Bournemouth Uncut

Chasing the corporate tax avoiders & fighting the cuts

The Deficit Myth

The coalition government and the press are constantly stating the UK has a record deficit, a over-sized public sector and that the poor state of the economy is the fault of Labour. This really is nonsensical and these myths need to stop being peddled.

Firstly, we need to take a step back to the Labour budget of 2007. The then Shadow Chancellor, George Osbourne, agreed with the proposed levels of public sector spending and, in fact, asked for more to be spent. In November 2009, before the credit crunch, the deficit was 35% of GDP ( Gross Domestic Product ), the second lowest of the G20 contries. Some may think this is too high but it must be stated that Labour came to power in 1997 after 18 years of a Conservative government that had underspent in the public sector and areas such as schools, hospitals and public transport needed a massive injection of cash. 

Neither was the collapse of the banks caused by Labour. All banks throughout the world had lent money irresponsibly. Most economists believe that the subprime mortgage collapse in the United States was the trigger and it soon became apparent that it was a global problem. It was worsened due to banks like Goldman Sachs who had sold supposedly triple AAA rated subprime debt to other banks throughout the world, only for these banks to susequently find that it was bad debt. It has since emerged that the rating agencies for Goldmans were in the bank’s pocket and all concerned have now been heavily fined.

All this led to a global recession and banks throughout the world being bailed out by their respective governments. Apart from the necessity of having to bail out several UK banks, the Labour government took Keynesian measures to bring our economy out of recession and to limit the impact on employment and business. Quite understandably, all these measures increased the UK’s deficit to 70% of GDP. However, as the growth in the UK’s economy for all quarters of 2010 shows, these policies were working and the deficit was gradually being reduced.

One of the reasons why the UK economic recovery has been slower than some other countries is that we have an over-dependence on financial sector jobs and, of course, this is one of the areas hit the hardest by the recession. This needs to be addressed by whoever is in power but it must be stated that our manufacturing base was decimated during the Thatcher years which has led us towards the imbalance between manufacturing and office jobs.                 

Is the UK deficit at record levels?

Quite simple, no! Government debt never fell below 100 per cent of GDP between 1920 and 1960. It is only in the past decade or so that it has become normal to think of government debt being stable at around 40 per cent of GDP. After the second world war the deficit was 250 per cent of GDP.

Does the deficit need reducing?

Of course but both Labour and the Lib Dems consistently argued that any public spending cuts should not happen until 2011 and the deficit should be reduced to more substainable levels over 2 parliaments (10 years) which would stabilise the economy and secure the recovery.

The coaliton government have decided to eliminate the deficit over 1 parliament (5 years) with immediate spending cuts. Many respected economists believe this strategy is a gamble as they are cutting too deep and too fast and the private sector will not have time to fill the black hole that will be inevitably left by public sector job losses and the knock-on effect to the private sector. 

The CIPD (Chartered Institute of Personnel and Devlopment) has said the impact of spending review had been understated. Its research suggests that the government’s spending cuts and the rise in VAT to 20% in January 2010 will result in more than 1.6 million job losses across the public and private sectors by 2016. It predicts 725,000 public sector jobs will go (over 200,000 higher than a government appointed body forecast) and it estimates 900,000 private sector jobs will go.

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