To no great surprise, David Cameron has announced an immediate audit of the ‘crazy’ spending of Labour’s last years in power. Politically, this no doubt makes great sense – “look what those idiots got up to” is perfect scene-setting for the blood-letting that will follow. But what worries me is what sort of a narrative this tells of the crisis that has gone before – and how such a narrative restricts our future scope for action.
I’m rushing, so I’ll explain. Look what Paul Krugman has found in the latest IMF report into the sovereign fiscal crises worldwide. You will notice that it agrees with endless repeated polemics I launch on my slightly smaller blog:
what the report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren’t there before. So spending cuts and tax increases loom.
No arguments so far.
where are those structural deficits coming from? It’s not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: the report shows that discretionary spending increases are a minor cause of rising deficits even in the crisis, and these increases will be reversed as stimulus winds down.
As I argue repeatedly, above all in A Balancing Act (see the pie chart), the revenue collapse was what finally revealed our massive deficits, the deficits that will characterise this premiership of David Cameron, and every subsequent premiership he might have.*
Why does all this matter? Is it not just a matter for historians in what order things happened? We are where we are: laden with debts and deficits. Get over it, I hear you call.
But it does matter because the stories we tell of the past influence our future behaviour. Consider the following crude account of how things happened:
- We were going along nicely while the banks gambled madly
- They made the economy collapse.
- Governments responded by spending masses of money on two things. Hundreds of billions on the banks (just read Peston)
- And then this daffy thing called ‘Keynesianism’ encouraged that spendthrift Brown to go nuts with public money
- Despite all this the economy has tanked by 6%, and is not growing well. And we have a massive debt
Reading this, what would you conclude? Well, that saving the banks and doing the Keynesian ‘splurge’ certainly left us with a debt, but only possibly helped the economy. Next time, if we went badly into recession again, we should on no account repeat the same measures.
Which would be a terrible mistake. The truth is that we did very little Keynesian spending indeed. The government’s spending** did not rise very much (check out any economic reports). The deficits happened because its ability to raise money was muellered by the collapse of the asset bubbles that fed it. The states that were best able to do the Keynesian spending appear to have had faster recoveries.
I am not sure that I agree with Krugman in thinking this proves we need more spending, now; at some point, the risks of a sudden stop from the bond market just outweigh the benefit. But we should be very careful that we don’t tell ourselves the wrong stories about the recent past. We have a truly horrible fiscal situation. Yes, cut the pay of highpaid civil servants. But it was not the Labour government going crazy with Sir Humphrey that got us in this mess. It was a collapse in nominal GDP, and revenues that are far too geared to an asset bubble. Let’s get on with fixing that.
*amusingly, my working title for that piece was ‘The Cameron Inheritance’. I was told off for begging the question – but they were 15% ahead in the polls. Oh, how right the critics were …
**by which I mean its CONSUMPTION. Look at the supplementary documents in the pre budget reports (table 1.12)
the figures for 2009 rose by just £20bn.