Why deciding if the deficit really has been halved depends on your political view

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January 5, 2015 by Paul Goldsmith

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The Conservatives ‘fired the starting gun’ on the election campaign last Friday by unveiling a poster. Under the slogan “Let’s stay on the road to a stronger economy” (and a picture of a road allegedly in Germany!) there were three signature achievements that the Conservatives wanted to trumpet. 1.75 million new jobs, 760,000 new businesses and the deficit halved.

The first two achievements can be questioned on the basis of what types of jobs they are in terms of pay and hours, and whether or not the businesses were formed by people who chose self-employment as no suitably paid jobs were available. The final achievement, has been accused of being a downright lie. It isn’t a lie, but it does show how even the simplest of sums can be subject to political manipulation.

The deficit, (the amount that government spending exceeds tax revenue) when the Conservative-led coalition took over in 2010 was £153 billion. Now it is £91 billion. On what is known as ‘cash’ terms, even at a cursory glance that doesn’t look like ‘halved’ to me, more like a cut of about 40%. The ‘halved’ figure was using the deficit as a percentage share of the country’s GDP (Gross Domestic Product, a measure of our yearly national income).

Under that measurement, when the Coalition took over the deficit around 10% of GDP, and now it is around 5%. Under that measure, it HAS been halved. The question is, which is the important measure of the cut in the deficit. Well, the answer to that, in the run up to this election, will depend on many peoples’ political leanings. This includes economists, many of whom have joined the queue to call the Tories liars over their claim to have halved the deficit. So, who is right?

Well, measuring deficit and debt as a percentage of GDP is important. Put simply, you can have a deficit of cash terms of £100bn and GDP of £200bn and that deficit would be catastrophic for a country. But a deficit that is 5% of GDP, which is what the UK’s is now, is not catastrophic (leaving aside that the Conservatives said they would get rid of it in this current Parliament). Gordon Brown’s ‘sustainable investment rule’ when he was Chancellor was to limit government debt to 40% of GDP. More importantly, when the EU created a ‘Stability and Growth’ pact in 1999 to give current members a target for stable economies to help the Euro work better and give applying members a target to ‘converge’ to, they used a target of deficits of 3% of GDP. So it is generally accepted that measuring deficits as a % of GDP is perfectly legitimate. David Cameron can also point out that although the deficit isn’t cut in cash terms the work that the Tories have done to grow the economy, even with spending cuts, has been done WITHOUT extra adding to the amount we borrow each year.

However, most of the voters are laypeople in economic terms. They may not fully understand the importance of using a measurement of % of GDP. The deficit is the difference between incoming money and outgoing money and what will matter to a layperson is that it hasn’t been halved, it has been cut by 40%. The Tories could have mentioned that on their poster, even in small print. To not have done so could be argued to be misleading and inaccurate.

As someone who does understand economics, I happen to think using a measurement of the deficit as a % of GDP IS legitimate. But many voters will not, and so the Conservatives need to be careful to be clear about the measurement they are using. They can’t help that those whose views differ politically WILL use the one figure, and those who support them will use the other figure, but they can make sure that ordinary voters know what they are talking about.

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