So we\’re told that more government borrowing, a wider deficit, will create he conditions to produce economic growth.
We actually have more government borrowing, a wider deficit.
So, why don\’t we have that economic growth? And as we don\’t, where is the proof that more borrowing will create the growth?
Maybe it’s not the right kind of deficit?
Does anyone remember the 70s? Does anyone remember anything at all, or read history?
The 70s were characterised by huge government spending – they owned the means of most costaplenty production after all – tons of jobs in manufacturing, lots of infrastructure spending – look at Concorde for example – vast oceans of borrowing and tax-the-rich-until-the-pips-squeak 83% with a 15% surcharge on unearned income.
If this is the winning formula why did the UK need to call in the IMF?
I’m getting bored waiting. Can anyone tell me when we’re going to see the euro hit the skids and one or more countries being ejected?
Britain, too, can’t go on like this surely, or can it? How long can you run a country for, spending more than you earn year after year with an ageing workforce, and not suffer any significant consequences? And by “consequences” I mean a downgrading to junk, a wholesale shake-up of the political system, tax riots, etc?
The UK’s debt burden will grow by £138bn this year alone, excluding bank bailouts (and presumably future pension liabilities), according to http://www.debtbombshell.com
The rise in borrowing seems to be mainly the result of a fall in corporate tax revenues. Which suggests that:
1) We may have set corporation tax rates too far to the left on the Laffer curve.
2) The tax revenue generating machine of the last fifteen years, banking and financial services, has ground to a halt.
U mis-interpret. It’s not a wider deficit, it’s more absolute spending. I believe this is falling though not as fast as tax revenues. Presto more deficit.
Shinsei has it. The figures show borrowing rising mainly because tax revenue is falling. In other words it is rising BECAUSE there is no growth. The increased borrowing has nothing to do with stimulus – it is entirely passive.
Shinsei, I agree that the main cause of the sharp drop in corporate tax revenues is probably the collapse of financial services, particularly investment banking. I’m still amazed that Ritchie thinks this is a good thing, giving his liking for lots of tax revenue to pay for wage rises for PCS employees.
John B, Britain called in the IMF because sterling was on the skids.
Ha, as I said mockingly, the wrong kind of deficit. If we are supposed to believe that a deficit is a stimulus, surely the fact that it comes from “falling revenue” rather than “more spending” is irrelevant?
Shinsei67 (#4) said “The rise in borrowing seems to be mainly the result of a fall in corporate tax revenues.”
Sorry, that’s simply not correct.
Borrowing in July 2012 was £600m, vs a £2.8bn surplus in July 2011 – that’s a loss of £3.4bn.
Corporation tax receipts in July 2012 were £7,383m, which is £1.2bn down on July 2011 (although still higher than July 2009).
So only a third of the July problem was caused by corporation tax – it wasn’t “mainly” caused by that.
Other taxes are roughly level (in fact slightly up), so most of the problem must have been caused by higher spending, not lower tax revenues.
Except that Tim made it up, to appeal to the economic Luddites out there. No-one has ever claimed that a deficit will itself induce growth.
It’s about the trade off between spending more now on things that use and conserve otherwise idle resources, and the additional tax revenue and reduced expenditure in the future from doing so. Under certain circumstances, it can be argued, this trade-off favours spending more now. According to many economists, for what that’s worth, we may well be in those circumstances.
Also we don’t yet know whether July 2012 shows a genuine decline in corporation tax revenues or just a blip.
May and June corporation tax receipts were both higher in 2012 than in 2011, which doesn’t support the long-term decline theory.
@Richard
You are making a comparison between what the government raised and spent in July 2011 with what it raised and spent in 2012. Why ? What’s relevant about last year’s tax and spending ?
The question to be asked is why corporation tax is lower and spending higher than was forecast for July 2012 ?
“Corporation tax receipts in July 2012 were £7,383m, which is £1.2bn down on July 2011”
And what was the OBR forecasting in corporation tax receipts ? If they were expecting £10bn+ then my point that “corp tax has been primarily to blame” would be correct.
Diarmid Weir, so presumably when Balls and Darling et al. say things like “the coalition is cutting too far and too fast” it is because they have been brainwashed by Tim Worstall?
@Blue Eyes –
Strangely not. Their argument is that the spending being cut would have served to ‘use and conserve otherwise idle resources, and produce additional tax revenue and reduced expenditure in the future’. It is not that government spending in excess of revenue automatically causes economic stuff to happen.
Even if, as a government, you wanted to simply boost the GDP number by spending more (increasing G in the national accounting identity) its irrelevant in the short run whether you do that by deficit spending or match it with taxes.
Shinsei67 #4, It is also possible that the corporation tax rates are too far to the the right on the Laffer curve as there is not less than 1 point either side of the maximum where the tax raised will be the same.
Therefore if they are to the right reducing the rate to reach the optimum/ maximum equally makes sense.
Depends on ones outlook as to how you see it in the absence of hard proof either way.
What’s astounding , to answer John B (2) is that the Likes of Murphy appear, despite being lauded as ‘deep and complex economic thinkers’ to have zero understanding of history or knowledge of other systems where this approach has been tried. The USSR, although politically obviously a long way from what Miliballs is advocating, had state control of almost the entire economy prior to some very narrow liberalisation in 1985, and the results were unarguably catastrophic. As John says, in the UK in the 1970s, Nationalised industries were a byword for inefficiency , Industrial strife and low productivity.
The proposed works programmes (and I haven’t seen any detailed proposals as to specific projects) all seem to hinge on ‘construction’ which will lead to the money being quickly trammelled into Slovakia, Lithuania and primarily Poland, as that is where the bulk of the workforce in the sectors certainly in the South seems to be derived from. Are Murphy and his acolytes (No Arnald for a few days) advocating redeploying the various ‘Climate Change co-ordinators’ and ‘Diversity Outreach workers’ as Bricklayers and Electricians?
Shinsei (#11), that’s not what you said; you blamed it on a fall in corporation tax receipts (i.e. less than they were before), not on a shortfall against predictions.
But whichever you meant, my point is still much the same – the OBR estimate in Budget 2012 was for corporation tax receipts to be pretty much the same as last year, so there’s not much difference between a fall on last year’s actual and a shortfall on this year’s estimate.
The OBR predicted a 3% increase on last year, so July showed a £1.4bn shortfall on prediction vs a £1.2bn fall on last year. That’s still nowhere near doing what you claimed it does, explaining the £3.4bn deterioration in government finances for July.
JohnB: I remember the 70s. The problem then was high inflation, caused by an unfortunate interaction between a credit-led boom stoked by Anthony Barber to get the Tories re-elected, and an oil price shock inflicted on the world by OPEC to punish the USA for helping Israel in the Yom Kippur war. Heath tried to break the wage-price spiral by refusing to pay the miners, and got booted out of office by the electorate. Callaghan’s plan was to do the same thing more subtly, but he got overtaken by rising bond yields – over 15% in late 1976 – and falling sterling. With hindsight, the IMF deal wasn’t essential – the loan was never fully taken up, and oil revenues would have eased the situation in any case – but it certainly made Callaghan’s life easier.
What you imagine all this has got to do with the situation today I cannot imagine.
To answer Tim’s question: certainly deficit spending can stimulate the economy. But the current deficit is caused by a contracting economy; it’s alleviating the contraction but not reversing it.
However, the problem our politicians ought to be losing sleep over is the balance of trade. Perhaps someone should tell them.
Can we have a dose of honesty here.
The reason the usual suspects like the idea of government spending to boost the economy lies in the nature of government spending. The sort of projects governments spend on are large & long duration. It’s their nature, the spending in the early stages goes to planners, lawyers, architects, designers, big company execs. Sort of people the usual suspects hang around with. It’s only in the latter stages do the jobs for the brickies, carpenters, electricians, glaziers & all the other small company stuff materialise. By which time the economy’s in entirely a different phase of the cycle & cue the starting conditions for the next fuck up.