The government must admit that it is wrong about the debt crisisby Tony Dolphin / March 20, 2013 / Leave a comment
Budget-watchers who are old enough will remember a time when the most important element of a budget was the “budget judgement”: how much money the chancellor was putting into or taking out of the economy. On this basis, today’s budget was a non-event. In 2013/14, the chancellor is adding £1.3bn to the economy, before taking £1.6bn out in 2014/15. In a £1.5 trillion economy, these are no more than rounding errors.
The prime minister and the chancellor claim they could do nothing else because Britain faces a “debt crisis.” But the coalition has persistently misdiagnosed Britain’s economic problem. To the extent that we have a debt crisis, it is due to extraordinarily high levels of household and financial sector debt, not government debt. This is evident from the fact that the government is still paying less than 2 per cent to borrow for 10 years, despite the fact that public debt is now expected to peak at 86 per cent of GDP in 2016/17, compared to a peak projected at the time of the June 2010 budget of 70 per cent in 2013/14.
In the short-term Britain has a growth crisis, not a debt crisis. Real GDP has increased by just 0.7 per cent since the third quarter of 2010 and remains 3 per cent below its previous peak. The Office for Budget Responsibility has again revised down its growth forecast for this year to just 0.6 per cent.
The reason for the growth crisis is simple enough: no part of the economy is both willing and able to increase its spending. Households’ spending power is squeezed by prices increasing more rapidly than wages, and at the margin they prefer to save a little more, rather than take on more debt. Overseas demand for UK output is being hit by the recession in the eurozone, still our main export market. Meanwhile, some businesses have resources to spend but are put off by the weak outlook for demand for their goods and services; and other businesses that might want to expand are unable to get the funds they need from banks.
The government’s response has been to cut its own spending, thus making the situation worse, while hoping that an easy monetary…