Saturday, 26 November 2011

Toby Young on The Debt Delusion

Mehdi Hasan is typical of high-profile Labour insiders. He's arrogant, cynical and mendacious, but not stupid.

Toby Young
has produced a blog post in response to Hasan's latest attempt at disinformation: The Debt Delusion.

As Young puts it,
[Hasan's] view is that, far from trying to reduce the structural deficit by slashing spending on public services, the government should be taking advantage of historically low gilt yields to borrow more, spend more and stimulate the economy in the text-book, Keynesian manner.
As this blog and many others have pointed out, our Coalition hasn't really been "slashing" spending at all. The government is burning through more money than ever.

But according to Young, Hasan argues that there is a sense in which the cuts are real:
If you just focus on DEL (Departmental Expenditure Limits), i.e. the amount spent on public services each year, the picture looks bleaker. If you look at those same Treasury forecasts (see table 1.9), only three departments will see real-terms increases in expenditure over the course of this Parliament – Heath, International Development and Energy. The rest will see real-terms cuts. Spending on Education, for instance, is due to fall from £58.552 billion in 10/11 to £51.558 in 15/16, a real-terms cut of £6.994 billion or 14.3%. Overall, DEL is set to fall from £375.170 billion in 10/11 to £331.900 in 15/16, a cut of £43.27 billion or 11.53%.
A killer argument? Not quite.
Hasan believes these cuts are monstrous – just monstrous – and quotes the IFS in support of this view, which described the Chancellor's plans as “the longest, deepest, sustained period of cuts to public services spending at least since World War II.” However, what Hasan neglects to mention is that these "cuts" only pare down public expenditure to the level it was at a few years before the Coalition came to power. TME, for instance, is forecast to be higher in real terms in 15/16 (£668.5 billion) than it was in 08/09 (£658.823), some 11 years after Labour had been in power. The same goes for DEL, though you have to go a bit further back. Education spending, for instance, was lower in 06/07 (£51.048 billion) in real terms than it's forecast to be in 15/16 (£51.558). What Hasan and other left-wing critics of the "cuts" always gloss over is that public expenditure increased massively under the last government – more than 50% in real terms between 97/98 and 09/10.
All we need to do is roll back the clock.

Young goes on to consider the the importance of the bond market. It's true that they have to be kept on side as long as we're living beyond our collective means:
So the programme of cuts embarked upon by the present government last year is, in the grand scheme of things, fairly modest. Much more modest than the government's critics would have you believe. But what is indisputable is that if Britain hadn't embarked on this programme, our 10-year bond yields would now be in the red zone.
What Hasan overlooks – willful blindness? – is that on the eve of the last election the UK's 10-year bond yields, at 4.2%, were higher than those of Germany, Italy and Spain. This was in spite of having our own currency and a healthy debt rollover profile which supposedly guarantee our safety. Ambrose Evans-Pritchard wrote an article at the time, quoting the fixed income director of Unicredit, Europe's second largest bank, predicting that the UK was next-in-line for a sovereign debt crisis. Does Hasan really believe that if Gordon Brown had been re-elected – and made Ed Balls his Chancellor – Britain wouldn't be in the same boat as Ireland, Greece, Portugal, Italy, Spain, Belgium and, now, Hungary?
If hell-bent on the Keynesian "stimulus" Hasan desires, a Labour government would have found no support from the bond markets. They would instead have turned to the printing press even more enthusiastically than our Coalition overlords.

Of course, the proper solution is to balance the books. And once the deficit is eliminated, it's hard to see why we should continue paying interest on government debt.

Far better to repudiate it. Bond market be damned.

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