The deficit & the IFS: a black hole between a rock and a hard place?

• Topics: Public Debt, UK

Anyone familiar with the austerity obsession of EU leaders will know that the boundary between fiscal virtue and profligate sin lies at minus 3%.  A budget balance below the ominous minus 3 sends the offending government to the fiscal headmasters of the European Commission, who enforce the dreaded “excessive deficit procedure”.  Demonstrably absurd, dysfunctional and a major explanation of the long delayed and tepid recovery of the euro zone (see our report), the 3% austerity solution is too lenient by half for the Institute for Fiscal Studies (literally, numbers in charts below).

In its latest true-to-form report, “Between a rock and a hard place”, the IFS discovers to its horror that the Tory Chancellor badly missed his borrowing target and is unlikely to balance the central government’s budget.  Apparently gobsmacked by the report, the Guardian reproduced many of the IFS charts, sounding the alarm of a “new budget black hole”, its default moniker for a fiscal deficit (a singularly misleading cosmological metaphor as a trip to the NASA website shows).

An inspection of British government statistics suggests that for all the fiscal high crimes and misdemeanours over the last seven years, the Tory Chancellor is not “between a rock and a hard place” with government finances.  The chart below shows annualized borrowing over twenty years by month (ie., the moving sum of twelve months borrowing).

After an almost continuous monthly decline over the last three years, public borrowing, both for the central government and all governments (Maastricht measure), has fallen to about the level just prior to the Great Financial Crisis of 2008.  Adjusting for inflation over those twenty years annual borrowing would show a substantial reduction compared to 2007-2008.

Annualized Public Sector Borrowing, Sept 1997 – Sept 2017, billions

The second chart, the budget balance as share of GDP, reinforces the conclusion that the Chancellor rests not between a rock and a hard place, but in a considerably softer location (fiscally speaking).  At the end of this September the annual equivalent fiscal deficit as a portion of GDP fell to less than 2%, its lowest level since the last quarter of 2002.  It may not matter for very long, but the British general government deficit (Maastricht measure) is well below the 3% requirement, and lower than for almost half of the other 27 EU member governments.

Mr Hammond’s fiscal transgressions derive from the same source as the IFS’s balanced budget fantasies.  The transgression against sound fiscal policy, commonsense and the welfare of the population arises because he and his predecessor George Osborne sought and seek to do what the IFS urges and the Guardian seems to endorse, to balance the fiscal books.

Quarterly Public Sector Borrowing, 1998Q1 – 2017Q3, billions

The roughly continuous and extremely slow decline in public borrowing is the by-product of an ideological project consciously planned and implemented by Conservative politicians since May 2010.  This project was and is to shrink the public sector, and, in doing so, destroy the welfare state. 

Complimentary ideological is the propaganda from the Institute for Fiscal Studies.  Without explaining why a balanced budget is either necessary or desirable, the IFS provides apparently independent endorsement of public sector downsizing.  While the IFS report mentions tax increases as an “option” for achieving the unnecessary and reactionary goal of a balanced budget, the language used betrays an ideological preference for expenditure cuts (see “Policy Options for the Budget”).  Expenditures are stigmatized as “giveaways” and tax increases as “takeaways”.  The specific policy suggestions call for further cuts (see discussion of working age benefits).

While the Daily Mail may ignore or excuse the deficits of Conservative governments, not so for the neoliberals of the right and centre.  These fiscal reactionaries play a long game and organizations such as the IFS are key utensils in that game.  Consistently preaching the necessity of balanced budgets lays the basis for political attack on a future Labour government.  The inevitable IFS attacks on a Labour Chancellor for unsound fiscal policy would seem all the more credible and non-ideological after critiquing Mr Hammond for the same sins.

Indeed, this last summer in the run-up to the general election the IFS deputy director heaped ridicule on the Labour Manifesto, accusing it of “pretending that everything can be paid for”.  Most of the Guardian economics writers have little patience with the balanced budget mythology.  In contrast, those who edit and write the news section faithfully transmit the propaganda generated by the Institute for Fiscal Studies in its reports and policy briefings, enhancing that ideology with emotive phases such as “black holes”.

Herein lies a lesson for progressives.  Conservative Chancellors have not met the targets they set for deficit reduction.  It is quite possible that they never intended to meet them.  As long as the Treasury failed to achieve its targets, it could argue for continued austerity – further destruction of the public sector.

The lesson is that no progressive, especially no progressive politician, should ever criticize Tory Chancellors for failing to meet budget targets.  Doing so is a de facto acceptance that the target should have been achieved.  That is endorsement of the core lie of the austerity doctrine.