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
    +2

    Comment number 64.

    Stef,

    Are you suggesting a link between Pol Pot and Ed Balls? (The year zero reference.)

    If you are, it is disgraceful.

    You are not too young to know of the awful Khmer Rouge regime that slaughtered 2 - 3 million of its own people in 4 years from 1975. To suggest that anything Ed Balls is contemplating is remotely similar is absurd.

    Please explain yourself.

  • rate this
    0

    Comment number 63.

    Money reformers advocate change from a debt-based to a debt-free economy where most money is supplied into the economy debt-free, as treasury-issued value money such as the Bradbury Pound of 1914. Money reformers also advocate that the creation of money should be a public service, under public control for the public good, and replacing compound interest (money from nothing) with simple interest.

  • Comment number 62.

    All this user's posts have been removed.Why?

  • rate this
    -2

    Comment number 61.

    Mainstream analysts offer no solutions. Money reformers such as prosperityuk or positivemoney offer solutions. Debt based economy means that virtually all money is supplied as debt owed to the banking system. Money reformers advocate that money creation must be removed from corporate banks to establish a publicly-created supply of debt-free money created on behalf of the people, by a public body.

  • rate this
    -4

    Comment number 60.

    With the rise of "Blue Labour", the difference between the parties will diminish yet further as New Labour Mk2 strives to win credibility and voters.

    If they get rid of the two Ed's, stop opposing everything for the sake of it, then Labour really ought to win in 2015....unless the Tories kick Cameron into touch and get a leader with some marbles e.g. Hague (if only for PM's Questions!!!)

  • rate this
    0

    Comment number 59.

    It is becoming increasingly irrelevant what our political leaders say or do. They are powerless in the face of global capitalism.

  • rate this
    0

    Comment number 58.

    Growth has been fuelled artificially for years by huge amounts of business and corporate debt.

    The crash exposed how companies like Woolworths were not economically sustainable, and the outrageous levels of personal debt - all relying on a growth future that does not exist.

    On that basis, growth is no longer possible - not without getting into the same problems again.

  • rate this
    +8

    Comment number 57.

    Investment in maintaining the required functionality of existing infrastructure is a must but managed deterioration can be a valid strategy. The case for investment in new infrastructure always relies heavily upon the the assessed benefits; and that is where projects such as HS2 fail.
    Education is an investment with a certain return and that is where our money should be targetted now.

  • rate this
    0

    Comment number 56.

    Interesting like the idea of Steph being overly critical of Labour. Not an accusation that can be levelled very often. Namechecks the US but seem to ignore France; the BBC's fevered dreams of 70% tax, tenure, rampant union bullying and a public sector bloated beyond even Beeb expense account levels are there and it's... not going so well. Fair point though, argument becoming irrelevant.

  • rate this
    +1

    Comment number 55.

    When the non-banking sector buy securities (debt bonds), saved money is recycled into the economy through government spending. But, when banks buy government securities, then entirely new money created out of nothing by the banks specifically for these purchases is spent into the economy by the government. The government has to find the money to repay them in full, with interest. It's a scam.

  • rate this
    0

    Comment number 54.

    #50 Sage_of_Cromerarrh - presumably you can create growth by investing in green technology and extending green infrastructure. Doesn't that both help save the planet and create some degree of useful economic activity?

  • rate this
    0

    Comment number 53.

    BOTH PARTIES IGNORE THE PROBLEM

    Not quite. The ROLE of the political elite IS TO IGNORE the problem.

    This is the plan.

    The plan is don't change anything because the mega-rich are milking it.

    Who are they milking ?

    You. And your children. Now and for the next 100 years.

    This debt - what it is actually ?

    It is your slavery. You work, they get rich. Your children and family too.

    2013

  • rate this
    -1

    Comment number 52.

    I wouldnt be surprised if Labour didnt want to get re-elected after the complete ................. mess (expletives deleted) The current government is making of the country & our economy

    At least the mess after the last Labour government was mostly due to the banking collapse

    The current bunch are doing even worse without such a disaster occuring. God help us if that happened on their watch

  • rate this
    +11

    Comment number 51.

    Both parties studiously ignore the real problems:
    - Inequality
    - Lack of accountability
    - Top managers and large companies above the law
    - Fiddled official economic figures that don't match the common man's experience

    Hence:
    - Politician still for sale
    - Rotating door between regulator and regulated still in place
    - No criminal prosecutions on LIBOR or deceiving shareholders

    Rot is the problem.

  • rate this
    +4

    Comment number 50.

    When are we going to get off this planet runing growth monkey trail? We are obsessed with it. The only thing that matters is improving the quality of life and the quantity of the quality times we have. This would be better addressed in reality by considering more sharing of the real work that si required to be done and taking steps to reduce the birth rate to be below the death rate without war.

  • rate this
    +8

    Comment number 49.

    We 'spent' hundreds of billions on bailing out the banks/QE, and what is the result? Basket case state-owned banks that can't break free of the government, and battered savings.

    It's hard to argue that that was a more effective use of that money than spending the equivalent actual cost on infrastructure, schools, universities, NHS, cancer research... moon landings... anything really.

  • rate this
    +4

    Comment number 48.

    Just because the last 200 years or so has seen a lot of economic growth does not mean that it is in anyway inevitable. Our economy is saddled with an annual funding deficit resulting from a state sector where more than 50% of people get more from the state than they put in. Until the welfare state reverts to being a safety net rather than a means to buy votes growth may prove very elusive.

  • rate this
    -7

    Comment number 47.

    WHAT THE HELL - BBC ?

    Here is another BBC reporter excusing the MPs and power elite for destroying the livelihoods of British people.

    This is totally sickening how the BBC snakelike acts as the voicepiece for these "people" ... how many of them are in jail now for stealing public money ?

    How many of them were caught taking money last week ?

    How dense is the BBC ?

    The BBC is an inside job.

  • rate this
    +1

    Comment number 46.

    "Borrowing to spend on infrastructure" is a nice catchphrase approved of by most, except of course when it comes to the nitty gritty and the government wants to fork out a few billion for a high speed rail link everybody is against it. Lots of luck in trying to find a way to invest in infrastructure without spending money.

  • rate this
    +6

    Comment number 45.

    Personally, I think we're on thin ice. Lots of small/medium businesses are running on empty, a further period of low spending and the high street will truly be dead. Meanwhile people are paying 50%+ of salary on mortage or rent and will be crippled if interest rates return to normal, the cost of living is through the roof and it seems average spending power is set to tumble....

 

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