The big news of the day for econo-geeks is the letter from the Head of the Office of Budget Responsibility to Cameron, rebuking him for his false assertions over the impact of austerity on growth.
In the longer term, though, I don’t think will be the most signficant lie in Cameron’s speech. I think this will be:
This deficit didn’t suddenly appear purely as a result of the global financial crisis. It was driven by persistent, reckless and completely unaffordable government spending and borrowing over many years. By 2008, we already had a structural deficit of more than 7 per cent – the biggest in the G7.
No source is given for this 7% assertion, but as far as I can tell* it comes from the 2012 IFS Green Budget which says:
Our estimates, based on the OBR’s latest official forecasts, suggest that the apparent ‘hole’ in the UK’s public finances that has opened up since the March 2008 Budget – that is, the additional structural borrowing that is now forecast to persist in the medium term, over and above what was forecast in the March 2008 Budget – equates to 7.5% of national income (or £114 billion in today’s terms) (p.51).
This does not, of course, say what Cameron appears to be claiming. In fact, we get the actual estimated structural deficit figures for 2007/08 further down the same page:
In 2007–08, total PSNB stood at 2.4% of national income. Since, at the time, the Treasury thought that the UK economy was operating slightly above its productive potential, underlying structural borrowing was estimated to be a slightly higher 2.6% of national income. The larger output gap** now estimated by the OBR implies that structural borrowing in 2007–08 in fact stood at around 3.5% of national income [my emphasis].
The reason I think this apparent lie is more important than the one about the austerity effect is that it looks like it’s going to be the main one used to beat Labour with. As the next election approaches the Conservatives will realise they are unable to defend their own record on the economy, and will need to rely on the “mess Labour left us in” narrative which served them well early on.
The general ’worst in the G7′ structural deficit accusation is not entirely new – it dates back at least to the ‘emergency budget’ in 2010 ( see p.8, although no figure is given there, just a reference to an OECD report, in which I’ve been unable to find the assertion backed up). However, it has not been used again until recently, and this firming up of a (false) figure appears to be a conscious attempt to resurrect it. Further, the 7% figure is important because it allows the Conervatives to claim it is the highest since the war, whereas in fact the IFS report makes clear that it was higher twice under the Major government:
A structural deficit of 3.5% of national income in 2007–08 would have been the highest level since 1995–96 (when it stood at 3.8% of national income) but still far below its previous peak of 5.5% of national income in 1992–93.
In any event, I expect to see the 7% structural deficit line to be trotted out regularly by the Tories, including by Cameron at PMQs, over the coming months. I hope Labour will be alert enough to call them out on the spot, referring to the actual figures set out in the IFS report.
* I suspect the 7% figure comes from here because it was trailed at the weekend (possibly by mistake) in a tweet from the Conservatives’ press office:
Terrible banking was cause of banking crisis. Before that happened, the UK under Labour, was running deficit of over 5% of GDP.
When challenged on this statement, which is clearly untrue, the following clarification was given:
@citizenandreas check the Most recent IFS report on structural deficit when banking crisis hit.
** It’s also worth pointing out that measuring the output gap is a very unexact science. The figures used in the IFS report are based on OBR work, which in turn depends on a wide variety of source information to try to calculate ”the difference between the current level of activity in the economy and the potential level it could sustain while keeping inflation stable in the long term”. These sources include , for example, British Chamber of Commerce surveys of recruitment difficulties in firms. While the OBR report says that the historical analyses “appear to give a plausible representation of UK business cycle history and remain close to the range of alternative estimates”, it also notes that “[a]ny output gap estimate remains uncertain, even when it relates to the past. Similarly the estimates presented in this paper are subject to significant uncertainty and remain work-in-progress.” With these caveats, the OBR report finds that a structural deficit of 3.5% in 2008, pre-crisis, compared with the 2.6% on which the Treasury was basing its projections.
