Want to reduce the public debt? Then grow the economy, stupid!

Good news from the Office for National Statistics; the first significant reduction in government borrowing since the start of the financial crisis. Borrowing in July 2010 was £3.8bn compared to £6.1bn this time last year.

So how has that happened? Has the government’s austerity package started to work already?

No, don’t be silly! No-one has made any significant cuts yet; they’ve just talked about it a lot. In fact, public spending rose by 5.7% in July 2010 compared to the same time last year.

So how did borrowing fall by so much then? Simples! Tax receipts have jumped by 10.5%. Even our sluggish recovery has increased the tax take, thereby reducing the monthly deficit.

Despite what the government would like us to believe, the most significant single cause of the soaring public deficit was not an increase in public spending but the catastrophic collapse of the UK’s tax revenues. It is therefore reasonable to assume that the most effective way to reduce the deficit would be to increase those tax revenues and try to get them back towards where they were in 2007.

The only way to increase tax revenues is through economic growth and, as this month’s statistics show, even a little growth goes quite a long way.

None of this is to say that we don’t need to cut public spending. As I said in yesterday’s post, there is a medium term imperative to reform public services provision and reduce its overall cost. But if we want to reduce our deficit quickly and start paying off our accumulated public debt, growing the economy and increasing the tax take is a more effective way to do it than cutting public spending.

Update: On a similar theme, here is the Independent’s Mary Anne Sieghart and some leading economists at a Bank of England conference.

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10 Responses to Want to reduce the public debt? Then grow the economy, stupid!

  1. Pingback: Want to reduce the public debt? Then grow the economy, stupid! - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. CharlieMcMenamin says:

    “The only way to increase tax revenues is through economic growth”?

    Well, there is the far from insignificant matter of cracking down on tax evasion and avoidance as well. Richard Murphy thinks evasion alone amounts to £70bn p.a.

  3. Richard J says:

    HMRC estimates it at £40bn, of which just over a tenth comes from avoidance. . To say Richard Murphy’s methodology is erratic is a bit of an understatement. (Stripping aside the rhetoric, the demolition of his work at http://www.fcablog.org.uk is fairly convincing.)

    Click to access measuring-tax-gaps.pdf

  4. CharlieMcMenamin says:

    It’s a brave non-accountant who stands in the way when accountants are arguing the toss, and I must confess my ignorance of the technical points involved. But I don’t think that the personal bile towards Murphy which comes off that fca blog gives me great confidence that they’re approaching this in an entirely disinterested way. (Though I also recall Orwell’s basic rule: just because it’s in the Daily Telegraph doesn’t mean its wrong).

    In any event, even on HMRC figures, I think my original point stands: one way of increasing tax revenues is to crack down on evasion and avoidance.

  5. Steve Hemingway says:

    ‘To grow’ is an intransitive word. You don’t grow a tree – it grows itself. It’s the same with the economy: producers produce and consumers consume. The economy will grow when more of this production stuff happens. This happens when individual businesses actively decide that they can afford to increase production because consumers are ready to consume it. It is a Brownian-cum-Maoist delusion that without a great helmsman steering the economy it will run into the rocks.

  6. Cian says:

    Indeed, much like a field of wheat grows itself… Oh hang on. Not that many people are likely to take somebody seriously who accuses Brown of being a Maoist.

  7. Rick says:

    Charlie – I agree that cracking down on tax avoidance is desirable and the government needs to do more but I doubt that we’d get enough back to get us out of the fiscal hole we are in. It would be great if we could track down all the tax avoiders and close all the loopholes but that is almost certainly a pipe-dream. It’s a bit like saying ‘wouldn’t it be good if we could eliminate crime?’ – it would but we’re unlikley to be able to do so. Government would be much cheaper if everyone behaved themselves but unfortunately they don’t.

  8. CharlieMcMenamin says:

    Yes, of course, there are limits to how far any crack down on tax evasion and avoidance would be successful: but wouldn’t it be nice to discover those limits by having a properly funded attempt at pursuing that objective?

    Some people refer to a ‘Wimbledonisation’ process in the City of London since the mid 1980s Big Bang. By this they mean Britain plays host to world changing (financial) ‘games’ but rarely has a competitor who can seriously compete.

    So why does all this American/oil producer/BRIC loose money come here? Because the regulatory oversight – including the tax burden, once all those conveniently accessible offshore arrangements are taken into account – is noticeably less severe than on Wall St….

    The City is central to the UK economy and tax evasion and avoidance is central to the City.

  9. Rick says:

    Steve – yes, that’s true but I could get that nuance into a snappy blog headline. To follow your analogy, trees only grow themselves if they have enough water and nutrition in the soil. The danger in the government’s proposals is that they will starve the plant of water before it gets chance to grow itself.

    As for steering the economy, every government does that to an extent – albeit with different emphases. There is nothing Brownian or even Maoist about the view that taking money out of the economy too soon is extremely risky. Even the ratings agencies have expressed concern about the UK cutting too much too soon.

  10. Cian says:

    London is essentially a centre for offshore capital, which might be why Britain has never tried terribly hard to crack down on it. Given that quite a few off shore centres are British protectorates, or part of the UK, we could certainly do more. In Europe, for example, it has mostly been France and Germany pushing for tighter controls and Britain has been fairly resistant. Now the current government are cutting back on the part of the Inland revenue that investigates tax avoidance, suggesting where their priorities lie. And no you can never eliminate cheating, but you can certainly make it a lot less attractive.

    If the G8 countries acted in unison, it would be pretty trivial for them to make off-shore financial centers irrelevant.

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