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
    0

    Comment number 244.

    We need to make work pay and not speculation. Work needs to be taxed less and speculation more.

  • rate this
    0

    Comment number 243.

    the rot set in to the UK economy when it transitioned from being manufacturing based to pimp based economy. Lets face it banks and armies of landlords see less risk in buying properties & renting them out than investing in business ideas. Sad reflection on the UK, you have more pimps then any other economy sorry "service type" jobs that don`t really make anything just sponge off somebody else.

  • rate this
    0

    Comment number 242.

    If the world is in debt. Who does the world owe money to?

  • rate this
    0

    Comment number 241.

    (SF) suggests, The sheer scale of the deficit means that it will dominate British politics for years to come." The question? arising who? is responsible for "sheer scale of the deficit" source (SF) the current Chancellor who ensures the rich become more rich and the poor become more poor in the name of "growth versus austerity" source (SF) or Who?

  • rate this
    +1

    Comment number 240.

    The deficit itself is not a problem; the National Debt is. The National Debt itself is not a problem; the annual interest is. But the deficit is currently more than a fifth of total spending, so should we cut spending by a fifth or increase taxes by a quarter? No, we should budget to pay the interest on the growing debt and plan for the end of cheap borrowing.

  • rate this
    +1

    Comment number 239.

    This economy needs consumers to spend for a proper recovery. Consumption is starting to steadily rise again but people are still saving more and there's not enough confidence!
    If Osbourne keeps this austerity and inflation keeps reducing real incomes, this confidence is going to be all but gone and with it our fragile recovery.
    Keep the deficit a little longer George!

  • rate this
    +2

    Comment number 238.

    236.T Pott
    Spot on. Productivity, not spending, drives an economy and delivers prosperity.

    We need laws to reward savings and encourage production. Not laws like taxes, and supressed interest rates that penalise this.

  • rate this
    -2

    Comment number 237.

    235. bigmouth strikes again
    "So the growth in the 00's had nothing to do with high debt, cheap credit etc?"
    -------------------

    What part of "Chinese credit was sucked into the country to fund a City boom" don't you understand?

  • rate this
    +4

    Comment number 236.

    Political argument is gradually discarding the dross, but will it find "the right answer" in time for 2015?
    My "right answer" is that we need investment for higher productivity so that living standards can be restored.
    Who will slap a new Intel or Apple factory investment plan on the table to create more skilled jobs and reverse the current account deficit?

  • rate this
    0

    Comment number 235.

    233.Donkzilla

    So the growth in the 00's had nothing to do with high debt, cheap credit etc?

    'But it was collapsed by fraud and lax banking regulation'

    Clueless

  • rate this
    +2

    Comment number 234.

    230.Donkzilla
    Thanks for the patronising start to the day. You must be a hit at parties...

    I expect there to be banking scandals, that's why I demand laws to punish those responsible, not pay out bonuses to them from innocent people's wallets, like we do now!

    I think my system of personal liability & restitution would have a more deterrent effect than the current one of rewarding the banksters.

  • rate this
    0

    Comment number 233.

    229. bigmouth strikes again
    "It eventually caused the crash."
    ------------------------

    Are you referring to toxic collateralised debt obligations dressed up as AAA rated juicy profit, as sold by dodgy bankers like Nigel Farage?

    Chinese credit was sucked into the country to fund a City boom. But it was collapsed by fraud and lax banking regulation.

  • rate this
    -3

    Comment number 232.

    where is recovery coming from? Consumer spending? They are playing safe. Business expansion? sitting on £750 billion waiting for the others. Exports? Europe and US have the same flat markets. That just leaves a Govt. stimulus. It would be useful if the BBC properly explained Keynesian ideas. We get too much of the neo-liberal American economics. The growth forgone is very costly.

  • rate this
    +1

    Comment number 231.

    Paxman / Balls interview in Newsnight showed Balls for what he is, an incompetent clown.
    It was the best comedy on the BBC all week.
    If this 'man' becomes Chancellor we should very concerned for our country's future.
    He is show bad he makes Obsbourne look competent

  • rate this
    -1

    Comment number 230.

    227. Sally
    "Keynesian economics has ruined us. But, both parties are guilty. They're the same party. Their policies are almost identical."
    -----------------

    On planet Sally there is no such thing as banking fraud, no banking crash, no blame for Osbourne, the place is overrun by evil socialists. The morning coffee on planet Sally is doped with happy pills and a heap of sugar.

  • rate this
    +1

    Comment number 229.

    169.Donkzilla

    '2007

    UK GDP growth: 3.6%'

    Ever thought how that growth was achieved? I'll give you a clue. It eventually caused the crash.

  • rate this
    +1

    Comment number 228.

    We have a big deficit because the Government took on failed banks at the taxpayers expense. Other banks are 'cleaning' their bad debts through these Government owned banks at the taxpayers expense. The £1,800 'worse off' amount is one of the costs for paying off the bad debt accrued by the Government for 'buying' a failed bank. Labour and the Coalition have both been involved in setting this up.

  • rate this
    -3

    Comment number 227.

    225.Redfootball
    I agree, Keynesian economics has ruined us. But, both parties are guilty. They're the same party. Their policies are almost identical.

    223.johval
    Solution abolish minimum wage?
    At least some wage is better than none, encourages working, and allows for those unskilled or uneducated to get vital on the job training and a reference to get a better paying job next time around. Xx

  • rate this
    0

    Comment number 226.

    38.Sagacity "The Balls speech is confirmation & reinforcement of the fact that Labour have decided not to contradict the Tory economic view"

    Or if it was vice versa the tories would be happy clapped for recognising the need for change in your view? You can't have it both ways. If you support the cuts and bullying people, why change your mind when someone else shares your view?

  • rate this
    +1

    Comment number 225.

    The problem with Lab since '97 is that they are scared stiff of the tory press. The arguement for spending, for Keynsian economics needs to be made and not that the current austerity measures are right. Theyve failed before and they are failing now-all over Britain and Europe. Spend for growth should be the maxim.

 

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