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Is the 25% cut in the deficit real?

by Marrick on October 24, 2012

One of the things that has been much trumpeted recently is the government##Q##s “success” in cutting net borrowing (the deficit) by 25%. I thought I##Q##d look into it.

Here are the net borrowing figures for the last few years – just before the financial crisis and just after:

2007-08 £40.3bn

2008-09 £104.2bn

2009-10 £167.4bn

2010-11 £145.1bn

2011-12 £119.3bn <<< much trumpeted 25% cut

2012-13 £127.3bn estimated

It doesn##Q##t look so good now eh? Even at the height of the financial crisis, Gordon was borrowing LESS than the Tories did last year and next year they are projected to borrow more.

So, how did they “achieve” this:

a) Cuts in public investment: Most of the deficit reduction came from cuts in public sector investment. Funny how they now say that this is just what the countries needs… It’s easy for a government to cut capital investment, because the electorate doesn’t see an immediate cut in public services. It does, however, have a long term adverse effect on economic performance. Many businesses are now concerned that under-investment in transport and infrastructure is creating supply-side bottlenecks. This, in turn, can damage the long-term productivity of the economy.

b) Taxing the poor more: the expiration of the VAT cut by Labour and the increase to 20% by the Tories, putting the burden for the banking failures firmly on the shoulders of the less well off had a direct annual input of about +£12 billion

Cutting public investment stores up problems – Labour has had to face these problems every time they come into office. You can##Q##t freeze road, school and hospital building and repairs forever. Sooner or later you have to repair things, so it isn##Q##t REALLY a cut in the deficit, just storing up problems for future governments and generations. It##Q##s just smoke and mirrors.

Cutting public investment stores up problems – Labour has had to face these problems every time they come into office.

Meanwhile taxing the poor reduces their liquidity and causes them to spend less – this will, in turn, eventually translate into lower Exchequer receipts and lower economic activity. Worse though is the impact on the lives of the people most affected – their standards of living drop and those living on the margins can drop below a living wage. This will lead to stagnation poverty, deprivation and crime. The proof of this is shown clearly in today’s release of Office for National Statistics figures confirming how devastating stagnation has been in Britain over the last few years.

Consumption-and-growth-373x600Household consumption has fallen through the floor. Take a look at this graph from Barclays research which compares household consumption in the UK, USA, Germany, France and Spain. Only Spain compares to how badly we are doing in the UK. The fact is, it isn’t going to get better any time soon: a typical household close to middle income could expect to see an income of £22,100 in 2020 – a 3% fall from £22,900 in 2009. This is the real impact of low growth and high indirect taxes.

Even the Prime Minister’s feeble attempt at looking progressive is turning on him. The Measuring National Well Being project – remember that? They have four key statistics used to measure economic aspect of national well-being. One of these is Net National Income per head (slightly different from GDP per capita, because it measures production that is available for the working population). The latest figures reveal that Net National Income is now 13.2% lower than it was just before the recession.

As the ONS reports says:  In the 1980s, NNI per head had recovered to its pre-recession value three years after the beginning of the recession. The equivalent recovery came earlier in the recession of the 1990s; it took two and a half years …

This time, after more than four years we are still in a worse position than at the Q5 recession trough.

Using deficit reduction as measure of economic wellbeing is a fallacy, using fake figures to demonstrate this is near criminal. The government is deliberately distorting the picture to make itself look good, while the rest of us suffer. Nero fiddling while Rome burns.

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