Yesterday the Today programme ran an interview with an IMF spokeswoman who told us cutting a deficit at the wrong time could be self defeating. She was asked by Mr Davis if we cut £1 of deficit how much economic output would fall. She said it could do 6-10 times as much damage. He pressed her to give actual percentage figures. She said if the deficit was cut by 1% output might fall by 0.5% in a good case, but could fall as much as 2% in a bad case if the economy was already weak.
At this point the interview should have become interesting. Surely sharp Mr Davis would ask why she had scaled her 6-10 times back to four times with just one additional question? Would he ask what evidence she was using? Which deficit reduction programmes had they examined? Had she examined the cuts in deficit and spending plans in the early 1980s and early 1990s in the UK, both of which led to good recoveries? Could she explain why Sweden had grown so well since the 1990 cuts? Why did the new Scandinavian model where growth is faster rely on much lower public deficits than the UK or Greece? Why do all IMF programmes demand cuts in spending and tax rises, if they now think this cuts national income? Why did they impose such cuts on Greece at a time when its economy was clearly in free fall, if they now think this will make it worse?
Instead he let her go on to assert that cutting people’s benefits and pensions would be much better than cutting other types of public spending. He might have asked her how cutting people’s spending and general demand would help, where cutting civil service salaries would not, but failed to do so.
No-one was invited on to debate with her, no-one was interviewed to provide balance. Surely if the BBC regards such a person as an expert they should be asked tougher questions about their research, what numbers they have produced, and why they think it is right? The interview was remarkable for giving us no actual figures or any country experience.
Meanwhile the UK state debt goes on up and up. Are there no limits to taking on debt? Why is borrowing an extra £10 bn a month an insufficient deficit? Why does it lead to the economy declining? How would borrowing say £15 bn a month provide growth?
Labour inherited a state debt of £290.3 billion (outstanding gilts) in 1997. This rose to £355.5 bn by 2005, an increase of 22.5%. By March 2008 it was up to £478.8 bn (before the Credit Crunch crisis hit fully), an increase of 65% from 1997. By March 2010, just before Labour left office, it was at £913.5bn. This took Labour’s increase in the state debt to £623bn over 13 years, or an increase of 214.7%. I am excluding all the PFI/PPP and bank debts also incurred.
The Coalition debt reached £1163.8bn by March 2012, a further increase of £250.3 bn over 2 years, or 27.4% on their inherited base. This means the debt to GDP ratio (just taking money borrowed via the gilt market) has reached around 77% of GDP.
However, the Bank of England has bought in £375 bn of this debt, or almost one third of it. If the government simply cancelled this debt, and the Treasury loan to the Bank financing it, UK state debt on this number would fall to £788 bn or around 52% of GDP, a more modest proportion by modern government standards.
The government is not rushing to cancel this debt. No doubt it is worried how such a course of action would be perceived by the markets and media. It has four options for its quantitative easing programme:
1. Carry on with more of it. It keeps the rate of interest on government debt at very low levels, making the government’s excess spending seem affordable.
2. Stop new quantitative easing, but leave the purchased bonds with the Bank of England. As individual bonds are paid back, the Bank would reinvest the money in other gilts from the market, keeping the QE amounts intact.
3. Allow the repayments of gilts that occur to reduce the amount of gilt edged stock owned by the Bank over time, gradually working it out of the system.
4. Sell the Bank’s gilts back to the market, to recoup the created money from the system.
Memo: Between 1992-3 and 1999-2000 Cyclically adjusted UK net government borrowing was slashed from 5.5% of national output to -1.1%, a turnround of 6.6%, and the economy expanded by around 3% per annum
Between 1980-81 and 1982-3 Cyclically adjusted net borrowing was cut from 3.4% of GDP to -1.4%, a reversal of 4.5%. The economy started to grow As the programme was completed and grew continuously until the ERM disaster at the start of the next decade.
Conversely, large increases in the Cyclically adjusted net borrowing occurred piror to the mid 1970s slump and IMF visit, and prior to the Credit Crunch of 2008-9.