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Anti-BBC economics

I’ve been infuriated in recent days by the BBC’s simplistic and utterly biased acceptance of the Coalition line that its spending cuts are necessary.

The problem is that it’s a very easy idea to sell to a public already fed a diet of economic stupidity by large sections of the media.

We’ve got a deficit of £156bn, goes the BBC’s new mantra, so if we find £156bn in spending cuts, all will be fine and dandy. 

As long as no-one mentions things like loads of unemployed public sector workers claiming benefit and massively reduced demand in the economy leading to an INCREASED deficit, then the BBC journalists and editors can go home at night, safe in the self-deceit that they’re just doing a public service by bringing the scale of the deficit to attention……

……but I can whinge about this kind of thing all day.  That won’t change the fact that it’s happening.

The challenge is to develop an alternative ‘story’ of the economy, which challenges the crap the BBC and their mates at the TPA come out with, in a way which is readily understandable to the public.

My litmus test on this challenge is whether I could put such a ‘story’ in one of my local newsletters, and get it read.

So here, as concise as I can make it, is my challenge to ‘the cuts are unavoidable narrative’.  Clearly corners must be cut, but cutting the right ones is part of that challenge.

At 660 words it’s too long even for my 12 page newsletters, but it’s a start. Let me know what you think, and help me hone it down. 

Why the cuts are senseless

A lot of residents will have read the mantra from the Tories at the council that service and job cuts are necessary because of the ‘debt crisis’.   

This is wrong, and deliberately misleading, and ignores simple economic realities. 

Sadly, this misleading information is also being peddled by the national press and even the BBC, and I have therefore agreed with Labour colleagues all over the country that we should set out our case against the Coalition cuts in local newsletters and leaflets.

At a local and national level, it is simply wrong to cut services and jobs in the way set out by the Coalition. 

By cutting services, whatever they are, jobs are also lost, and those people often end up on benefits. 

Unemployed workers are not able to buy as much as they did, and this leads to more job losses, leading to lower tax revenues and higher welfare spending. 

Thus cutting spending like this is self-defeating, and ends up increasing the deficit. 

This is exactly the policy which is being pursued in Ireland, with disastrous results, including the recent further downgrading of its credit rating status and the threat of increased borrowing costs.

The best way to curb the deficit is not to cut spending, but to use it to grow the economy. 

Here some basic figures may be helpful to illustrate how feasible this is (for simplicity inflation is not factored in).

1) GDP (the whole value of the UK’s economic output) was £1,400 billion (£1.4 trillion) in 2009.

2) The deficit (the difference between tax revenue and government spending) will be around £1,600bn in 2010.  Current interest repayments, around 60% of which are repayable to ourselves, are around £35bn per year.

3) The government thinks GDP may go up by 2.3% in 2010 to around £1, 432bn.

4) Tax revenue tends to fall more sharply than GDP when that is falling, and to rise more sharply when GDP is rising.* 

So tax revenue in 2009-10 fell from £439bn to £397bn in 2008-09 (a 9.5% drop) even though GDP fell 4.9%.

5) In the mid 2000s, when annual GDP growth was between 2% and 3%, tax revenues overall grew by around 6% to 8% per year, because firms, domestic and foreign, were doing well and paying more corporation tax, and because people were doing well and paying more higher rate income tax, for example.

6) So if the UK economy did grow at 2.3% this year as planned (though the coalition’s stupid cuts make this unlikely now), and tax revenues grew by 7%, an extra £27.8bn would come into the public purse.   If this was repeated over four years, then the government would be generating an extra £34bn per year to pay for its outgoings.

7) Alongside this, the growth in the economy would reduce unemployment and other welfare bills by something in the order of £10bn per year (based on how much it increased in the recession).

This means the annual deficit would come down by around £44bn overall to around £116bn.

8) Of course the outstanding overall debt would have to be serviced with interest payments, but it should be noted that around 60-70%% of all these payments are made to ourselves anyway in the form of pension funds etc. buying safe government bonds as part of their overall portfolio.  A certain level of domestic debt is actually useful for pension holders, as it is a risk-free investment.

These figures are simplified for illustrative purposes, but show clearly that public spending cuts of the scale now ordered by the Coalition are not only self-defeating because they increase welfare spend and reduce tax revenue; they are also unnecessary because even mild growth of 2.3% per year would be enough to ensure the deficit is managed without any cuts.

More active government policy of the type advocated by Labour to create jobs and reduce unemployment would further increase GDP growth by up to 5% , with government revenue increased by a greater margin e.g. 10%, and lead to massive reduction in the deficit over a four year period.

Even without the benefit of post-recession Labour economic policy, though, the BBC and other media outlets are simply wrong to say that there is ‘no alternative’ to spending cuts.

(Please see the electronic version of this piece at www.bickerstafferecord.org.uk to click on links to all the sources.)

* When I passed this post via Duncan Weldon for a quick ‘howler check’, Duncan pointed out that the way tax revenue grew at a multiple of GDP in the 90’s/00’s, might well have reflected booming assets prices, which aren’t directly captured in GDP data but do add up in terms of CGT, stamp duty, higher corporation tax from the city etc..

While this is accepted, it’s probably a bit too esoteric for a local newsletter aiming to establish the ‘scale of things’ and challenge the ‘no alternative’ orthodoxy being peddled locally.

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Categories: Terrible Tories
  1. sirrontail
    July 29, 2010 at 6:10 pm

    “2) The deficit (the difference between tax revenue and government spending) will be around £1,600bn in 2010. Current interest repayments, around 60% of which are are around £35bn per year.”

    I’d imagine that should be:
    “2) The deficit (the difference between tax revenue and government spending) will be around £160bn in 2010. Current interest repayments, around 60% of which are payable to ourselves, are around £35bn per year.”

  2. paulinlancs
    July 29, 2010 at 6:32 pm

    Sirrontail @1: Yes, not sure how that happened. Thanks. I’ve updated.

  3. July 29, 2010 at 7:58 pm

    Yes, it’s a good post. We should take note of Ireland. – had a very severe austerity package (welcomed by EU of course). But, it led to such a fall in economic growth, their credit rating has been downgraded. – It shows deep spending cuts can be very damaging.

    The debt interest payments of £35bn will definitely be rising though. I think that figure is from 2009.

  4. Agog
    July 29, 2010 at 9:01 pm

    One of my favourite pieces of illogic from Cameron was about how in a few years time interest payments on our government debt would exceed so much departmental spending (transport plus schools plus whatever was convenient to mention). What was his response? Obviously to reduce departmental spending. So in a few years time he can use the same argument and compare interest payments to 25 percent lower spending and so slash it even further. Twisted.

  5. July 30, 2010 at 12:16 pm

    Great idea, and in the past I have put graphs from the IFS on election leaflets so am fully behind this idea, but what you’ve got is still too complicated.

    2 quick thoughts:

    1. Are there any pictures / graphs which could illustrate the point you are trying to make?

    2. The bit of the conventional argument which is most counter-intuitive is their idea that since we are in so much debt, we need to make more people redundant. Common sense and economic history/theory both suggest that if we reduce the number of people who are working and contributing, then we will have less money. So I’d start with that point and go from there.

  6. paulinlancs
    July 30, 2010 at 2:21 pm

    Dan

    Yes, a graph/chart would be good. I used them on local leaflets too in gen election.

    I think the bare numbers are important. Otherwise we just look like we’re making it up to a sceptical audience.

    A lot of work is needed to refine the message to, say, a double-sided card the sized of debit card that goes in your wallet. Could a proper designer get this 82 word message onto such a card (figures done quickly from memory, because in many ways that is the point, that every leftie activists should be able to spout the figures as quickly as rightwingers can shout ‘Labour debt crisis):

    The Tory Cuts Lie Card

    Cuts will raise unemployment, lower output, increase deficit

    We can cut the deficit without cuts.

    GDP growth without cuts: 2.3% pa
    Deficit in 2010: £156bn
    Tax revenue 2009: £400bn
    Tax income growth at GDP growth (2.3%) = 7%: £34bn (by 2014)
    Welfare payments saved with growth (from 2011): £11bn
    Tax revenue with growth: £45bn
    Annual deficit interest repayments 2009: £35bn

    So we can cut deficit by £10bn pa even at low growth rate

    Tory cuts are NOT needed

  7. John
    July 30, 2010 at 2:39 pm

    I like this, but it’s too confusing for me, even in debit card form! You need to be a bit more basic…to me it’s just a list of numbers with little meaning at present. And I’m not stupid ;p

  8. beginner economist
    August 3, 2010 at 2:34 pm

    I like the line of questioning this from an idealogical sense, but are you really asking for the country to carry on spending money that it doesn’t have and to fund interest on this debt for the foreseeable future.

    You make 4 errors that undermine your reasoning above:
    1) you are assuming that none of the public sector job losses will be picked up by a private sector upturn or increase in growth
    2) that the UK is the same as Ireland; our economy is much more diverse so is akin to comparing apples with bananas
    3) the reasoning for spending your way out of a recession is based on the premise that you have saved money during the boom time; alas Brown has left us with no money having spent more in the boom times than we were generating.
    4) the previous government were planning on making cuts just as severe – why would this be the case were it not needed? These shouldn’t be opposed on the basis of “its the tories” but compared with alternatives

    If you can explain these then you will gather much more support.

    • paulinlancs
      August 3, 2010 at 6:36 pm

      @8: The point is to keep it brief, just as the Tory narrative is brief.

      I can answer all these points easily enough, and I will if you really want me to, but it’s all readily available on other sites.

  1. August 4, 2010 at 12:54 am

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