Duncan’s Economic Blog

Debt, Growth and Hypocrisy

Posted in Uncategorized by duncanseconomicblog on March 7, 2011

Via Old Politics on twitter (blog here and worth a look), I came across this old BBC story from 2001.

It’s interesting that back when Brown was running a surplus the Tory attack was as follows:

The Conservative Party has accused Labour of raising taxes without delivering service improvements.

So there we go – if the Government runs a deficit then that’s reckless, if they run a surplus they are ‘raising taxes without delivering service improvements’.

This shouldn’t come as a surprise – I can’t imagine any situation in which a democratically elected government could continue to run a surplus over the medium term. The clamor for more spending from the left or tax cuts from the right would quickly become unbearable.

Now I imagine many commentators are about to graffiti this post with supposedly insightful comments such as ‘This proves Keynes wrong, he said you should run a surplus in the good times and you say the government can’t’.

Which really just proves that the General Theory is a true classic – i.e. often cited but little read.

If those commentators could point me to the bits of old Maynard’s writing where he for this argues this then I’d be very grateful.

Of course the government should repair the public finances after a recession, and as I’ve said before running a structural deficit after a 15 year boom was hardly ideal (although my caveats are as important as my main point), but the notion that in non-recessionary times the government should always run at a surplus is, at best,  highly unrealistic.

We have a very large deficit at the moment and at the first signs that it might be slightly smaller than anticipated this year the Tory right are already demanding tax cuts, imagine their attitude if we had an actual surplus.

The chart below shows the cyclically-adjusted current budget surplus/deficit and the debt/GDP ratio for the UK since 1975. (All data from the IFS).

It’s worth noting that the UK ran a deficit each and every year from 1987/88 until 1999/2000.

And what happened to the debt/GDP ratio during these 12 years of profligacy?

It fell from 36.8% of GDP in 1987/88 to 35.6% in 1999/2000. How is this possible? Simple – GDP grew quicker than debt.

Maybe growth matters after all…

32 Responses

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  1. David Holden said, on March 7, 2011 at 1:24 pm

    The problem I have is who will lend us the money to grow out of this

    and while I believe that there is merit in infrastructure (both hardware and software) spending I’ve seen far too many examples of government waste (national and local) to believe if the money was lent it much of it wouldn’t be an massive exercise in malinvestment and waste.

    Heard a good one last week – a friend called the council because he had a leaking tap and toilet. They said we can send someone to fix the tap but the toilet would be about week later. The tap guy came and fixed the tap. My friend said why couldn’t he sort out the toilet. He said he hadn’t been told about the toilet but took a look and fixed it in about 30 seconds. My friend said why couldn’t they have book you to do both jobs – the tap guy said he doesn’t know but this happens all the time. My friend rang the council to complain and they said they’d “have to report this” but not the waste, just the fact that the plumber had done a job that they’d rather pay twice for. Bonkers!

    I also find it disheartening that Economics is often seen as a tit for tat – look what the Tories did versus what Labour did nah nah..

    But since this blog pretty clearly identifies itself as a political one please ignore that rant🙂

    • Mike said, on March 9, 2011 at 10:05 am

      Your friend received excellent service from the Council.

      The now-privatised water (and gas, etc) utilities all limit the number of jobs to one per call-out, no matter if the job is only fixing a tap washer. They are then able to charge for multiple call-outs against their insurance plan.

      Here’s my true anecdote: An elderly friend had a leaking stopcock and toilet and suddenly lost all mains water. Panicking, he phoned up a plumber from Yellow Pages and was quoted £75 for the whole job. He ended up paying over £300 because, after work was done, he was told the £75 was in fact a half-hourly rate. (The now-private water utility had turned off the mains water to fix a leak elsewhere but neglected to tell.)

      Hooray for private enterprise, not!

  2. Andreas Paterson said, on March 7, 2011 at 4:16 pm

    There’s a few reasons that come to mind with the toilet story, it’s often hard to diagnose from a phone call exactly what is required in terms of the amount of labour, the parts and a lot of the scheduling of this kind of job is based on details supplied over the phone.

    As a result, contractors tend to use a “best guess” of how long the job will take and the parts required. The situation you describe is likely due to the need to schedule the plumbers time in order maximise the number of jobs with a certainty of being addressed.

    It’s likely that in this case the tap job fell into the “simple” category wheras the toilet job fell into the category of “complicated” (even though this was not actually the case), it was probably judged that the toilet job may have required items of stock that the first plumbur may not have posessed.

  3. gastro george said, on March 7, 2011 at 4:19 pm

    You’d get the same kind of problem with British Gas or TalkTalk. This is just organisational stupidity and says nothing about public vs private. We live in an increasingly Taylorised workplace where nobody thinks about what they are trying to achieve, but is only looking at their (often stupid) metrics and the bottom line.

  4. David Holden said, on March 7, 2011 at 4:38 pm

    “This is just organisational stupidity and says nothing about public vs private.”

    No here they’re spending my council tax money British Gas or Talk Talk are spending their customers money.

  5. David Holden said, on March 7, 2011 at 4:42 pm

    “As a result, contractors tend to use a “best guess” of how long the job will take and the parts required. The situation you describe is likely due to the need to schedule the plumbers time in order maximise the number of jobs with a certainty of being addressed.”

    If that were the case apart from obviously missing the opportunity to get the first plumber to assess the job why has my friend had to get on to someone high up in the council (he’s lucky he knows someone0 to make sure this plumber doesn’t get flack for doing this extra job.

    • Andreas Paterson said, on March 7, 2011 at 5:16 pm

      I can’t say for certain, what I’m relating to you is the experience I had working for a large private sector plumbing company in the insurance industry. I’m assuming that they would have similar organisational challenges. I’ll give you my best guesses though:

      The reason for reporting the job was because it’s likely that the second job would have been booked with a separate contractor. Since this second job was no longer necessary the I’d assume that the council cancelled this second appointment.

      As to why they didn’t assess the job at the time, this is because this was an exceptional case, I’d suspect that by “all the time” what the plumber actually meant was fairly regularly, possibly 1 in 10 jobs. Having IT/Administration systems that handle exceptional cases such as this means that the administration of the system (once you scale it up) becomes far more complicated.

      • David Holden said, on March 7, 2011 at 5:33 pm

        “The reason for reporting the job was because it’s likely that the second job would have been booked with a separate contractor. Since this second job was no longer necessary the I’d assume that the council cancelled this second appointment.”

        Sounds fair enough.

        “As to why they didn’t assess the job at the time, this is because this was an exceptional case, I’d suspect that by “all the time” what the plumber actually meant was fairly regularly, possibly 1 in 10 jobs. Having IT/Administration systems that handle exceptional cases such as this means that the administration of the system (once you scale it up) becomes far more complicated.”

        This doesn’t make sense. If they’re going to send a plumber out why not let him make the assessment on whether he can handle both jobs rather than pre-booking both jobs as separate appointments.

        • Andreas Paterson said, on March 8, 2011 at 2:30 pm

          “This doesn’t make sense. If they’re going to send a plumber out why not let him make the assessment on whether he can handle both jobs rather than pre-booking both jobs as separate appointments.”

          Try thinking of it like this. At the place I used to work for we modelled jobs as flow charts, the moment you start adding speculative sections of a job (could the plumber fix the problem) and different outcomes it leads to an increased complexity for the actual job.

          You might think this is not a problem, but when you are dealing with large numbers of workers and thousands of jobs increasing the complexity of how a job is handled can lead to a massive increase in mistakes and jobs lost in the paperwork.

          The overall point is that your tale of the council’s “incompetence” does not necessarily ring true. You have taken a view centred on problem on one part of a job, while failing to consider the wider challenges faced by the organisation and come up with your own knee jerk opinion.

          • David Holden said, on March 8, 2011 at 5:53 pm

            It may not necessarily ring true but knowing several people who work for the council I’m pretty sure it is. So in that sense you’ve by stating I’ve made a “knee jerk” opinion it could be said you’ve just done the same not know the bigger picture if you will..

  6. gastro george said, on March 7, 2011 at 4:49 pm

    No here they’re spending my council tax money British Gas or Talk Talk are spending their customers money.

    In which case your argument is with the privatisers who want to treat all users of public servers as “customers” rather than people.

  7. David Holden said, on March 7, 2011 at 4:56 pm

    “In which case your argument is with the privatisers who want to treat all users of public servers as “customers” rather than people.”

    No my argument is with my council wasting money they took from in tax. They can do this because of their opaque accountability and lack of choice.

    • gastro george said, on March 7, 2011 at 6:40 pm

      By extension you seem to be asking for a choice of council, or a choice of plumbers supplying council services. That would probably lead to more inefficiencies. Better to address the organisational problem.

      I get a bit fed up with people complaining about “waste”. It’s usually because we refuse to pay for a decent service, we don’t create decent organisational structures, or we’re getting ripped off by companies cheapskating. Most of that is a political/economic choice – except for the decent organisation part, which is down to crap management.

      Sorry for hijacking the thread and that rant …

  8. David Holden said, on March 7, 2011 at 7:39 pm

    “Better to address the organisational problem.”

    But what’s there incentive to do this?

    “I get a bit fed up with people complaining about “waste”.”

    If you don’t complain why should it change?

    “. It’s usually because we refuse to pay for a decent service, we don’t create decent organisational structures, or we’re getting ripped off by companies cheapskating. Most of that is a political/economic choice – except for the decent organisation part, which is down to crap management.”

    The NHS is riven with it. Believe me I volunteer in it. And it’s less down to underfunding than to a poor incentive structure and demarcation.

    • gastro george said, on March 7, 2011 at 10:56 pm

      But what’s there incentive to do this?

      That’s an impossibilist statement. You’re saying that the difference with private companies is that you can take your custom elsewhere. But, of course, you can’t with public bodies. So they have no incentive to improve. So they will always be rubbish. Believe it or not, some people in the public sector try to do a decent job. Sometimes they succeed. Sometimes they don’t. Blaming it on a lack of incentive doesn’t go anywhere near touching reality.

      The NHS is riven with it.

      So are private companies.

      • David Holden said, on March 8, 2011 at 12:35 pm

        Not at all it’s a valid question and it’s one reason why councils can get away with such bad service and waste. Labour of course tried to address this with a plethora of targets which led to a massive increase in pen pushing and box ticking and an incentive culture purely centred on those targets. This was fine for the top down specific targets chosen but lead to a massive distortion of effort and neglect of many patients interests outside of those targets. For the particular instance of the NHS what’s needed is a better alignment of informed patient choice with spending power – much as I’m against yet another reorganisation of the NHS this does seem to be one of the coalitions aims.

        • gastro george said, on March 8, 2011 at 5:30 pm

          This was fine for the top down specific targets chosen but lead to a massive distortion of effort and neglect of many patients interests outside of those targets. For the particular instance of the NHS what’s needed is a better alignment of informed patient choice with spending power

          I don’t see any reason to think that increasing marketisation of public services, which is what I think you’re suggesting, will lead to any positive outcomes.

          There’s no doubt that some target setting in the public sector led to atrocious results. But some level of result monitoring is necessary. The devil is in the detail, of course, but that is what (good) management is about.

          But I don’t see how patient choice and money following the patient is going to help things. Money following the patient is just going to lead to a lot more breast implants and liposuctions. “Choice”, as always, requires knowledge. As we have seen with schools, it can lead to a lot more useless metrics (league tables) that only reinforce inequality and social segregation. Which patient is going to have the time or inclination to research which hospital gives the best outcome when they’re lying on a stretcher? In any case “choice” is going to be constrained by the contracts made by the GP consortia – which may well be price driven rather than outcome driven. You think this is a sensible way to run public services?

          The best outcome is usually found when you let professionals do their jobs – within an appropriate organisational structure (and by that I don’t mean the old consultants close shop where they bunk off to do private work on the side). Look at Finnish schools, for example. Proper respected professionals don’t require “incentives”.

          • David Holden said, on March 8, 2011 at 5:48 pm

            ““Choice”, as always, requires knowledge”

            I said informed patient choice and to suggest that this will lead to breast implants and liposuction one shows a contempt for patients and two would be quite easily prevented – medically unnecessary procedures should be privately funded.

            “Which patient is going to have the time or inclination to research which hospital gives the best outcome when they’re lying on a stretcher?”

            That’s just a straw man argument – most procedures are discussed with your doctor months ahead of a decision.

            “The best outcome is usually found when you let professionals do their jobs – within an appropriate organisational structure ”

            That’s just a standalone statement – how do you get the “appropriate organisation structure” that responds to the needs of patients because so far we don’t have it.

            • gastro george said, on March 8, 2011 at 6:29 pm

              OK, my comment about liposuction was trite. But it hides a few questions. Firstly define “medically unnecessary procedures”. This is already a grey area and subject to some conflict within the system. IVF, for example, is not a popular treatment (except for those that want it, of course). What I’m trying to say here is that patient choice is not necessarily going to lead to an optimal use of (becoming scarce) resources. Who will make those decisions? If you have a market in healthcare, then money may well follow these grey treatments. If they don’t, then patient choice is a myth. What we’ll probably get is a mess.

              I also accept the straw man accusation. But you didn’t answer my point about patient “choice” versus GP consortia contracts. Again, who will actually make the decisions? Will that lead to greater efficiency?

              The point about “appropriate organisation structure” was deliberately general – because I was thinking about different parts of the public (and private) sector. There is no one solution. The NHS is not perfect, but it has a high approval rate from the public, improving statistics and is remarkable value for money – especially when compared with the home of the market, the USA.

              I stand by my preference for letting professionals decide on that structure. I don’t see how market reforms are going to lead to improved incentives for healthcare workers, which you seem to think are going to improve healthcare.

              • David Holden said, on March 8, 2011 at 6:57 pm

                Well I agree that medically unnecessary procedures is a grey area – but I don’t necessarily agree that combined with informed patient choice it would be any bigger problem than it is now or this particular aspect end up as money sink.

                “In any case “choice” is going to be constrained by the contracts made by the GP consortia – which may well be price driven rather than outcome driven.”

                This I accept but I see constrained as preferable to none. Will it lead to greater efficiency? Possibly, possibly not. But I would also contend that it has the potential to lead to an organisational structure on the Trust side more tuned to patients needs.

                “The NHS is not perfect, but it has a high approval rate from the public, improving statistics and is remarkable value for money – especially when compared with the home of the market, the USA.”

                Rest assured I’m no market fundamentalist – the US system is a basket case. It’s a country that spend almost twice as much as any other on healthcare yet has 40 plus million with no preventative health care whatsoever and on many metrics worse outcomes overall.

                I do however think our system can be considerably improved.

  9. […] Debt, Growth and Hypocrisy | Duncan’s Economic Blog Duncan reveals that when the previous Labour government ran a budget surplus, the Conservatives complained. […]

  10. Luis Enrique said, on March 8, 2011 at 10:49 am

    Duncan … for your post-in-the-works about the IMF

    http://krugman.blogs.nytimes.com/2011/03/07/does-imf-stand-for-impressive-macroeconomic-flexibility/

  11. Andreas Paterson said, on March 8, 2011 at 2:42 pm

    And because I’m feeling a bit guilty for discussing plumbing when we should instead be discussing fiscal policy, here’s a bit of Keynes, I’m not sure he was much of a fan of surpluses at all:

    In the United States, for example, by 1929 the rapid capital expansion of the previous five years had led cumulatively to the setting up of sinking funds and depreciation allowances, in respect of plant which did not need replacement, on so huge a scale that an enormous volume of entirely new investment was required merely to absorb these financial provisions; and it became almost hopeless to find still more new investment on a sufficient scale to provide for such new saving as a wealthy community in full employment would be disposed to set aside. This factor alone was probably sufficient to cause a slump. And, furthermore, since “financial prudence” of this kind continued to be exercised through the slump by those great corporations which were still in a position to afford it, it offered a serious obstacle to early recovery.

    Or again, in Great Britain at the present time (1935) the substantial amount of house-building and of other new investments since the war has led to an amount of sinking funds being set up much in excess of any present requirements for expenditure on repairs and renewals, a tendency which has been accentuated, where the investment has been made by local authorities and public boards, by the principles of “sound” finance which often require sinking funds sufficient to write off the initial cost some time before replacement will actually fall due; with the result that even if private individuals were ready to spend the whole of their net incomes it would be a severe task to restore full employment in the face of this heavy volume of statutory provision by public and semi-public authorities, entirely associated from any corresponding new investment. The sinking funds of local authorities now stand, I think,[4] at an annual figure of more than half the amount which these authorities are spending on the whole of their new developments.[5] Yet it is not certain that the Ministry of Health are aware, when they insist on stiff sinking funds by local authorities, how much they may be aggravating the problem of unemployment.

    • Andreas Paterson said, on March 8, 2011 at 2:43 pm

      Should just add that those are two separate snippets of text rather than one large quote.

  12. […] Debt, Growth and Hypocrisy | Duncan’s Economic Blog Duncan reveals that when the previous Labour government ran a budget surplus, the Conservatives complained. […]

  13. AH said, on March 9, 2011 at 9:28 pm

    Interesting post. Small budget deficits are compatible with a declining debt-GDP ratio but I was at a NIESR seminar recently where they argued that only those hubristic enough to believe they’d abolished boom and bust would rely on this. Because you never know when the next war/financial crisis etc. is going to come along and push the debt-GDP ratio up massively so it is -there is no other word- prudent to run surpluses in good times. And the debt-GDP ratio was increasing under Labour pre-recession.

    Although governments have rarely run surpluses since the mid-70s, during the Keynesian ‘Golden Age’ of the preceding 30 years governments did so persistently. No, I don’t quite understand the politics of that either. Perhaps partly a less populist style of politics then. And partly because fiscal policy -rather than interest rates- was then regarded as the main instrument to manage the economy. So you had to tighten fiscal policy in booms to prevent the economy overheating. Running surpluses in booms does have the advantage that you don’t need high interest rates to prevent overheating. Good for investment in productive capacity and long term growth and for manufacturing as the exchange rate is kept low. Unlike how manufacturing suffered while a loose fiscal policy was run the early 2000s boom. The budget surpluses of the 50s and 60s were a counterpart to a high level of private investment no doubt to an extent stimulated by low interest rates.

  14. donpaskini said, on March 10, 2011 at 1:27 pm

    Good article, but I’d quibble:

    “I can’t imagine any situation in which a democratically elected government could continue to run a surplus over the medium term. The clamor for more spending from the left or tax cuts from the right would quickly become unbearable.”

    Depends what you mean by “medium term”, but I’d have thought that just at the moment, there’d be plenty of people who support the idea of the govt running a surplus in order to reduce the risk of another economic crisis, or just generally as an example of financial prudence. It’s one reason why Clinton was so popular in his second term.

    I’d have thought as well that the political advantages of running a surplus become even stronger if (say) both John Redwood and Bob Crow are vocal critics of it – after all, the Tory criticisms in 2000/1 didn’t get them very far.

  15. gastro george said, on March 10, 2011 at 5:03 pm

    there’d be plenty of people who support the idea of the govt running a surplus in order to reduce the risk of another economic crisis

    That would be odd as, IIRC, running a surplus over the medium term has generally been followed by another economic crisis. Is it popular in the short term because of lower taxes?

  16. AH said, on March 10, 2011 at 7:44 pm

    gastro george – I think the point is that running a surplus means you’re in a stronger financial position when the next crisis hits.

  17. gastro george said, on March 10, 2011 at 7:56 pm

    Be better not to have the crisis though, eh?

  18. AH said, on March 10, 2011 at 8:34 pm

    Yes – but a country integrated into a global market economy can’t completely eliminate the possibility of crisis.

  19. gastro george said, on March 10, 2011 at 11:05 pm

    No, but they can avoid creating one themselves.


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