“Credit Card Maxed Out”? How UK debt statistics have been misrepresented Howard Reed Landman Economics Radical Statistics Conference 24 February 2012.

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Presentation transcript:

“Credit Card Maxed Out”? How UK debt statistics have been misrepresented Howard Reed Landman Economics Radical Statistics Conference 24 February 2012

The Coalition story UK deficit and debt out of control because of Labour overspending Unsustainable by May 2010 – risking increase in government borrowing costs Severe austerity – eliminating the “structural” deficit over the course of this parliament –only course of action left to the UK This will enable sustainable private-sector growth

Austerity in one sentence “If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse.” (David Cameron, June 2011)

Putting the record straight Every part of the Coalition story is at least partially (and in many cases wholly) wrong Austerity is a disaster So why is the narrative so pervasive?

Labour overspending?

Overspending? No… tax revenue collapsed! Current spending and tax revenue tracked closely prior to The Great Recession of 2008 caused a collapse in tax revenues Labour was not overspending before Spending after was essential to avoid deepening economic depression (stablisers, stimulus)…

Unsustainable debt?

Debt interest payments

Is austerity the solution? A simple formula: D t+1 = ((r – g) × D t ) + d t Where: D : debt/GDP ratio r : real interest rate on debt servicing g : real growth rate of GDP d : deficit as proportion of GDP t, t+1: years

Is austerity the solution? D t+1 = ((r – g) × D t ) + d t Starting from a steady state of constant debt year-on-year, D will grow if: The real interest rate rises Growth falls The deficit rises

An illustration: OBR govt debt/GDP forecasts (%) Fiscal YearJune 2010 Budget Nov 2011 Autumn statement 2011/ / / / / /

An illustration: OBR GDP growth forecasts (%) Calendar YearJune 2010 Budget Nov 2011 Autumn statement

UK now doing worse than 1930s

A similar story in Europe IMF forecasts for the Eurozone (% GDP growth): Date Apr Jun Oct Jan

Costs of austerity High unemployment – human costs now, and ‘scarring’ later Spending cuts strongly regressive (see my paper with Tim Horton in last year’s RadStats conference papers) Collapse in investment (both govt and private sector) Increasing consumer debt

Stupidity or malice? The economics don’t support the case for austerity But I don’t think (Conservative) politicians are stupid – rather, they are using the crisis to advance a (pre-existing) small-state agenda

UK spending/GDP will fall below USA by 2015 Source: IMF referenced in Taylor-Gooby (2011)

How are they getting away with this? ‘maxed out credit card’ line seems logical at first glance (return of “handbag economics”) The media are (mostly) sympathetic Opposition within Parliament is weak The crisis was “spun” as one of govt debt rather than one of unsustainable private sector growth model (out-of-control financial sector, extreme volatilty, bubbles, debt etc.)