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 84.

    Some people seem to think that Growth can be created by fiddling with taxation and political policies. The wealth of any country is created by competitive business. 'Worldly' competitive business.It is successful business that creates jobs, not the Dole Office. unnecessary Civil Servants jobs are still a drain and too many workshy individuals are allowed to sponge from hard working people

  • rate this

    Comment number 83.

    Wouldnt sorting out the housing problem help the deficit more than running the economy into the ground?

    building more houses would Lower housing costs means people have more money to spend and savings on housing benefit costs (approaching £20 Billion/year - certainly worth having)

  • rate this

    Comment number 82.

    The debate needs to be about where we are now not where we were in 2010. If politicians stop fighting the last election and start fighting the next that's a good thing. With public and household sectors still in debt that needs to be about how to increase exports and reduce imports, not about how to redistribute shrinking resources.

  • rate this

    Comment number 81.

    Money reformers are clear that the money-creation decision has to be separated from the money-spending decision. We cannot have politicians being able to create money and spend it, since they will use it to enhance electoral prospects. We cannot trust corporate banking sector to create money when it abuses this power to maximise profits. Check out Bank of England Currency Creation draft bill.

  • rate this

    Comment number 80.

    How can we move on from the deficit debate when it seems that no party has any real answer on how to reduce it ? It seems they come up with all these fanciful speeches on what to do. Or they blame each other for the economic mess this country is in. All talk and wayward action. And still the debt gets bigger every year.

  • rate this

    Comment number 79.

    "There is only one way to become solvent, stop pending more than we take in"
    You couldn't have said it better!

    Even a family managing its finances on the kitchen table knows this!

    But does our government? No no no... We need to spend an eye-watering £32Billion, it thinks.

    We have no idea what austerity is yet, but we will. Sooner than later.

  • rate this

    Comment number 78.

    We are always at year zero.

    For didn't you know that things will get better from now on?

    Or so the politicians would have it.
    That is the way they get votes.

    But the bankers know that we are where we are. And that is the way to set your stall out and simply make money.
    Letting others pick up the tab.
    Anybody - but not them.

    It is called reality.........

  • rate this

    Comment number 77.

    There is only one way to become solvent, stop pending more than we take in. So called austerity is hyperbole for doing normal housekeeping. Only fools pretend spending more you have to borrow actually helps anything. Especially if wasted on infrastructure.Such imaginary benefits of it only apply to undeveloped lands, here there is no real transport difficulty, gains are very marginal at huge cost.

  • rate this

    Comment number 76.

    In a similar way to public debt, private debt is created out of thin air. Private debt is money created out of thin air using your signature for a loan as a pledge of debt that allows the banks to create money, as described in Money As Debt (You Tube), or by banking reformer, Simon Dixon. 97% of money in circulation in money-as-debt systems is money created as debt, with compound interest added.

  • rate this

    Comment number 75.

    Money need not be scarce unless it is created by banks as debt. Govt is raising money it doesnt have by borrowing from banks who have legal authority to create money out of nothing. Govt has mandate to create the money itself instead of borrowing it from banks, and forcing us to pay it back. Government or a state appointed authority has authority to create money itself and spend it into society.

  • rate this

    Comment number 74.

    I'm no economist but I firmly belive they have set about the whole thing the wrong way- they have cut money from the poorest in society and alientated the middle classes. If they had cut taxes not benefits people would feel richer, spend more and fuel growth that would then work it's way to the treasury. As it stands, there are no jobs no growth and people are hunkered down waiting for it to pass.

  • rate this

    Comment number 73.

    75% of this country's entire economy is people spending money on goods and services. 75%.. Taking money out of people's pockets can mean only one thing. No need for economic think tanks, study groups and steering committe's to work that out.

  • rate this

    Comment number 72.

    Money reformers argue that money be based on the real wealth of society – on people, skills and materials. If people have something they want to do in their community, and have skills and materials, they should not be prevented for “lack of money”. Money is a means of exchange for goods and services produced by people; skills; resources. It is not a commodity - unless created as bank debt.

  • rate this

    Comment number 71.

    Austerity isn't working. Look around. It's time to ditch old thinking and take a new tack, one that considers people as real human beings rather than numbers on a spread sheet - that person in the gutter could very easily be you. Getting tax avoision sorted out is the starting place, then government incomes will actually match forecasts and spending can be accurately related to needs.

  • Comment number 70.

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

  • rate this

    Comment number 69.

    'The sheer scale of the deficit means that it will dominate British politics for years to come.' - This is the key point.
    The madness of Labour running even a small deficit in 2003-2008 under conditions of strong economic growth means you are incredibly vulnerable. Like getting a 10% rise every year but still being skint - if you lose your job you're stuffed.

    They must not be re-elected.

  • rate this

    Comment number 68.

    Oh how I adore you Stephanie Flanders
    You edit economics better than any man does
    Your chunky necklace style does your neck wonders
    Marry me Stephanie before my love flounders
    Not that it ever would beautiful Stephanie Flanders.

  • rate this

    Comment number 67.

    Treasury-issue debt free money would be spent not lent into society on the basis of proven need, to break reliance upon the private banking system for the supply of money; to open potential for change and empower people democratically. Money reformers have gathered these ideas into a clear, concise and concrete solution in draft legislative form, called Bank of England (Creation of Currency) Bill.

  • rate this

    Comment number 66.

    Ms Flanders,

    The 'problem' with your economic analysis & commentary is that you, like Mervyn King, are Harvard educated and so cannot see the wood for the trees.

    We need to make optimal use of the nation's capital - that is its labour. The obsession with banks has almost totally corrupted the whole state and economics education.

    First we have to accept the economic consequences of bust banks.

  • rate this

    Comment number 65.


    Banks create debt by typing numbers into a computer.

    I suggest we type those same numbers into the computer, this time with a MINUS sign in front.

    End of.

    Who loses ? ... some millionaires and billionaires and politicians, big deal.

    Better than 60 Million people.


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