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Why are we so obsessed with the deficit?

wrong targetIn 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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  1. Stephen Ferguson says:


    Good piece, but Democratic US senator Bernie Sanders is way, way ahead of you in this. Why? He just hired leading Modern Monetary Theory (MMT) economist Professor Stephanie Kelton as Chief Economist on the Senate Budget Committee.

    MMT stands for Modern Monetary Theory and in 2015 needs to absolutely be THE go to place for any progressive politician who wants to fundamentally and truly understand why Governments Budgets are not like Household Budgets…

    Another straw in the wind is this excellent article in The Guardian last week…

  2. Robert says:

    So which party do we vote for to get a better life. The fact is labour are not better then the Tories.

    1. Gary Elsby says:

      Oh, I don’t know so much.
      Labour in Stoke-on-Trent (RIP 2015) closes all vital services including dementia homes, rehabilitation centres, libraries, swimming pools, day centres. etc…. to a finer art than any mouth foaming rabid Conservative party we excluded for over 100 years.

      Half of the Labour council is refusing to stand in 2015, all the very senior officers are going and the Chief Executive wants out.
      It is so bad that paedophiles and Nazis now stand a big chance of winning in 2015 and running this City.

      Currently expelled from Labour:
      Two leaders, one Deputy leader, one chief whip and various senior figures. The walked out total 500+ and counting.

      Well done the NEC.
      Well done Mandy.
      Well done Region.

  3. David Gould says:

    Much of the postwar debt was fixed at 2% interest (effectively a free loan from the US).

    Greece nearly brought down the EU with 113% debt-to-gdp.

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