Why are we so obsessed with the deficit?

In general election year 1970 a last-minute delivery of two US civil aircraft to the UK arguably changed the course of the election. The great issue that year was the adverse balance of payments, and the sudden and unexpected import cost of these two planes was seen to tip the scales against the incumbent government (Labour) in terms of economic competence. Fast forward to 2015 and a similar narrative unfolds.

The issue this time is the budget deficit. Just as the premature despatch of two aircraft swung crucial political sentiment in 1970 on wildly inappropriate grounds, so the narrative now being spun around the deficit could swing the election in 2015 on equally inappropriate criteria – namely that the state of the deficit in 2020, like the import-export gap in 1970, is the be-all-and-end-all of politics and the slightest adverse shift in this totem could herald political eclipse.

A few simple facts disabuse this picture. Public debt, on which the interest paid forms part of the budget deficit, is currently about 90% of GDP. After the second world war it reached as high as 260% of GDP, but without provoking the political panic which the much lower rate today has produced because in the 1940s the very high level of the deficit was subsumed in the much more important political objective of post-war national recovery. Under that regime the deficit gradually reduced over a period of 30 or more years, but the crucial point is that it did generate a national revival repudiating the awful experience of the 1930s and it did inaugurate a social democracy embracing the Welfare State and the NHS as well as neutering excessive corporate power by making full employment a central objective of economic policy.

By contrast the British Establishment’s commitment to fiscal famine and monetary necrophilia in the 1920-30s, which is being reproduced by Osborne’s policies today, had disastrous consequences. In 1938 real output was hardly above the level of 1918, with growth averaging 0.5% a year. Exports were persistently weak and unemployment persistently high. The aim was to break organised labour, a policy that led directly to the general strike of 1926. But the key point is that quite apart from the colossal economic and social costs imposed by this wanton austerity, the policy failed in its own terms. Public debt did not fall. By 1930 it had reached 170% of GDP (twice today’s level) and by 1933 it reached 190%. In fact the UK did not return to its pre-first world war ratios until 1990.

The lesson that cries out to be learnt is that whilst the level of the deficit is not unimportant, it is much less important than other objectives, notably sustained economic growth and rising incomes and productivity, paying our way in the world through a revitalised manufacturing sector, and the restoration of full employment. Do we need a repetition now of the 1930s to learn that fundamental lesson?

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