March for What Alternative?

In my restless search for clarity about the Alternative for which so many people marched last weekend, I have sought to answer a couple of questions posed to me by a friend who wasn’t on the march but was sympathetic to it.

How much of the budget deficit was caused by (1) having to bail out the banks, and (2) Labour over-spending?

The short answers, I think, are:

(1) None of it, and (2) About a third of it, depending on how much you think Labour should have been spending (and taxing).

Bailing the banks didn’t cost us much because it is all capital. In exchange for taking over the risk of bank loan books, we got bank shares. When these come to be sold they will probably earn the Exchequer a profit. The Office for Budget Responsibility report (pdf) published with the Budget said that if we sold them now the taxpayer would suffer a loss of £1.6bn, but it expects them to be sold at a £3.4bn profit in time.

As for Labour over-spending (or under-taxing, depending), the deficit was 2.4% of GDP (public sector net borrowing, 2007-08, Budget 2009, pdf) before the crash and 11.1% afterwards (public sector net borrowing, 2009-10, Budget 2011, pdf). We should not have been running a deficit at all at the peak of the boom, from about 2002 onwards, under the original interpretation of Gordon Brown’s golden rule. Although it is notable that the Conservatives did not make this objection at the time.

If we make an assumption about what would have been prudent, let us say that we should have had a surplus of 1.5% before the crash (the highest recent surplus was 1.9% in 2000-01), the deficit would have been 7.2% in 2009-10 (not counting the cumulative savings on interest payments). That is one third lower than it turned out.

Previous posts in this series here and here.

Photograph: alternativeSE4

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