By Patrick Nolan, Chief Economist, and Lucy Parsons, Senior Economic Researcher, Reform
Last week a debate between economists spilled over into the mainstream media. In the Sunday Times 20 economists signed a letter arguing that a credible medium-term fiscal consolidation (spending cuts and tax rises) is necessary for a sustainable recovery, that the current structural deficit should be eliminated over the course of a parliament, and fiscal measures should begin to take place in 2010-11. Later in the week an even bigger group of economists (67 this time) signed another letter arguing that these 20 economists were wrong and we should back the plans in the 2009 Pre Budget Report.
We got an insight into what the public may make of this public fall-out between economists when we spoke at a focus group on economic literacy at Demos this weekend. Demos invited 16 members of the public to hear economists argue on spending cuts from both sides – and we were there to make the case for cutting spending and cutting soon.
In making our case we emphasised that:
· The deficit is more than just a debate between economists over numbers. The deficit has a real impact on everyone. Not tackling the deficit will lead to rising interest rates, currency instability and slower economic recovery. This will make it harder for individuals to borrow (meaning more expensive mortgages) and harder for businesses to borrow (meaning they cannot invest and hire more people).
· The government’s finances can be thought of in a similar way to a family budget. The government gets income (from us all) in the form of taxes and other revenues. The government spends money on public services (e.g. NHS) and welfare (e.g. Child Trust Fund). When your income and spending don’t match, you save or borrow – so does government.
· We have been living beyond our means for many years. Over the last 50 years governments have persistently spent more than they collected in taxes. Families have also been persistently spending more than they earn (think credit cards, overdrafts, mortgages). The government is now spending more on interest on its loans than on the transport and police budgets put together.
· Some people argue spending cuts mean people stop spending money, leading to businesses cutting back production, leading to people stopping spending money, and on and on. However, this argument largely ignores how the money is spent – and the government tends to spend money more poorly than people would themselves – and that the money that government spends is not free. Taxing, borrowing and printing money all come at real costs – money does not grow on trees (and, if it did, it would be largely worthless).
· Something needs to be done and we need to get on with it. Just like making the minimum repayment on a credit card, putting off repaying the debt will lead to the total amount we need to pay being higher. People who lend us money need to know that there is a plan for paying it back – otherwise interest rates will go up (which will mean mortgages will be more expensive).
· When the money runs out, households prioritise their spending. The government needs to do this too and to focus spending on the right things, such as a more educated and efficient workforce and infrastructure (e.g. roads and utilities). Government plans are, however, to protect spending in the wrong areas (such as public service jobs) while infrastructure spending will be cut hardest. This is the wrong approach.
· Some government spending is clearly being wasted or failing to provide a return that covers its costs of funds. In this case, why wouldn’t we cut this waste as soon as possible? Otherwise we would be simply throwing good money after bad.
· Finally, although cutting spending in some areas will take time (e.g. given the need to consult with unions and staff) there is no excuse for not presenting a clear plan for reducing the deficit now.
So how did this all go down? When we asked the audience which politician has gone on record as saying we face some of the deepest cuts in spending in 20 years, the most common answer was David Cameron. No members of the audience identified a Labour politician (it was Alistair Darling) and that the Labour Party is planning major cuts. As Stephanie Flanders argued, in reality the difference in proposed spending cuts between the Conservative and Labour parties is slight (£15 billion by 2015-16, or 1% of GDP), but the perception of differences is much larger. All political parties are planning cuts soon after this year’s general election. The debate we should be having is how and where these cuts should take place.
