The Tory Chancellor who made the right call on the deficit

Jonathan Portes

article 2099885 00F193F000000191 66 468x545 257x300 The Tory Chancellor who made the right call on the deficitTwo years ago, the coalition set out its programme for government. Today, the Prime Minister and Deputy Prime Minister reaffirm their commitment to the central element of that programme – cutting the deficit quickly.  This is despite the dismal results this strategy has delivered, despite the fact that even the IMF is arguing that there are more sensible alternatives, and despite the growing realisation in the eurozone that austerity is a dead end.

But, particularly in the light of the Governor of the Bank of England’s comment that the government’s approach was a “textbook response to the situation”, it is worth looking back and considering what the new government’s options were and whether there was, in fact, no alternative.

After the election, it was clear that the recession had left a massive hole in the government’s finances.  Ultimately the books needed to be balanced; spending would have to be cut, and taxes increased.  The question was timing: cut the deficit quickly, or wait until growth was reasonably strong again. Both David Cameron and I, from our very different perspectives within government, understood this.  But ultimately the decision was the Chancellor’s.

Fortunately, he made the right call.  And the result was solid, sustained and healthy growth. As he said in his Budget Speech:

“In doing so, I have had to balance two key objectives : first, the essential task of helping recovery; secondly, the need to tackle the deficit so that the recovery will be sustained. I believe that my proposals today strike that right balance. In the year ahead their effect will be broadly neutral, thus allowing the recovery to take hold. However, for subsequent years, as the economy strengthens, my proposals are designed to build in a wedge of steadily rising revenue.”

OK, by now you will have twigged I wasn’t talking about 2010.  The quote is from Norman Lamont’s Budget Speech in 1993.  David Cameron and I were both 26; I had been Lamont’s speechwriter (a civil service position) through and after the election, although I’d left his office by the time of the budget.  Cameron was still his Special Advisor.

The 1993 Budget famously raised taxes (both National Insurance and VAT) to accompany previously announced tight restrictions on public spending. But neither kicked in immediately. The deficit actually rose in 1993-94, and, according to the Treasury, so did the cyclically adjusted current deficit (the structural deficit that the government currently targets). So there wasn’t any fiscal tightening at all.  Only in 1994-95 did the deficits, both structural and headline, begin to come down.  By the time spending cuts and tax increases actually began to kick in, the recovery was firmly established; growth in 1994-95 was close to 4 percent. As the chart below clearly shows, fiscal consolidation followed recovery; it did not cause it.

90s recession21 1024x584 The Tory Chancellor who made the right call on the deficit

Fast forward to 2010.  In the Chancellor’s “emergency” Budget, he committed himself to the precise opposite of this approach.  Deficit reduction was a precondition for growth, not something to be achieved after recovery had been secured:

“Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice. The crisis in the Eurozone shows that unless we deal with our debts there will be no growth.  And these forecasts demonstrate that a credible plan to cut our budget deficit goes hand in hand with a steady and sustained economic recovery, with low inflation and falling unemployment.”

So he announced what he described as an “accelerated reduction in the structural deficit” – aiming to reduce it by more than 2 percent of GDP between 2009-10 and 2011-12 .  Of course the forecasts turned out not to “demonstrate the credibility” of Mr Osborne’s plan, but rather the reverse – unlike Mr Lamont’s, which turned out to be very much on the cautious side.

Two very different approaches. Two very different results.  But hardly surprising, to anyone who remembered even the basics of undergraduate macroeconomics.  There is a simple, absolutely standard prescription for dealing with an unsustainable deficit resulting from a recession.  It is the following. Announce, and commit clearly to, tax and spending measures to deal with the deficit.  But ensure implementation follows recovery, not precedes it.  This is the “textbook response” that Mervyn King should have commended to the Chancellor.

If done right, such an approach will ensure fiscal credibility, maintain confidence, and allow businesses and households to plan, without committing the elementary error of reducing demand when the economy needs it most.  The 1992-97 Conservative government followed this prescription to the letter – and it worked.  Pity about this one.

Jonathan Portes is director of  the National Institute of Economic and Social Research
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  • itsafunnyoldworldsaint

    This is a simplistic analysis based on completely different scenarios.
    In 1993 the current account defict was shrinking with every hope of genuine wealth creation growth, rather than the misleading GDP figures that merely measure money changing hands. The chart above shows that a Keynesian response was possible due to not having spent the last 13 years abusing the idea. That is, the deficit was 1% of GDP.
    Fast forward to 2010 and you have a defict (and nothing to do with bank bailouts by the way) of 11.5% of GDP. And it had been strongly negative, of the order of 3%, since 2003 despite strong growth that should have put it at least in balance.
    Furthermore the current account defict had been strongly negative since 1997 with no prospect of wealth creation (export led) growth. That defict was merely financing imports.
    Brown had shown no competence in managing the economy, someone needed to show they were not as incompetent. The only prospect of ‘growth’ was by what had become the norm – debt in a Ponzi spiral.
    And by the way, this is not a recession. It is a paradigm shift as the post-Bretton Woods world of fiat money fuelling consumption in societies that cannot create wealth but are happy to consume it (like the UK) comes to a shuddering halt. 

  • David Scheiner

    What on earth is that supposed to mean????

  • David Scheiner

    Of course the Chancellor’s budget was bound to fail. The diagnosis on which it rested was a lie. Labour’s spending didn’t cause the fiscal crisis, the crisis here was the result of the same forces that caused deficits to spike in the rest of Europe, the United States and elsewhere: the financial collapse and the bailouts that followed and rescued the world from a much worse crisis. David Cameron took advantage of people’s short attention spans and got them to focus on the deficit and then diagnosed excessive spending as the cause. Now he cut spending and we can all see the results.

  • Kugelschreiber


    You have a point, but creative new language can be quite fun and even sometimes also illustrative.  

    But let’s not get carried away and add new expressions TOO quickly, these things need to be done very slowly,  a step at a time, giving people a chance to learn them.

  • Ian C. Purdie – Sydney

    I assume the usual un-constructive criticism without offering alternative solutions.

  • HJ777

    Then why was our deficit so much bigger than those in other countries?

    The figures clearly show that a combination of the deficit the government was running before the crisis (when tax revenues were booming) plus spending increases thereafter constitute a majority of the deficit.

    The current government has not cut spending – it has increased in real terms as well as cash terms. So far, all that it has done is reduce the rate of increase.

  • timberanddamp

    If we keep on fishing from the same pond, the same results are inevitable, the consistent pedigree of all of these chancellors, and governments, is the same, with their only intentions being that, of duplicity, and of duality, with their long term loyalties and their future obligations to their retained and eventual paymasters, this attitude far exceeds their temporary roles whilst in public office, Lamont”s original background and loyalties stayed consistent after he gave up public office, he returned to whence he came, the same as Healey, Brown, and every other chancellor who came up through this process, they just finished up standing in the corner, discredited ex public schoolboys, leaving the task of clearing up their mess to someone else, the levers of power are only passed on, by the men in grey suits, who permanently pull these levers of power whosoever is in government at the time, and this never significantly changes for the good of the majority of the people, they change their branding, (New Labour) and then become worse than the people they replace, maybe it will take another storming of the Bastille, or the overthrow of the Czar, or some similar type of occurrences to make these people at the helm, change their direction, if this previous challenge to the old order took place in an era of the unenlightened masses, then it certainly can take place in the era of swapped intelligence, and global communications, there’s only so many times that you can go too the well, the internet has eliminated border controls and the limitation of worldwide governments, of limited shared intelligence, the world has now become an international gold fish bowl, which eliminates to a degree these previous secreted procedures of deception, so as to keep the masses ignorant, too ask the people in general to pay the price of corrupt political horse trading while they were in office, and against the majority of people who have been mislead, and who have been victimized by a small amount of consistent unaffected beneficiaries at the top, to pay for those indiscretions, by the poor, and disenfranchised people at the bottom is a formula for anarchy, there must be charges, and disclosure of these practices together with any austerity plans, otherwise this will become a too bitter pill to swallow on the road to recovery, it will also be unacceptable this time that the greed, and selfishness, of the institutions and the people administrating those procedures that brought this up to date collapse, and recession about, are still profiting from those disastrous decisions, and are still in the main in place to do it all over again, when they decide the time is right to re-enter the arena, as Ernest Hemingway said, ” Do not ask for whom the bell tolls, it tolls for Thee”

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