Duncan’s Economic Blog

4 Year Plans – the Numbers

Posted in Uncategorized by duncanseconomicblog on September 6, 2010

I’ve been rather busy for the past couple of weeks and so blogging has been very light. Hopefully I’ll be able to post more in the coming weeks than I have in the past.

The table below, which I’ve been playing around with, might be helpful to people when thinking about deficit reduction. It summarises the tax rises and spending cuts planned by Osborne, planned by Darling and what would happen if Labour adopted a 50/50 tax and spending programme, but stuck to a 4 year timetable.

We can see that under the “Darling Plan”, Labour would be able to oppose £9bn of spending cuts in 2011/12, rising to £31bn by the end of the Parliament. In other words, sticking to the 4 year plan doesn’t mean accepting all the cuts.

Going for a 50/50 split would mean being able to oppose £10.5bn next year, rising to £46.5bn by 2014/15 – although Labour would have to spell out £7.5bn of tax rises in 2014/15 (or £20bn, if they planned to reverse the VAT hike too).

One interesting thing that leaps out is how Osborne is rasing more in taxes in every year than Darling planned (he raises less as a proportion of his tightening, but total tightening is much larger).

And whilst we are on four year plans, it’s worth noting what Liam Bryne had to say recently:

Labour had a much more flexible approach; we legislated to halve the deficit over 4 years, but it was possible to bring in orders for a change if the economy started heading south. George Osborne’s fiscal mandate appears to have no such escape hatch.

Labour didn’t talk much about the “escape hatch” during the general election campaign, but if Ed Balls is right on the coming economic hurricane , and I think he might be (so does Martin Wolf),  then this might becme crucial.

We can stick to the four year timetable and have a crediable plan to halve the deficit, one that still allows us to oppose a cumulative £86.2bn of spending cuts whilst emphasing that we are flexible and realistic.  The pace of tightening will be dictated by the pace of recovery.

16 Responses

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  1. yorksranter said, on September 7, 2010 at 10:12 am

    And, tactically, you could hark back to the 90s and call the 50/50 option the Ken Clarke plan. Or the Ken Clarke memorial plan if you wanted to be extra snarky.

  2. Quietzapple said, on September 8, 2010 at 9:04 am

    Osborne won’t worry too much about offering hostages to fortune while he has the support of the billionaire led media.

    If he can cut, he will, it is a class issue for him.

    He hopes that whatever economy is left will still support jaguar cars, the up-market wallpaper industry and a plutocracy with some style, but that is it.

  3. Tyler said, on September 8, 2010 at 9:38 am

    Wow…halving the deficit within 4 years to a still masive 6% of GDP. Under Labour’s plan debt would rise to about 90% of GDP by 2015 (which has been shown to reduce term growth by about 1% of GDP) and interest payments would have ballooned by about 35bn p/a, or roughly the entire defence budget. AND those same interest payments would still be increasing….growth jsut isn’t going to cover it.

    • duncanseconomicblog said, on September 8, 2010 at 9:49 am

      Tyler,

      I’m curious where you’re getting your numbers from?

      The OBR in it’s assessment of the Darling plan states that by 2014/15 Public Sector Net Borrowing would have fallen to 3.9% of GDP. Net debt to GDP would 74.4%. And debt interest payments would be £67.2bn by 2014/15. Debt interest payments are expected to be £63.0bn under Osborne’s plans (again by the OBR).

      So all these cuts and the risk of a double dip – it saves about £4bn in interest annually by 2014/15.

      OBR report on Darling’s plans here:

      http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf

      Budget here:

      http://www.hm-treasury.gov.uk/d/junebudget_complete.pdf

  4. Tyler said, on September 8, 2010 at 1:42 pm

    Darling’s last budget plan indicated the deficit will fall from 11.8% to around 6%. That projection also have very fanciful GDP growth predictions.

    Osbournes plan comes close to elimating the deficit.

    The (compund) difference between the two plans is about 15% in debt/GDP terms by 2015. I tend to stick with independent research – in this case GS/SocGen.

    That is, of course, before all the off balance sheet items, such as public sector pensions and PFI.

    Under the Labour plans debt interest payments are set to increase by about 30-40bn. It’s hard to compare like with like given the coalition have been in power only a few months, and have been handed a hospital pass by a certain Mr. Brown….but….

    ….the point I am really trying to make is that there is simply no way that spending can continue on its previous trajectory (espeically the Tory “cuts” are really a reduction in the rate of increase) and there is no way we can grow our way out of a 6% deficit, let alone a 12% deficit. The debt we are building up is going to suffocate it rather than promote it (though it might help growth in Germany and China).

    When it comes to the crunch, all this stimulus worldwide is doing is increasing various imbalances and kicking the deleveraging can down the road. Politically, why take pain now when yuo can kick the can down the road, at the cost of lower future growth, and make it someone else’s problem? Who was it who suggest in 2002 that the answer to the crash post Nasdaq bubble (and I quote here) was in inflate a housing bubble?

    Oh, that would be a certain chap called Krugman. Tell me, how did that work out for us all?

    • duncanseconomicblog said, on September 8, 2010 at 1:55 pm

      I’m using the assesment of Darling’s plans done by Osborne’s OBR and comparing it with the assesment of the budget by the OBR. This seems fair!

      The OBR revised down the deficit numbers set out in Budget March 2010 in June.

      Under Osborne’s plans debt interest payments will increase by £25-30bn by 2014/15.

      I don’t think fiscal policy alone will end the crisis. But I think cutting back now will make it much worse.

    • duncanseconomicblog said, on September 8, 2010 at 1:56 pm

      Also, I don’t believe Osborne will eliminate the deficit by 2015.

  5. vimothy said, on September 8, 2010 at 2:59 pm

    Tyler,

    Why couldn’t we have a, say, 12% deficit in perpetuity?

    If everyone tries to eliminate their imbalances simultaneously, does anyone hear it?

    If we spend less, don’t we produce less?

    • duncanseconomicblog said, on September 8, 2010 at 3:05 pm

      I’m with Krugman on this:

      http://krugman.blogs.nytimes.com/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont-do-that-wonkish/

      More broadly though I agree, we shouldn’t be tightening now – nor I suspect in 2011.

      • vimothy said, on September 13, 2010 at 12:45 pm

        Duncan—

        I don’t disagree with Krugman and his little model either (not with the results, anyway). However, I’m not saying that we can print as much money as we like and not worry about inflation. That seems like a bit of a straw man, though I can understand how cursory reads of the neo-chartalists et al could lead a person to thinking that making such an argument is necessary.

  6. Tyler said, on September 9, 2010 at 7:28 am

    @Vimothy

    We can’t have a 12% deficit in perpetuity for two linked reasons. Firstly, you need someone to finanace it, and after a while your interest costs become large enough to reduce the effect of any further spending and reduce growth. Your ability to pay debts then becomes impaired, and interest rates rise. You get caught in a debt trap.

    Spending less doesn’t mean producing less unless you are a left winger and believe that all government spending is efficient and worthwhile.

    @Duncan

    I agree with some of Krugman’s article, but disagree with his conclusion regarding stimulus. It won’t really help and will store up economic problems a few years down the line. Stimulus hasn’t helped Japan for 30 years and it doesn’t seem to be working in the US – all the indicators are pointing to the fact that this is a depression past this one off inventory rebuild.

    Krugman also makes no distinction between inflation and hyperinflation. He seems to believe the one is the extension of the other. This is not the case though. Inflation is demand driving up prices. Hyperinflation is when people lose all faith in the currency as a store of value. Totally different ideas.

    • vimothy said, on September 13, 2010 at 12:33 pm

      Ooh, a left winger, eh—ouch!

      But I was thinking of Jean Baptiste Say, not Karl Marx. I.e. aggregate spending, you know, the famous short run.

      In any case, the burden of the debt is just the ratio of interest payments to income. As long as income grows in a geometric fashion, this ratio will approach a constant: Assume income grows at constant rate, r, and that every year a constant proportion of that income is being borrowed, α; therefore, the growth of the debt will approach r, and the ratio of debt and national income will approach the constant α / r.

      Stimulus hasn’t helped Japan—and how do you know? Where is your otherwise identical control country that didn’t stimulate?

  7. […] Duncan Weldon has pointed out that Labour’s plans amount to avoiding £86 billion of cumulative cuts. Thinking of this “extra” investment as being “Labour’s fund for growth”  that we can trigger when needed would help give that spending a strong political puropse well beyond merely protecting the interests of Labour allies. […]

  8. […] coincidence, today I also came across this excellent analysis of what would happen if – instead of putting burden of deficit reduction on cutting spending […]

  9. […] (This useful table, from Duncan Weldon’s uniformly excellent economics blog, gives a breakdown of the various plans. Incidentally, as you’ll see from the table, Darling’s plan – and Labour’s current plan – only proceed as far as the election in 2015. A different balance of tax and cuts could theoretically be adopted after that.) […]


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