Written by Mark Kirby –
The Tories are trying to claim credit for getting the deficit down to £25.5bn this year. Given they were going to eliminate the deficit by 2015 and failed to do so and now predict the deficit in 2023 will still be £19.8bn we may be realising their claims are not worth a jot.
But more than that, it is their actions that have caused these deficits. Their actions have increased inequality (Gini up from 0.284 in 1984 to 0.326 in 2015) and the OECD points out that as a result the UK economy only grew by 40% instead of 50% up to 2010. This lost 10 percentage points are worth approx. £116bn by 2010. These economic pressures led to calls for cuts.
But cutting government spending (as austerity did) has a knock on effect on the economy as people and companies have less to spend. This multiplies the original effect. George Osborne and the OBR implicitly estimated that these knock-on effects were a multiplier of 0.50 meaning a cut in govt spending of £1 would reduce the economy by £0.50. Unfortunately, the IMF showed these estimates were totally wrong and massively underestimated the effect. Instead of a multiplier of 0.50, they show it was in fact between 0.9 and 1.7. This means cutting spending by £1 would reduce the overall economy by between £0.90 and £1.70. Clearly this is much more serious. TUC estimates using a middle figure of 1.3 show that by 2015 the effect on the economy is to reduce it by £76bn more than the OBR (with its 0.5 figure) estimates.
If we combine these two figures together we see that increasing inequality (£116bn) and underestimating the effect of austerity (£76bn) means that by 2015 the economy was at least £192bn, a sum that is almost 10x the amount still estimated to be the deficit by 2023.This shows that without Tory inequality and austerity we would have eliminated any deficit long ago. The continuing existence of a deficit is the painful legacy of these policies.