Is it year zero for the UK deficit debate?

Shadow Chancellor Ed Balls Shadow chancellor Ed Balls has outlined new economic proposals for Labour

It's no good crying over lost growth, and Labour is not going to win the economic argument by constantly harking back to the summer of 2010. That is a key message you can take from Ed Balls' big speech on the economy this week.

Commentators have understandably jumped on his admission that Labour will have to squeeze spending too, if it wins back Number 10 in the next few years. There was also that symbolically important gesture, about taxing winter fuel payments going to better-off pensioners.

But the biggest lesson is that the great rhetorical debate between Labour and the government - the battle over "growth versus austerity" - has had its day. The country has moved on. And like it or not, so has the shadow chancellor.

Room for debate

That does not mean that all the questions about growth and austerity have been answered. As the International Monetary Fund (IMF) said the other day, the foundations for growth are not yet firmly in place. There's still room for lively debate about how best to secure the recovery.

Nor does it necessarily mean that George Osborne was right all along - and Ed Balls was wrong. In fact a disinterested observer might look at what the two of them were saying in the summer of 2010 and conclude precisely the opposite.

That observer would note that George Osborne has failed to achieve either of the key objectives he set himself - to eliminate the structural hole in the deficit and have the stock of debt falling as a share of GDP by the end of the parliament.

Debt will still be rising as a share of the economy in 2015, and the deficit in that year is now forecast to be about £70bn higher than originally planned. Borrowing is barely going to fall at all, now, until 2014-15. Instead of growing by 6% since the summer of 2010, as Mr Osborne hoped, the economy has barely grown at all.

Ed Balls could have decided, a while ago, to declare victory and call this Plan B. I suggested as much to him, on the BBC's Budget programme, minutes after the chancellor had delivered his speech in March.

'Killer' question

I asked him, if Mr Osborne was borrowing and spending so much more than planned, didn't that mean he was doing exactly what Labour had suggested? How could he berate him for that, while still claiming the chancellor was cutting too far, too fast?

Afterwards I got quite a lot of emails and twitter messages, applauding my "killer" line of questioning. (Also some from Labour sympathisers accusing me of "picking on" the shadow chancellor... poor thing.)

In fact, there was a respectable economic answer to my question, which is that being forced to borrow more, as a result of a flat economy, is not the same thing as choosing to borrow more, to prevent that flat economy, in advance.

In theory, a more 'Keynesian" government in 2010 might have set out to use those extra billions to invest in infrastructure and done more for jobs and the economy - without borrowing a lot more than George Osborne now has. (That is what the IMF means when it talks about the "fiscal multipliers" being much larger than they initially thought.)

But this was not really the reply Ed Balls gave on Budget day. And it is not an argument that Labour have managed to get across to voters, for two very good reasons.

The first is that most people are inherently sceptical of the idea that you solve a debt crisis by borrowing even more, whatever economists might say on the subject.

David Cameron has been happy to exploit that scepticism in countless speeches, even as his government continues to borrow more than Keynes would ever have imagined.

The second reason why Mr Balls has not been able to claim victory for his alternative strategy is that he never really offered it.

Pseudo debate

Former Labour Chancellor Alistair Darling was going to slash capital investment too from 2010 onwards. Ed Balls distanced himself from Darling's plan and came up with his "five point plan." But in the scale of things, that was not so very different from what we already had.

A determined Keynesian effort to double public investment, cut taxes and go all out for growth - along the lines suggested by the likes of Paul Krugman - was simply never on the table.

Maybe America shows us that there was a better alternative out there. Maybe it doesn't. The problem for Ed Balls is that people never really believed he was offering one. And now they no longer care (if they ever did).

Modest growth between now and the election will not prove George Osborne right. But it will make the battle over 2010 look less and less relevant to the concerns of ordinary voters. Ed Balls' speech is a reflection of that basic reality.

The sheer scale of the deficit means that it will dominate British politics for years to come. But something tells me the pseudo debate between Labour and the coalition over "growth versus austerity" will not.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 44.

    I dont think it really matters what Ed Balls says about anything to be quite honest. He is associated with the Labour Party and was Gordon's right hand man. The Labour party that brought our country to its knees. I see people on these forums blaming those that contribute the most to the treasury for their lot in life while taking no responsibility for their own failings and short comings.

  • rate this

    Comment number 43.

    I worry for the human race sometimes.

    Labour helped cause this mess......with the help of the bankers of course....but labour should hang their heads in shame over their 13 years in office.

    The Tories are making a bad situation worse by not spending on infrastructure investment. Yes we have to borrow to do this....but we are borrowing anyway!!!! Borrowing to stand still Mr Osbourne!!!

  • rate this

    Comment number 42.

    Reality says it's going to be like this for rather a long time irrespective of who is in power. Slogans from left or right are exactly that. Moreover, growth - such as there is - will be technology/capital intensive - so unemployment will remain high ignoring the fact many unemployed are near unemployable with such poor literacy/numeracy and irrelevant skills. It's a very bleak outlook.

  • rate this

    Comment number 41.

    With debt heading towards £1.5tn we are only seeing half the problem. The other half of the problem has effectively been stored up in the housing market. Without low borrowing rates unemployment would now be out of control. Methadone has been fed to the drug addict.
    We need to act now to normalise conditions before we are forced to defend the £ and go cold turkey.

  • rate this

    Comment number 40.

    Growth v austerity would be an interesting discussion if there had been any austerity. The simple fact is (based on HM Treasury numbers) that between 2010 and 2015 in absolute terms public spending has gone up. After taking into account inflation public spending will be reduced at the rate of 0.7% per year.

    All politicians are doing is hoping that growth will make decisions for them

  • rate this

    Comment number 39.

    It's like two grown up men arguing about who can best fix their only bicycle.

    Never mind it only has one wheel and no chain.

    The roads are un-passable anyway.

    Yet they will still argue about who will do the better job.

  • rate this

    Comment number 38.

    The Balls speech is confirmation & reinforcement of the fact that Labour have decided not to contradict the Tory economic view - essentially "all the Tory memes about the economy are right but we'll just try & be little bit nicer about it". It is cowardly & dishonest

  • rate this

    Comment number 37.

    As an 'ordinary voter' the two things that will be uppermost in my mind come the next General Election will be the awful state that Labour left the economy in and the coalition governments cruel targeting of the wrong people with their austerity measures. The 'growth versus austerity' argument is of less interest to me than the argument of who should pay and how for the mistakes made.

  • rate this

    Comment number 36.

    It seems to be getting harder by the day to know what, if anything, really CAN improve the economy and the fortunes of ordinary people. There are so many snake-oil salesmen [and women] who tell us they have the answer. Politicians, economists, bankers, policy planners and more

    We've been told for years that wage increases causes inflation. Now we see it doesn't, but policy [QE] does. Now what?

  • rate this

    Comment number 35.

    Mr Balls and Mr Osborne don't come up with anything - their myriad of advisers do that for them.

    All we ever see are the puppets and never the puppet-masters.

    You only have to watch a parliamentary debate to understand that none of the front bench MPs have a clue about what it is they're debating - rhetoric and hot air.

    And it's not just the chancellor; it's all government ministers - chaos!

  • rate this

    Comment number 34.

    I do not see either Osborne or Balls putting citizens and the good of the country first in the vague plans either have put forth, both are more concerned about safeguarding their cronies in the financial industry; & they do not care who they hurt in the process. They have completely lost sight of the duty of care they take on by seeking public office.

  • rate this

    Comment number 33.

    Currently the Tories think that by beheading the patient the rest of the body will still be alive. I am reminded of Blackadders cunning plan when there was some confusion in the decapitation department. 'Put a bag on your head and no one will notice.' I think the 99% already have...

  • rate this

    Comment number 32.

    Darling's plan in 2010 accepted that the deficit could not be contained before total debt was at least £1.5tn and their growth assumptions were heroically ambitious.
    Mr Balls played his part in creating an overspend that will be with us for generations. The behaviour of the banks was atrocious but he was happy and content to suck on the juices. He shares their incompetence and hubris.

  • rate this

    Comment number 31.

    Perhaps, there is nothing to be gained by reforming areas which will then cease to generate, previously reliable, sources of recycled revenue?

  • rate this

    Comment number 30.

    Austerity 2010 - 2013 has neither reduced the debt or created a sustainable annual tax revenue that matches the annual public spend.

    Assuming growth remains insepid between now and say 2018, well into the next parliament, then further cut-backs in the public sector will be required than that already implemented!

  • Comment number 29.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 28.

    "... the foundations for growth are not yet firmly in place." *** No, and they probably never will be. Not with the 'slash & burn' economics of the Tories. All they have done is squeezed the poor and middle incomes. The rich are doing very nicely, thanks. But without a holistic approach to our economic ills, we have little chance of progress, IMO. And none at all while we have wars going on.

  • rate this

    Comment number 27.

    If ultimate intention is to borrow less then surely spending to provide growth is the answer? Gives us the ability to earn more and plus hope us/future generations?

    This is better than spending more only to prop up a disastrous economic policy (used as cover for ideology) which strangles the economy?

    Same notion as student loans, mortgages, car loans - borrow to eventually earn more/spend less?

  • rate this

    Comment number 26.

    I have no more love for Balls than Osbourne, they're both career politicians and nothing they say will change that fact, by definition they're liars and cheats. It's time the government realised that the lower classes aren't content with watching the rich boys hoard everything, pay low wages, have 10 holidays every year and then complain about taxes. Sooner or later it will be their undoing.

  • rate this

    Comment number 25.

    The solution is a one-off wealth tax of 10% on personal net positive assets starting at £500k and severe cutbacks in the big spending budgets particularly health and education.
    This would get rid of our National Debt in one stroke.


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