Wednesday, 6 April 2011
The difference between a debt and a deficit
It's fairly well established now in the public mind that 'there's a massive debt, we've maxed out the credit card, we've got to cut back'. And there is a little bit of truth in that. However, it's a totally mishapen grain of truth in a sea of a familiar effluent - muddled thinking, poor comparisons, nonsensical imagery and above all similes that make no sense at all.
For one thing, the Government is able to justify cutting so quickly because it's taking advantage of public guilt and fear over household debt - a potent and a toxic threat to both efficient economic policy and equality, as Danny Dorling has pointed out in his most recent book Injustice: Why Inequalities Persist. In short, the most recent transfers of wealth from the poorest to the richest have partly been facilitated by lending to individuals who're not able to bear even the payments on their debt.
But as I've pointed out again and again, states - especially the British state - are nothing like households. For one thing, they are exceedingly unlikely to go bust. There was, in the UK case, a vanishingly unlikely threat of a default or even of a sovereign debt crisis. I was at a conference with Jim Tomlinson, Professor of Economic History at Dundee, the other day. He made the very good point that while recessions are technically defined and observable, 'crises' are political constructs that are for the most part given shape and meaning by self-interested politicians. 'Never let a good crisis go to waste', Rahm Emanuel, one of Barack Obama's key advisers, once said. The Coalition is taking this advice to heart - just as New Labour swallowed 'it's the economy, stupid', in its entirety.
Anyway. The reason Britain never looked likely to have a soverign debt crisis - or really that government debt would put pressure on interest rates - is down to the difference between a debt and a deficit.
Gordon Brown as Chancellor spent the first years of his reign at No. 11 paying off debt - which he then let rise from about 2003. Even so, it had reached only in the low 40s as a percentage of Gross National Product by the start of our present financial crisis in 2007. That's why the stock of total British national sovereign debt is so low - not so high.
Its the deficit that's high This is the difference between state income and outgoings every year. And this has been at a peacetime high over the last year or so - though it's not peaked as high as everyone feared, and it would now be on a downward track whoever won the 2010 General Election.
But the balance on your credit card - the image that the Government invokes again and again - is a debt, not a deficit. Your personal deficit every month is what adds to it, and what puts you in danger of losing your home and your ability to borrow. The British Government was never really subject to that constraint - though the American federal government might be, and the Portuguese, Irish and Spanish states certainly are.
Want to know what to do? Look at the problem in front of you. Don't use a dodgy comparison.