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Hamish McRae: The idleness of debating statistics

There is water between the parties but less than their rhetoric would have us believe

Wednesday, 10 December 2008

So should the Government borrow 8 per cent of GDP next year or 6.5 per cent? Or, much more probably, should it borrow 10 per cent of GDP or 8.5 per cent?

The charge levelled by David Cameron against Gordon Brown is that his borrowing plans are "extreme" and "reckless" and spending has to be cut more sharply than it would be under Labour's plans.

The reply from the Prime Minister is that it is sensible to give a fiscal boost to the economy this year and next, and then claw back the position as growth resumes in 2010 and beyond. As far as spending is concerned, growth will be restrained in the future but it would wrong to start cutting back now. This difference is being presented as "clear blue water" between the two parties.

Well, there is some water between the two parties but rather less than their rhetoric would lead us to believe. The truth is that both parties are bound to borrow on a scale that will be greater, relative to GDP, than at any stage since 1947 and both will be forced into savage cuts in public spending. It is just that the cuts would come rather earlier under the Tories than under Labour.

For both political parties are prisoners of some brutal fiscal numbers – or rather we as British citizens are the prisoners and we will be for a generation. Take that first pair above, the 8 per cent and the 6.5 per cent. The first is the deficit for 2009/10 as projected by the Treasury, the second what might have happened had it not introduced this £20bn fiscal package with the cut in VAT and so on. But actually the outcome is much more likely to be in the 8.5-10 per cent range, because the Treasury assumes an economic recovery beginning in the middle of next year.

That is of course possible but if it were to happen, the downturn would be far shorter than previous post-war recessions. If the recession follows the average post-war pattern, there will not be a solid recovery until the second half of 2010. That would mean an even larger deficit relative to GDP than that forecast by the Treasury – as indeed is privately accepted by senior officials.

So were there to be an election next spring and the Tories to get in, they would still find themselves borrowing upwards of 8 per cent of GDP in their first year of office, ie more than Labour says it plans to borrow now. The reason is that Labour's plans are based on an unrealistically optimistic assessment of the timing of the cycle.

And the years beyond? Well public spending will have to be curbed because the tax system simply does not bring in enough money to support a public sector of the size we now have. In the tax year that ended last April, Her Majesty's Revenue and Customs brought in £451bn. That sounds like a huge amount of money and it is. But this financial year revenues are projected to be lower at £447bn and the year after they are expected to slump to £427bn. That would be £70bn less in tax revenue than the Chancellor had expected in the Budget six months earlier. Tax to GDP would be below 34 per cent, the lowest since Labour got into office.

So we have this strange spectacle of a supposedly high-tax government being actually one that simply does not seem able to raise the money. Go beyond to 2013/14 and revenues are expected to recover – they are supposed to reach more than £700bn then. But we don't know for sure that that will happen. What we do know is that on present, and arguably over-optimistic, plans we will double the national debt, something that has never happened before in peacetime.

This is something the next government will have to confront head on. It is not politics; it is mathematics. The top level of tax take in the UK seems to be around 36 per cent of GDP. Labour has never managed to nudge above that level for more than a year. Again and again it overestimated tax revenue even though growth came in on target. You can add all sorts of new taxes but the money simply does not seem to come in. The Institute for Fiscal Studies reckons that the proposed 45 per cent top tax rate will bring in no additional revenue at all.

I am afraid the underlying fiscal position will get worse irrespective of whatever happens during this economic cycle. There is the cyclical issue of to what extent it is safe or effective to try to borrow more to nudge the economy through the worst of the downturn. That on the surface is the subject of the present clash between the two parties. I realise that this is important politically but in economic terms it is not at all clear whether increasing borrowing really gives the boost it is expected to. It ought to help a bit but the evidence is mixed.

The even greater problem is not the cyclical deficit but the structural one: the fact that we cannot raise enough tax to support a public sector of the size we have now got. The problem will get worse because demand on the public purse will rise as pensions and interest rate payments grow. And once our workforce starts to shrink, as has started to happen in Germany, revenues will almost inevitably start to shrink too. You can see why Angela Merkel is so resistant to trying to borrow more to nudge Germany through the downturn.

To tackle the structural problem one or more of three things has to happen. One is to find some way of increasing the tax take so that the Revenue collects more than 36 per cent of GDP. A second is to shrink the public sector, maybe in part by forcing more efficiency on it but by having real cuts too. And a third is to find ways of charging people directly for public sector services. This is a vital political debate that will go on long beyond the next election. It will go on for a generation, for the bills we are now running up will have to be paid by our children and indeed their children too. Of course what happens in the next two years matters but we really should not be arguing about the odd £20bn of extra borrowing during this time.

Or rather, sure, let's argue about that, but let's use what is, I am afraid, a fiscal catastrophe to trigger a measured and honest debate about what kind of public sector we want and are willing to pay for. And that debate has to acknowledge the interests of the next generation, not just this rather greedy one.

h.mcrae@independent.co.uk

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Perhaps if a few of the expensive super projects were dropped;

The Olympics are unneeded - would it matter if we dropped them due to near bankruptcy and told the Olympic Committe to go hang?,

ID cards (an expensive infringement of civil liberties in their current form),

The Iraq War (do you know how much it costs to fire a single missile? Withdraw the troops from Afghanistan and Iraq; I don't care whose mess it was - arguably the brutal mass murder Saddams to be frank - I don't want my children to be paying for Blairs lies),

Massive cut backs on the corrupt development aid scams (why are we giving India a penny for development? They have their own Space program - any govt that can afford space flight & nuclear arms should be diverting funds to the poor if they need it). Most aid to Africa and other countries ends up in arms sales or private swiss accounts; untargeted aid simply supplies dictators with guns whilst leaving the poor behind as always.

Posted by Chris FP | 10.12.08, 17:16 GMT

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I agree that any economic forecast that anyone makes at the moment is worthless. We just fell off a cliff in the dark and don't know how far it is to the bottom. Trying to estimate the hospital bill on the way down isn't particularly useful.

Rather than arguing about made up numbers, I would prefer to see our politicians addressing first of all how they will limit the damage. The obvious target for this is to get credit available to businesses as fast as possible. Then I would like to see them open up the debate as to how they will reform the financial (and political) system that brought us to this crisis.

Posted by Matthew | 10.12.08, 16:55 GMT

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"the bills we are now running up will have to be paid by our children..."

And the bills that have already been run up. The baby boomer generation borrowed from their parents generation to fund their early years, and from thier children to fund their later years.

I've just done the calculations on a student loan for a junior colleague. If interest payments and principal repayments are limited to 10% of his post tax income (as mine worked out when I was paying my loan off throughout my 20s) then it will take him 57 years to pay off his student loan. And that's before worrying about the private pension he will need.

Posted by James | 10.12.08, 12:05 GMT

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Sadly, the "fiscal stimulus" is a totem, not a considered policy. As is often the case with this government, it is there to outmanoeuvre the opposition rather than to deal with the fundamental problems. These are: excess private sector debt - which will lead inevitably to a higher savings ratio for households and cuts in employment and investment by firms; and a banking system which, for good reason, is reluctant to lend.

Fiscal stabilisers help the first problem, but do not solve it. But the incremental fiscal stimulus is puny relative to the required de-leveraging in the private sector.

Surely any fiscal stimulus could have been better directed, to assist the second problem. Or, better still, more resources could have been shifted from existing public spending to support lenders and creditors. Unfortunately, as the Council of Mortgage Lenders has said, the government's approach to the banks is incoherent - the banks are too useful as a whipping boy to allow a coherent policy.

Posted by Patrick | 10.12.08, 11:08 GMT

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Statistics in themselves are harmless sets of numbers it is the manipulation and misreading of them that have dramatic and unfavourable consequences. The banking crisis was driven by a statistical misrepresentation of risk, models built on sophisticated data manipulation under estimated risk leaving banks and the Globe facing years of losses. Statistics have lead us into a World where common sense plays second fiddle to mathematical calculations. Answers derived from models are delivered as certainties rather than expectations.
From a political perspective statistics are banded around and used as modern day swords. They are quoted as fact with no qualification or justification of what assumptions have been made. They are used to obfuscate rather than clarify, they mislead us and worse of all they are used to blandly justify poorly thought out decisions.
Now misrepresentation of statistics are going to lead us into a very deep financial hole. Let us hope commonsense will dig us out?

Posted by James C | 10.12.08, 10:18 GMT

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As ever Hamish goes to the heart. the issue as I see it is that we have not built for the future as with the environment.

We have to fundamentally chnage the way we live to move from consumption to construction.

Posted by m i brocks | 10.12.08, 09:56 GMT

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...this greedy generation! But surely it is for the benefit of the next generation that we now pump money into the economy - so there still is one for them to inherit. This neo tendency to moralize is so yawny: much wealth was created by the recent boom, and wealth is good as it lifts people out of poverty, which sucks.

Posted by tomt | 10.12.08, 09:49 GMT

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True, we have some difficult fiscal choices to make. But will they be the right ones?

As a nation we still try to pretend we are a Great Power. Why not ditch Trident? No more foreign wars like Iraq. The ID card scheme promises to be a hopeless and bureaucratic failure. We should cut our losses there.

And we should look at our whole tax and benefit system. Too many loopholes for the rich and unscrupulous. And at the other end, a system that actually encourages welfare dependency and the black economy.

A fairer tax system with a leaner, meaner public sector must emerge. We must debate our priorities.

But most important, we need to rebalance our economy. We've had two very damaging boom and bust cycles based on inflating assets prices against which we've borrowed to finance a consumer binge. This private debt hangover dwarfs anything in the public sector.

Quite simply, both public AND priavte sectors must change.

Posted by David | 10.12.08, 06:44 GMT

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There is water between the parties but less than their rhetoric would have us believe.
So should the Government borrow 8 per cent of GDP next year or 6.5 per cent?
And I read in the other paper 0% interest rate on the horizon as economy shrinks twice as fast. I thank this talk of horizon. Experts said that the economy would shrink by 1 per cent or more this winter as it emerged that British industry is contracting at the fastest pace since 1991. Alistair Darling’s hopes go bang out of the roof. We are broke and it will take us not just two years and 0 rate but all the cash from 1914 to 1999 to balance our balance sheet and remove the soft, I never understand this)assets.
Let us debate by all means but sensibly and not practice these on then streets.
I thank you
Firozali A. Mulla

Posted by Firozali A.Mulla | 10.12.08, 06:13 GMT

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So £70billion to find from somewhere. Coincidentally, about the same as ditching the Trident replacement and ID cards....

Posted by richard | 10.12.08, 01:41 GMT

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