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Shameless Balls

March 24th, 2011 Posted in Economics, Labour by

The line adopted by the Ed Balls, that the Government’s current deficit difficulties are purely due to international banking / credit crisis in 2008 is one much repeated.

This is surely easy to test?

At one level is clearly false. It is simply an admission that the last Labour government made spending decisions on the basis of a bubble.

Anticipating such risks and hedging against them is the job of the Treasury. Under Labour the Government was spending more than they made in every year since 2001/02. As was said at the time, they didn’t ‘fix the roof when the sun was shining’.

They excuse this with all sorts of pseudo-Keynesian waffle about ‘investment’, but much of the rise in public spending was not infrastructure for the future, but current spending on wages for public sector workers and voter-pleasing bribes such as the child trust fund. A classic Labour approach to economics; spend, spend, spend, and hope something turns up.

Further the impact of the credit crisis on Government income is measurable.

Tax revenues fell from around £550bn in 2007/8 to £520bn in 2009/10 (£533bn in 2008/09). It’s a difference of around £30bn.

That’s less than the current interest on the national debt (@£50bn), let alone the annual deficit (@£150bn)

This means, crudely, public spending commitments are accounting for about 80% of the deficit, the recession around 20%.

And that only if you generously assume the Government couldn’t have possibly seen there was a bubble (whilst Vince Cable kept predicting it), and taken precautionary action. And further that the debt itself, and that large interest bill, was nothing to worry about and should not have been reduced.

How all that equates in the mind of Balls to the financial crisis being solely responsible for the deficit and debt is a mystery to me.

Perhaps a Labour economist could explain?

4 Responses to “Shameless Balls”

  1. Richard Laming Says:

    But some of those public spending commitments are also recession-related – the rise in unemployment pushes up the benefits bill, for example, so the split is more than 20/80.

    But, even so, this graph shows the relentless rise in public spending beyond what the nation could afford.

    Even if there were no bubble, there was still the normal economic cycle to take into account. When we should have been in surplus in the middle of the decade, we were tens of billions in the red each year. All that talk about prudence was strictly for the first term.

  2. Andy Mayer Says:

    The blame game on the spending side of the balance sheet is more difficult, principally for two reasons.

    Any or at least most unemployment attributable to a bubble bursting, is a correction. If the banks are responsible then they’re also responsible for creating those bubble jobs in the first place through lax credit and direct hires. The net effect should be zero. The bubble giveth, the burst taketh away.

    Second the government decides the generosity of welfare spending as a matter of policy and how much to set aside for market corrections. That it is politically difficult to cut welfare and politically easy to spend whatever you have, does not make it the fault of the banks that spending goes up during a recession.

    I possibly also should have mentioned Balls nuanced his argument on Today by specifically describing his government’s policy as undermined by losing revenue from the financial sector, not the other side of the equation.

  3. Tabman Says:

    I can feel a pedant moment coming on … resist the urge … argh … “balance sheets show assets and liabilities, not income and expenditure” ….

    I’ll get my coat.

  4. Jeremy Poynton Says:

    “Labour Economist” – very good!