ditch them.

    =========

    I didn’t say that, is it your plan? Default on them?

    =========

    You solve that by a) making the economy grow so tax revenues increase, b) making people work longer (a necessary side-effect of living longer) so that they contribute more over their lifetimes and c) regulating pensions in such a way that they become sustainable

    =========

    Congratulations on point a, where you’ve admitted that its only by taking more money from people (which isn’t exactly pro growth) that you close a gap.

    b) Working longer is a partial default, and whacking people for more money.

    c) What regulations?

    =========

    Again, you’re using the 5.3 trillion figure as if it will be paid up front. The state will never have to pay “14 times its level of taxes”, because that £5.3t will be paid over decades.

    ==========

    OK, try reading the ONS link.

    It’s a present value.

    For example, the borrowing of 1,200 bn doesn’t have to be paid up front. It’s spread out. Over all however, its not 1,200 bn that gets repaid it is far far more. 1,200 is the notional value, you’ve got the interest payments on top. It’s a present value.

    Same with the 5,300. It’s linked to above inflation. It is a present value (and an underestimate too) of the present value of the past pensions debts.

    If inflation was 3%, next year, that figure rises to well over 5,460 bn.

    5,300 * 1.03 = 5460. That assumes wage inflation is below 3%. (The triple lock).

    You need realize that the 5,300 behaves just like an inflation linked Gilt. It gets bigger with inflation. It’s also getting bigger with demographics.

    ========

    The relevant figure is how much pension payments are going to rise over the next 20 years versus income from workers.

    ========

    For example, from the same ONS article, the pension debts went up by 736 billion a year from 2005-2010.

    That means huge increases in future spending comitments to the extent that the state won’t be able to pay because it exceeds their ability to tax.

    The Laffer curve does have an effect.Tax 100% and your screwed.

    I’m saying that the spending comitments for the pension are in excess of the ability to tax.

    So you’re advocating massive cuts and massive tax increases, in the future.

    That’s particularly unpleasant for lots of people.

    e.g No state pension.

    I think that’s immoral for MPs to do that to people, whilst they make sure they are exempted.

  8. Newsbot9

    He’s an anti-pension shill, trying to engage him on this is silly. He doesn’t understand the concept of paying out of current tax.

  9. Newsbot9

    The point is he wants to abolish pensions, so there will be no more tax entering the system!

  10. Newsbot9

    Yes, you keep claiming that people would magically be able to “invest” NI. Nope, employer’s NI – lost to company profits, in your scenario. And many people would face a pay cut to mean the same take-home pay.

    Your fund would be, using actual rates and fees as of today, more like 54k rather than 250k. Well under the state pension provision.

    And of course you think it’s immoral to pay yourself a pension why you’re denying it to others, but you’re trying to do it anyway!

  11. Mark Moore

    Yes, but if we hadn’t been running a deficit before the crash, the collapse in GDP wouldn’t have given us the ‘record deficit’. Choosing to run a deficit is a risky choice that leaves you hideously exposed if a crash comes. Obviously we don’t know one will come, but to pretend that what Labour did (and the Tories want along with) wasn’t inherently risky is to ignore all common sense.

    Now how do we solve the problem? Austerity, or talk of it at least, is clearly not working. But would borrowing more to fund capital spending really work? Would it generate enough growth to give a net positive return? Given the history of farces our government has when it comes to big projects, I would be highly sceptical.

  12. Newsbot9

    So basically your answer is to go with what’s clearly not working? Or do you have another proposal?

  13. Mark Moore

    Well I’d go with middle class tax cuts, on the grounds that people generally spend better than government, but again there’s a risk that wouldn’t be net positive. Basically my point was that just because austerity isn’t working, it doesn’t follow that anything else would be better. Try something different and you could just as easily make things worse.

  14. Newsbot9

    So basically you’re hoping that sort of minor adjustment would work. And no, there’s no evidence for that, given how uniquely bad this recovery is.

    GDP is still down 5% from the start of the recession. This number of months after the start of the recession… was at roughly +4% in the one in 1920-1924, +4% in 1930-1934, +5% in 1973-1976, +2% in 1979-1983 and +8% in 1990-1993!

    I’m, to put it mildly, unconvinced. Especially when austerity has had the same effect elsewhere, such as in Italy – which had a primary surplus and absolutely didn’t need austerity!

  15. Mark Moore

    Ok, so what should we be doing instead? Give me a number, and some examples of where you’d spend. I’ve admitted I don’t know, so tell me some good ideas and I’ll consider them.

  16. Newsbot9

    Well, on housing…let’s cap rents, based on size, energy efficiency and general condition. Then introduce a major council house building program and a hefty tax on empty houses and unused brownfield land.

    As an example.

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