BUDGET MYTH-MAKING

Government borrowing and deficit spending are not just more train wrecks. UK Budget debates are a wonder to economists. Those of us who look empirically and dispassionately are regularly stunned by the trotting out of catchpenny urban myths such as 'tax & spend' and the recalcitrant notion that Government borrowing is inevitably a 'burden' on future taxpayers. Looking carefully at the history of UK GDP and budget settings will not find one clear example of 'tax & spend'. All years except one (1969, and not particularly errant) since the 1950s, in terms of UK budget deficit size in ratio to GDP, fit even within the overly conservative Maastricht criteria! Before back then, we had exceptional years of WWII and the immediate post-war economy of dollar-shortages until the Marshall Plan and IMF.
This week the myth-making reached new heights (see also "You can't spend your way out of a recession, or can you?" in November -click older posts at bottom of page) with Conservative Shadow Chancellor George Osborne's breathless bombast, "the greatest public policy failure in a generation", "time-old truth that in the end all Labour chancellors run out of money" and "tax giveaways paid for by a lifetime of tax rises" (FT, 25 Nov. pages 1 & 5). The budget deficit is par with Conservative deficit-spending in the 1990s. It may be fair to accuse Labour's Chancellor Darling of 'tax & spend' only because this is what Labour unfairly accused Conservative Chancellor Clarke of, in the 1997 election when the Conservatives failed to answer back with cries of "what would you have done" that Labour back-benchers fling at Osborne. Underpinning these myths is The Treasury's failure to fully explain Exchequor Revenue since 1979 when HM Treasury economists were ordered never again to explain to Cabinet the difference between the gross and net Exchequer costs of public spending. The Treasury pie chart (FT, 25 Nov. page 3) shows £29.8bn of the £104bn 'clawback' as 'Fiscal drag" when this is really merely the fact that 28% of Government revenue is taxation on its own spending and returns to (much of it never actually leaving) the Exchequer in the same year it is spent. More returns in the following two years such that the net tax and economic cost of Health, Education, Police and Defence and some other spending falls to close to zero. Thus, it is silly to claim that there is always a long term cost to taxpayers from Government borrowing. A third of the National Debt is anyway internal to Government. Notwithstanding this aspect, at 40-50% gross ratio to GDP, Government Debt is only a third of household debt, a third of corporate debt, and a sixth of finance sector debt, which have all grown much faster than Government debt. Which of these are the truer costs to future taxpayers? Certainly, Government debt must be the least of these burdens! There is much anguishing this week in the UK newspapers and media about the Government deficit. But, note the symmetry between the UK and US. The British government this week unveiled a stimulus plan that will boost the 2009 budget deficit to £118bn ($181bn), the equivalent of 8.0% of gross domestic product (GDP). U.S. President-elect Barack Obama’s stimulus plan will raise the 2009 U.S. Federal deficit to $1.2tn or also 8.0%of U.S. GDP. If the UK is wrong, so too is the USA, but it strikes me that they are both doing the right thing on at least the right scale.