“Credit Card Maxed Out”?How UK debt statistics have been

misrepresented

Howard ReedLandman Economics

Radical Statistics Conference24 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?

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

111

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

25.0

30.0

35.0

40.0

45.0

50.0Receipts Spending (incl investment)

fiscal year

% o

f GDP

Labour overspending?

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

111

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

200

300

400

500

600

700

800

900Receipts Spending (incl investment)

fiscal year

£bn

(nom

inal

)

Labour overspending?

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

111

2011-

12

2012-

13

2013-

14

2014-

15

2015-

16

2016-

17

200

300

400

500

600

700

800

900Receipts Spending (current only)

fiscal year

£bn

(nom

inal

)

Overspending? No… tax revenue collapsed!

• Current spending and tax revenue tracked closely prior to 2007-08

• The Great Recession of 2008 caused a collapse in tax revenues

• Labour was not overspending before 2007-08• Spending after 2007-08 was essential to avoid

deepening economic depression (stablisers, stimulus)…

Unsustainable debt?

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

20152016

0

10

20

30

40

50

60

70

80

90

year

Net

deb

t-GDP

ratio

(%)

Unsustainable debt?

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20092013

0

50

100

150

200

250

year

Net

deb

t-GDP

ratio

(%)

Unsustainable debt?

1700 1723 1746 1769 1792 1815 1838 1861 1884 1907 1930 1953 1976 19990

50

100

150

200

250

300

year

Net

deb

t-GDP

ratio

(%)

Debt interest payments

19451949

19531957

19611965

19691973

19771981

19851989

19931997

20012005

20090

1

2

3

4

5

6

7

year

debt

inte

rest

pay

men

ts (%

GDP

)

Is austerity the solution?

A simple formula:

Dt+1= ((r – g) × Dt) + dt

Where: D : debt/GDP ratior : real interest rate on debt servicingg : real growth rate of GDPd : deficit as proportion of GDPt, t+1: years

Is austerity the solution?

Dt+1= ((r – g) × Dt) + dt

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 Year June 2010 Budget

Nov 2011 Autumn statement

2011/12 67.2 67.52012/13 69.8 73.32013/14 70.3 76.62014/15 69.4 78.02015/16 67.4 77.72016/17 - 75.8

An illustration: OBR GDP growth forecasts (%)

Calendar Year June 2010 Budget

Nov 2011 Autumn statement

2011 2.3 0.92012 2.8 0.72013 2.9 2.12014 2.7 2.72015 2.7 3.02016 - 3.0

UK now doing worse than 1930s

A similar story in Europe

IMF forecasts for the Eurozone (% GDP growth):

Date 2012 2013

Apr 2011 1.8 -

Jun 2011 1.7 -

Oct 2011 1.1 -

Jan 2012 -0.5 0.8

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.)