Tuesday, 14 September 2010

What did you do after the war, daddy?


This plaque stands on a house in Pentre Gwyn in the Whitegate ward. The local council was rightly proud to have built 3,000 homes in the 13 years after the Second World War - a time of great hardship, of rationing, of rebuilding damaged infrastructure and dealing with returning soldiers and refugees.
Despite this, the council pressed ahead with an investment programme to improve housing for the people. At the time, the UK deficit was running at 200% and more of the UK's GDP. As the graph shows, the high level of government debt in those post-war years continued into the 1960s.



Today we're constantly bombarded with the notion that the UK deficit is historically high, that it's unsustainable and the Con-Dem government has to cut essential public services to balance the books. The truth is that the books haven't been balanced for the past 70 years, whether it's Labour or Tory running the show.
The millionaires running the UK government and their allies in the Tory newspapers are happy to spin this line because they won't be affected by reduced spending on schools, health, housing, social services and other services we have taken for granted.
But what both central and local government understood in those crucial post-war years is that creating work, investing in public services and improving key sectors like housing are vital if we are to avoid a depression.
At all levels, the challenge now is to resist the Tory and Lib Dem spin calling for cuts, cuts, cuts and make a comprehensive argument for better use of public money to create jobs, improve the environment and renovate those houses that were built in the post-war era.

12 comments:

The Druid of Anglesey said...

I'm afraid that your grasp of both history and economics is shaky.

1. The chart you include shows National Debt as a percentage of GDP. As current GDP is some four times larger in real terms (adjusted for inflation etc) than 1945, although public debt may appear much smaller in terms of % of GDP the real value of the debt is very close to that in 1945.

To illustrate this point Nominal GDP in 1945 was £9,908 million (approx. £299,851 millions in 2005 pounds). This compares with 2009 GDP of £1,395,872 millions (or £1,264,646 millions in 2005 pounds). Accordingly:

1945 Debt 215% of GDP = £646,599 mil (2005£)
2009 Debt 44% of GDP = £558,847 mil (2005£)

I'm sure you will agree that having real debt almost approximating national debt after 6 years of world war is somewhat catastrophic.

2. The chart you show only relates to government debt. The reason Britain is in so much trouble is because our corporate and household debts are now so much larger than in 1945 too. Citigroup has estimated this total 'external debt' to be anything up to 400% of GDP.

3. Rebuilding after the War was supported by the vast sums (£3297 mil valued in 1951£) the UK received as part of the US Marshall Plan. The equivalent of that now would be an IMF loan.

4. To compound this problem government borrowing will now continue to rise in order to meet increased welfare payments. Also, it is by no means certain that there are no more structural economic shocks in the pipeline - therefore it is certainly prudent to cut back now in order to get our finances in better shape in anticipation of further economic troubles.

Plaid Gwersyllt said...

Now isn't it nice to have someone as respected as the Druid looking over our shoulder just like being back in school. Now who do we know in Ynys Mon who is an ex head and politician?

The Druid of Anglesey said...

Who do you know on Ynys Môn who is both an ex-head and politician? Whoever it is, its not me.

In the meantime, six of the best for you, Gwersyllt my boy!

Plaid Whitegate said...

Glad you understood the graph Druid - like all stats, it does what it says on the tin.
I'm sure you'll agree that the rebuilding necessary post 1945 was far more serious in terms of infrastructure and dealing with the many millions of displaced people across Europe. The achievements of that era - establishing the NHS, taking public control of mines and steel industry as well as the house building programme I outlined above - are notable given those privations. Today we don't have anything like the same social or economic deprivation and hardship.
Welfare payments will only rise if unemployment rises - can I suggest one way to avoid that is to avoid the savage cuts being implemented by the Tory/Lib Dem regime? Investing in growth will avoid that.

The Druid of Anglesey said...

Whitegate - here's a graph for you then from the very same ukpublicspending.co.uk:

http://www.ukpublicspending.co.uk/downchart_ukgs.php?year=1900_2010&state=UK&view=1&expand=&units=k&fy=2010&chart=G0-total&bar=0&stack=1&size=l&color=c&title=UK%20National%20Debt%20(2005%20sterling)

Its based on the same dataset you used but with all values adjusted to represent the real value in 2005 pounds. This paints a very different picture doesn't it?

Furthermore, just for your reference, the HM Treasury estimate of government debt in 2010 is £680 billion - which is actually larger than the £646 billion in 1945 (both figures adjusted for inflation).

To put it another way, Britain is now more indebted than it was after having experienced six years of World War. Can there be any clearer indication that "public spending got too big relative to the productive resources of the economy, by error” as former cabinet sec Andrew Turnbull admitted yesterday.

You say: "Welfare payments will only rise if unemployment rises - can I suggest one way to avoid that is to avoid the savage cuts being implemented by the Tory/Lib Dem regime? Investing in growth will avoid that."

The unfortunate facts are that if cuts are not made, the likely result is that there will have to be either higher taxes and/or higher interest rates, which will lead to a new round of private sector job losses - i.e. further turmoil in the wealth generating sector of the economy.

Plaid Whitegate said...

The most significant part of that dramatic growth in government debt in recent years has been due to the need for the public sector to bail out the banks and financial sector due to their catastrophic failures.
Yes, Brown had ramped up government debt prior to that but the banking crisis raised the problem to a whole new level.
What is interesting is the notion that the situation merits a slash and burn approach to the public sector while the bankers merrily continue to enjoy their bonuses and benefits.

The Druid of Anglesey said...

"The most significant part of that dramatic growth in government debt in recent years has been due to the need for the public sector to bail out the banks and financial sector due to their catastrophic failures."

Yes and no. Below are the amounts Gordon Brown borrowed each year from 2002 onwards (source: http://www.guardian.co.uk/news/datablog/2010/apr/22/uk-deficit-government-borrowing)

2002 - £19bn
2003 - £34bn
2004 - £36bn
2005 - £41bn
2006 - £30bn
2007 - £33bn
2008 - £61bn
2009 - £142bn

Yes, borrowing did need to rise significantly to bail out three UK banks, but as you can see Gordon Brown was already borrowing considerable amounts even before Northern Rock.

"What is interesting is the notion that the situation merits a slash and burn approach to the public sector while the bankers merrily continue to enjoy their bonuses and benefits."

I would agree with you that Banker's bonuses need to be reformed so as to align them with more long term indicators of success. However, in order to cut the government deficit and ultimately our national debt, sadly some cuts are necessary in the government's budget. Without that, as I have already said, there will have to be either higher taxes and/or higher interest rates, which will lead to a new round of private sector job losses - which would certainly lead to a double-dip recession. As a country we cannot afford any more retrenchment in the wealth producing sector.

Plaid Whitegate said...

I'm not going to defend Brown and trading stats is ultimately not going to prove anything, because you now accept that the banking crisis prompted the majority of UK Govt debt.
But the Tory spin doesn't add up. The same table you use above gives these figures for Tory borrowing:

1990 -3.8bn
1991 -8.1bn
1992 -40.1bn
1993 -40.5bn
1994 -45.9bn
1995 -38,6bn
1996 -29.2bn
1997 -15.5bn

That was to deal with Black Wednesday and the run on the pound but the level of debt is alarmingly Brownian don't you think?

The Druid of Anglesey said...

Whitegate - I have never denied that a large part of the borrowing was to cover the cost of baling out the banks. Whether that was the right course of action or not is a matter for another discussion.

You miss the point insomuch that the the borrowing figures for 1992 onwards were to deal with a specific crisis (i.e. Black Wednesday) and its knock on effects. Also note that the levels of borrowing begin to decline year on year from 94 onwards until the country was running a budget surplus from '98-2002 whilst Labour committed themselves to following Tory spending plans. Brown's borrowing from 2002 onwards were not to deal with any specific crisis - it was just a spending spree built on the hubris of a man who thought he had ended boom on bust. When the inevitable bust came and it became necessary to bail out the banks, we were as a country already over-leveraged and therefore have found ourselves in today's precarious position.

None of this affects what I have already written: ie. without cuts there will have to be either higher taxes and/or higher interest rates, which will lead to a new round of private sector job losses etc. This is the point you continually avoid addressing in pushing your "investment for growth" line.

Plaid Whitegate said...

I don't disagree with your analysis of Brown as a politician who did nothing to regulate the financial sector and created a boom based on a property bubble.
Where we disagree is on the need for public services (although, as you have seen, we will continue to criticise the fatcats in the NHS for example).
Much of the investment of the public sector is in private sector firms, a fact you seem to want to deny. If that dries up, then it will be the private sector that contracts as well as the public sector.
Under the present regime, the consequence of both will be mass unemployment, economic stagnation, increased welfare payments and a reduced tax take.
This has recent parallels - in the mid-1980s we had mass unemployment and it wasn't a pleasant experience. My concern is that we are heading for a similar time with youth unemployment in particular soaring because nobody is hiring.

The Druid of Anglesey said...

"Where we disagree is on the need for public services (although, as you have seen, we will continue to criticise the fatcats in the NHS for example)."

Where is the evidence that the public-sector is so unimprovably productive that any cuts in their budgets will result in a proportionate reduction in services or value for money? Why is it that public sector budgets rise year on year whilst at the same time the private sector yearly produces better spec'd products for lower prices?

"Much of the investment of the public sector is in private sector firms, a fact you seem to want to deny. If that dries up, then it will be the private sector that contracts as well as the public sector. "

This is what is known as a circular argument. The money to pay for these public sector contracts comes from taxation on private sector companies anyway. Any economy whereby more than 50% of economic activity is accounted for by the state (as is currently the case in the UK) has crossed a important boundary.

"Under the present regime, the consequence of both will be mass unemployment, economic stagnation, increased welfare payments and a reduced tax take."

To add some balance to this discussion, I recommend the following quote from Gabriel Roubini, a man widely recognised as having predicted the credit crunch and subsequent recession. Of course being right in the past does not guarantee he is right in the future, but I believe this quote gives a good overview of the policy dilemma:

Roubini: "The policy dilemma is that you are damned if you do and damned if you don't. You have large budget deficits, there has been a large monetisation of these deficits, near zero rates, Quantitative Easing. On one side if you exit too soon in terms of fiscal stimulus and the recovery is still too weak there is a risk that you fall back into recession and deflation. On the other side, if you don't want to make that mistake, you say "no, lets maintain this stimulus", then deficits and debt are becoming already large - 10% of GDP deficits in most advanced economies, public debt rising towards 100% plus in the next few years, therefore either you have a fiscal trainwreck down the line, or you monetise these debts and eventually youre going to have high inflation and high loan rates are going to begin and crowd out the recovery. So its an extremely delicate trade off in this debate between growth now and fiscal and monetary austerity now."

My personal belief, as I wrote in one of the comments above, is that it is highly likely that the credit crunch is possibly just the beginning and that there will be more global economic shocks to come. Therefore it is absolutely prudent to start putting the countries finances into better shape now - otherwise we will find ourselves in an similarly even more over-leveraged state when the next economic shock comes.

Plaid Whitegate said...

"Why is it that public sector budgets rise year on year whilst at the same time the private sector yearly produces better spec'd products for lower prices?"

Do you really think that the private sector (say the railway companies) are providing a better service for lower prices year on year?

our local NHS Trust is looking at 7% cuts in this year's budget and I suspect most public sector organisations are having budgets that do not keep up with inflation. The difference between them and the private sector is that many have a statutory duty to provide services whereas a private company does not.

A final point on your claim that private business pays all the tax. Last time I looked, I was paying income tax on my earnings, VAT on goods and duty on alcohol. I don't know the split between corporate tax and workers' tax, but I do know that many larger corporations avoid paying ANY tax in the UK (see this week's Private Eye for details of Vodaphone avoiding £6 billion tax)