Myth Busting: The Coalition Cut the Deficit by a Quarter

As the economic failures of the coalition government become more and more apparent they are driven to hide behind increasingly dodgy claims. The most common of these is that they have cut the deficit by a quarter. Having been disappointed  by others’ attempts to bust this myth, I have decided to have a go at explaining exactly why this is such a disingenuous claim.

The coalition are already being called out on one of their claims: That they are ‘paying down the nation’s debts’ – an absurd claim that they will no doubt be forced to retract; however this post will focus on the equally misleading claim that they have reduced the deficit by a quarter’. I sketched out the broad contours of this argument elsewhere:

 It is true the deficit is down by a quarter if you are very selective about how you present the data. In order to make this claim the government pick a point where tax receipts were at rock bottom and were already climbing. Tax receipts were climbing, in no small part, due to the stimulus package delivered towards the end of the last administration. So the government had spent money at a time when tax receipts were low (the exact opposite of what Osborne has done) which meant there was a large deficit; but this spending helped generate  five consecutive quarters of growth that the coalition cannot really take credit for.

Since writing this I came across an attempt by Jonathan Portes and also by Full Fact to deal with this issue. In addition an article also appeared in New Statesman (today) attempting to debunk the ‘deficit down by a quarter’ myth. These explanations are correct but also deficient as they only deal with one side of the equation.

Portes Argues

[M]ost deficit reduction – about two-thirds – has come from cutting investment. Given that even at the peak investment spending was only about a tenth of total government spending, this is astonishing. Moreover, it’s getting worse. Last year more than three-quarters of deficit reduction came from cutting investment. Indeed, the current deficit – excluding investment – fell hardly at all, from £102.5 billion to £99.5 billion.

Indeed. Full Fact, Portes and the New Statesman are obsessed with cuts to spending. It is as if they have been taken in by right wing rhetoric which equates the deficit to public spending. I think we need to remember what the deficit actually is. The deficit is the difference between government spending and government revenues (mainly tax). It is the revenue side which seems to be overlooked. This is strange considering (contrary to popular myth)  the budget deficit of 2008/9/10 was driven primarily by a fall in revenue than by too much spending, as the graph below shows:

What is most awkward for me here is that what I am about to argue is a defence of Labour’s economic policy – not being a huge fan of the Labour party this leaves a somewhat sour taste in the mouth – but still in the interests of getting to the bottom of this, I’m afraid the truth is, if anyone deserves credit for reducing the deficit (and I’m not sure anyone really does), it is Labour.

Full Fact point out that the government’s figures come from  public sector net borrowing which ‘stood at £159 billion in 2009/10 and fell to £121.5 billion by 2011/12 – a fall of 24 per cent (revised down from 25% as the figures stood a month ago).’ As I have already said, this involves picking a time when the deficit was at its peak and most likely to start coming down anyway and comparing it with a time when the government had only been in power for a short time. I have also pointed out that according to the ONS the deficit increased in 2012 under the coalition’s watch.

According to the government’s claim, they reduced the deficit by £37.5M between 2009/10 and 2011/12. The deficit did indeed fall in this time; but how much of it was down to the coalition is debatable. The coalition came to power in May 2010 and their spending review was in October. The majority of  their spending policies did not really come into effect until April 2011. Therefore any deficit reduction between April 2009 and April 2011 would be more attributable to Labour policies than coalition polices.

As you can see in the Graph above the deficit went down by about £20M during the period where Labour spending policies dominated. Therefore about half of the government’s 25% deficit reduction claim can be attributed to more to Labour policy than the coalition. Now the coalition’s spending policies would have had an immediate effect on the deficit but their polices would have taken longer to impact on growth. Thus it is fair to say that economic growth between 2009/10 and 2010/11 would be driven more by Labour policy than by the coalition’s austerity  With the exception of a dip in growth at the end of 2010, this was a period of slow but steady growth and with this came rising tax revenues. In fact tax revenues increased by £38.7M between 2009/10 and 2010/11 (nearly double the increase between 2010/11 and 2011/12). This increase in revenues brought about by growth that is more attributable to Labour policy than coalition policy, would have had a huge impact on the deficit. It is at this point (after Labour policy had started to stimulate growth and increase tax revenue) that the coalition’s spending cuts would come into play. These cuts combined with the growth caused (at least in part) by Labour policy would have further reduced the deficit. It is this dynamic which accounts for the 24% reduction – a combination of Labour stimulus and coalition cuts. However Labour cannot receive all the credit. Part of it was simply natural economic bounce back from the dramatic loss of revenue (caused by the 2008/9 crash, noted above). As already stated the coalition chose to measure the reduction in the deficit from a period when it was at its peak, when tax receipts had taken a massive dip, and compare that with a period that had enjoyed a mild recovery caused, in part, by Labour’s stimulus measures. It is also true that (as others have noted) coalition cuts to infrastructure spending played a part in reducing the deficit too. These cuts combined with the knock on effects of Labour’s stimulus had a powerful impact on the deficit; but – crucially – this could only work in the short-term.  As the cuts started to impact on growth, the effect became less pronounced and has even gone into reverse.  Hence, as has been widely acknowledged, coalition policy has led to a double dip (maybe even triple dip) recession and stagnant growth. This explains why the deficit has increased recently under the coalition. This is why (as Full Fact point out) the coalition emphasise what is now a very dated measure, rather than admitting that recent data show that the deficit is rising again.

What is strange to me is that the deficit was caused by a drop in revenue, not by excessive spending, yet even the Left have bought into the myth that spending is all that matters. Thus even when the left wing commentators such as Jonathan Portes and George Eaton try to debunk the coalition’s deficit claims, they fail to convince, as only half the equation is considered. This is perhaps the most worrying aspect of all this for me. Not that the government manipulate the data to make themselves look good – this is to be expected – but that even left wing commentators seem to have bought into the dangerous logic that the budget deficit is all about government spending. This is the logic behind austerity and cuts….this is the path to the dark (supply) side; not a path that the Left should even consider walking down.

Also by Marxist Nutter:  Ideology and Discourse in ConDem Policy

Related posts:

Cameron and Osborne dwell on Bullshit Mountain, UK

Osborne and Cameron’s Big Deficit Myth

How to be a Deficit Owl

Labour’s deficit problem.

Why does the Structural Deficit remind me of LIBOR?

THE UK’S BUDGET DEFICIT IS RISING NOT FALLING

If Keynes is good for China – what about the UK?