“Credit Card Maxed Out”? How UK debt statistics have been misrepresented Howard Reed Landman...
Transcript of “Credit Card Maxed Out”? How UK debt statistics have been misrepresented Howard Reed Landman...
“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 GD
P
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-G
DP
ratio
(%)
Unsustainable debt?
19451949
19531957
19611965
19691973
19771981
19851989
19931997
20012005
20092013
0
50
100
150
200
250
year
Net
deb
t-G
DP
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-G
DP
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 (%
GD
P)
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 67.5
2012/13 69.8 73.3
2013/14 70.3 76.6
2014/15 69.4 78.0
2015/16 67.4 77.7
2016/17 - 75.8
An illustration: OBR GDP growth forecasts (%)
Calendar Year June 2010 Budget
Nov 2011 Autumn statement
2011 2.3 0.9
2012 2.8 0.7
2013 2.9 2.1
2014 2.7 2.7
2015 2.7 3.0
2016 - 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.)