Hastings Independent - Guide to Austeity

Austerity, National Debt and Budget Deficits.

Kent Barker’s election guide to what the parties are promising on the economy.

I have a neighbour who gives excellent dinner parties to which come friends of varying political persuasions.  Discussions can, therefore, be wide-ranging if seldom conclusive.

One was on a key subject in the current election campaign – Austerity.

Judging by the recent TV debate, the smaller parties – SNP, Plaid Cymru and the Greens - are anti-Austerity, while Cameron, Milliband and Clegg and Farage are pro-Austerity in one form or another. 

We’ll define what we mean by Austerity, ‘Budget Deficit’ and ‘National Debt’ shortly.  But first let’s return to the dinner discussion.  Our host is arguing that you, as a country or an individual, can’t afford to live with ever increasing debt because, eventually, repayment would consume your entire income. So the Conservative/UKIP promise to slash spending to reduce the deficit must be right.

Yes I know he’s mixed up the debt and the deficit which is why we’re going to have to have a quick economics lesson. But let’s first enjoy the excellent wine and poached salmon.

  Our ex-SWP friend replies that such draconian cuts would be far too devastating for social services and the NHS. Meanwhile the woman next to me quotes Dickens’ Micawber:  “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."  It’s the same for the country she says.

That seems logical enough. Until someone gives the example of buying their first house. Borrowing £30,000 back then seemed a huge debt. But today they have a mortgage ten times larger but they’re not nearly so worried. Their income is much higher now and, as the house is worth much more than they owe, they are sitting on £100,000 of equity which makes them feel wealthy.   

It’s just like the national debt, he says.  As long as there is plenty of growth in the economy, it doesn’t really matter that total indebtedness has gone up.

And now, I’m sorry, we really have to differentiate between Debt and Deficit. The National Debt simply refers to the amount of money owed by the UK, built up over many years by various governments.  It’s like the total you owe on everything. your mortgage, credit cards, overdraft etc.

The Budget Deficit (or surplus) is the difference between what the country spends and what it receives in revenues.  This is the ‘Micawber’ analogy.  Obviously if the government runs a deficit year on year, it adds to the country’s Debt.

Most, economists seem to agree that Debt is not always a bad thing.  In a recession governments needs to borrow and spend to prevent a collapse in demand and confidence which, in turn, suppresses economic growth.  This is classic Keynesian economics – spend your way out of a recession.

But what’s this ‘growth’ thing and why do we need it?  Well let’s go back to our dinner party.  The couple across the table have two children.  When they were young the wife stayed at home so there was only one family income. When she went back to work, their income increased but costs remained roughly the same.  Later the children, still living at home, got jobs and started contributing.   So now the family has four incomes rather than just one and is so much better off it can start to repay some its debts.  The same with the country. Population expands, more people work, pay taxes, help exports, and we’re all better off and the government can repay debts.

So to the election and your choice between different parties’ promises.  Cameron says he will eliminate the budget deficit by 2018.  Milliband says Labour will do it by the end of the parliament ie 2020, Clegg agrees it needs to be done but hasn’t said when.   But HOW is the question?   The Tories say entirely by cuts in public spending. The Lib Dems say a 60-40 split between cuts in public spending and higher taxes.  Labour are more vague, talking about taxing the rich, but also about increasing public spending.

The Greens, Plaid Cymru and Scots Nats oppose this Austerity agenda arguing that a budget deficit isn’t such a bad thing and public spending is good.

The problem is they’re not going to form a government. And those parties that could, are not exactly trustworthy when it come to pre-election tax pledges.  Remember Cameron’s promise in 2010: “We have absolutely no plans to raise VAT.’  In their first budget VAT increased from 17.5% to 20%. 

Can we trust any of them?  And, if not, perhaps we should just decide whether we are for or against Austerity.  The trouble is there’s only one party we can vote for in England that is standing on an anti-austerity platform. Time perhaps either to go Green or emigrate north of the border – that’s if you want public services protected or enhanced.