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

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  • rate this

    Comment number 184.

    180. keith95a I agree. Even applies to the housing bubble. Council's only see a 2,000 new housing development as more council tax. They count the income but not the cost.
    Are resources added to this 1 hospital when they are built?
    This is never taken into consideration. It's actually worse as the same hospital might be closing wards due to a budget deficit.

  • rate this

    Comment number 183.

    @77: I disagree. This country has productivity issues, and far from perfect infrastructure. I'm not saying that it us the only cause, and I don't think building HS2 in 20 years is the solution, but road and rail capacity and efficiency could be improved a great deal.

    Nor am I advocating spending more than we earn, but, whatever we spent on QE and lending schemes, it wasn't value for money.

  • rate this

    Comment number 182.

    I remember reading some years ago an excellent article about the 'tyranny of the budget'. That is the basic problem with public spending. I know I worked there for over 30 years. The fact you spent £10 on services last year has no bearing on what is will cost in the future. The only logical approach is a Zero Based Budget. Power in public sector is directly tied to the size of your budget.

  • rate this

    Comment number 181.

    @178 Donkzilla

    You do realise that cyberspace isn't real, right? And nor was the bubble. Maybe you also think that money is real. None of these things exists outside the human mind which is why none is constrained by the laws of Physics which was the point of my question. Unfortunately the Earth along with its resources is governed by physical law, a fact which is ignored by economics.

  • rate this

    Comment number 180.

    It strikes me that growth is fueled by assumptions of ever increasing populations versus market products whose shelf life reduces - leading to greater turn round of purchases.

    Growth in terms of the above is not sustainable.

    Bring in a re-cycling (Green) tax - so that every throw away product takes into account the cost of replacement - different model that forces sustainable efficiency.

  • rate this

    Comment number 179.

    Please tell me how Borrowing £80 £90 £100 £110 billion per year instead of raising taxes or cutting spending is austerity .

    Look at greece , They had austerity .

    It was a good word that made osbourne look tough ( well think he looked tough ),
    And gave Labour a principle to stand against . .

    We borrowed so much we had to get the BOE to print more as nobody would lend to us .

  • rate this

    Comment number 178.

    173. Martin Q Blank
    "the Earth is a closed system BTW"

    Yeah? What about cyberspace and the bubble? Do you think the collapse of the global banking system was deliberately engineered to stem the flow of crapital to tech geeks in developing countries? Just wondering.

  • rate this

    Comment number 177.

    Not really interested in the ill-informed polemic below. Just wanted to say what a well-judged and prescient piece from Stephanie, who goes from strength to strength. Keep it up. Together with Robert Peston a superb team on the Business/Economics front.

  • rate this

    Comment number 176.

    According to Lloyds TSB UK wealth reached £7.05trn in 2012.
    If this were subject to a wealth tax of 15% on average it would pay off the National Debt.
    This is the ONLY way it can be paid off.
    The only remaining questions are: how will it be levied; and will it be progressive with the most wealthy paying progressively more in percentage terms?
    Job done!
    Think outside the box.

  • rate this

    Comment number 175.

    172. Half lies.

    The whole world sucked in Chinese credit, nothing to do with socialist spending sprees. Or do you include the US as part of this socialist conspiracy to borrow recklessly?

  • rate this

    Comment number 174.

    At the end of the day we are too frightened to let the greedy top of the tree go. One way First class tickets to the USA should be provided on the state!!! We need new financial leaders that CARE about what they do and realise they are are service to the real economy - like they do in Germany. Thinking of the country and years ahead - not the next quarter or bonus payment

  • rate this

    Comment number 173.

    1. Do any of you economic experts understand that money is debt?

    2. How can you expect to have an ever-expanding economy in a closed system (the Earth is a closed system BTW)?

    3. How is it that our economic system is geared to reward investment bankers 2 orders of magnitude more than nurses even if they fail?

    4. Could it be that there is something wrong with money?

  • rate this

    Comment number 172.

    169 Half true.

    I see the banking crisis as the perverse "icing on the cake" of a decade of a welfare spending spree across a decade and more during a boom economic period. Same socialist spending spree occurred across Europe. The gravy train was at full speed, downhill with no one at the controls.

  • rate this

    Comment number 171.

    We've just been through the deepest recession and have the biggest defecit since the War.
    What do people expect?
    Growth is returning. How about we be a bit more positive for a change.
    The UK now has a falling deficit and higher growth than Germany and France.

  • rate this

    Comment number 170.

    This government, that pretends to patriotic, is encouraging the sale of our land, assets and companies to foreigners. They call it inward investment. This is worse than borrowing. They reduce the rights of British citizens so that they will be compliant workers.
    The NHS and local authorities are making their staff redundant and having the work done in places like India.
    British jobs for Indians

  • rate this

    Comment number 169.

    161. BevRoadNorth
    "If growth was guaranteed by reckless spending of billions,going by the rate Brown was flinging it about our economy should have overtaken America's in 2008."

    US GDP growth: 1.9%
    UK GDP growth: 3.6%

    2008 it went to hell in a handbasket because scamming bankers like Nigel Farage crashed the world banking system, nothing to do with Brown.

  • rate this

    Comment number 168.

    I mean taken into public ownership in the national interest, just like in WW2 when land, factories, hotels and houses were appropriated without compensation.
    There was even direction of labour.
    Faced with another national emergency we require an equally robust response.
    We are a wealthy country in terms of assets and only the wealthy can pay.
    What's a £1m to someone with £5m?

  • rate this

    Comment number 167.

    The only real 'Market' is the real jungle. All other markets are artificial and fixed to benefit some more than others. There can never be a free market.

    Welfare is needed because of the failure of governments to keep to the democratic contract and enable individuals to work to support themselves and their families. It is our present warped market that makes the poor poor

  • rate this

    Comment number 166.

    155 sprout-2001
    Don't put too much faith in the market. Just look at the banks. Since the Big Bang they have miss-sold pensions, employment protection insurance, interest rate swops, engaged in money laundering and engaged in high-risk activities which has brought the country to its knees.
    A bit of central planning would have been highly desireable.

  • rate this

    Comment number 165.

    #137 Sally
    "130.United Dreamer
    It's well accepted that minium wage laws are detrimental to employment.
    You know this, because you know the answer to why you can't make the minium wage £50k per year."

    First of all its not universally well accepted. Second of all whose talking about 50k a year? A 50% increase would make a big difference for workers who need government assistance to make ends meet.


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