If you’re active politically, you’ll probably get sent this article today, from The Huffington Post. Ramesh Patel describes himself as
Economist, worked in media and the financial sector
Which means he studied economics at university and has worked in the financial sector. It doesn’t mean he’s got any understanding of macro-economics. His more detailed bio is as follows.
Ramesh Patel worked in finance from investments adviser with JMC Finacial Assets, to comodities brokers in metal and currencies with Capital Assets. As well as a CEO for Proactive Internet Marketing and Brown Pound Publishing. Current working on a book on the UK deficit Myth and the real agender from the right and left.
*Agenda* *Commodities* *Financial*. 3 Spelling mistakes in his Huffington Post BIO! How embarrassing Which means he’s barely literate, and I won’t be buying his book. Anyway, enough of playing the man, let’s get back to his article and play the ball. I’ll fisk it so you don’t have to. Basically it’s a badly spelled rehash of Labour’s claim that the UK public finances are OK because our stock of public debt is low by international standards.
CLAIM 1 The last government left the biggest debt in the developed world.
After continuously stating the UK had the biggest debt in the world George Osborne admits to the Treasury Select Committee that he did not know the UK had the lowest debt in the G7? Watch: Also, confirmed by the OECD Those who use cash terms (instead of percentages) do so to scare, mislead and give half the story.
No-one credible is claiming that. True, politicians do have an unfortunate tendency to use “debt” and “deficit” interchangably, when it suits their purposes. Ed Balls is at least as guilty as Cameron and Osborne. The UK’s debt is fine. The problem is that we are accruing debt faster than any country in the developed world and will almost certainly overtake Germany and possibly France before the crisis is resolved.
Finally, Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% – a near 22% reduction page 6 ONS Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?
These figures are simply wrong, and completely ignore context. In 1997, debt was, yes 42% and FALLING FAST the UK having come out of the recession of the mid 90’s, reaching 35% or so at which point Gordon Brown ABANDONED TORY SPENDING PLANS. IN 2008, the stock of debt was RISING despite there having been 16 years of uninterrupted growth.
CLAIM 2 Labour created the biggest deficit in the developed world by overspending.
Firstly, the much banded about 2010 deficit of over 11% is false. This is the PSNB (total borrowings) and not the actual budget deficit which was -7.7% – OBR Economic and Fiscal Outlook March 2012 page 19 table 1.2
It’s difficult to untangle the syntax, but I think he’s talking about the structural deficit. Whatever, he clearly doesn’t have a clue what he’s talking about. The UK has the biggest deficit in the developed world. From 2000, Gordon brown embarked on the biggest peace-time rise in taxation in British History. Tax as a share of GDP went from (depending on which stats you uses) 35% to 42% of GDP. This enormous tax rise happened during a long period of expansion. And all this extra tax on a strongly growing economy wasn’t enough. Gordon Brown STILL ran deficits. Government spending went from around 38% of GDP to over 50% in 13 years. So the idea that Labour didn’t overspend is a simple, complete and absolute lie.The last Government was running a structural deficit. No question about that at all.
Claim 3 Our borrowing costs are low because the markets have confidence in George Osborne’s austerity plan and without it the UK will end up like Greece.
Yes, the markets have confidence in our austerity plan and that’s why PIMCO the worlds largest bond holder have been warning against buying UK debt.
The real reason why our borrowing costs have fallen and remained low since 2008 is because, savings have increased.
This is a half-truth. Every politician will claim (when in power) that low interest rates are a sign of market confidence. And they are – at least insofar as the markets remain convinced the UK will repay. But ultra-low interest rates are also a sign of economic weakness, as investors seek safe assets over risky ones. Bill Gross at PIMCO has been warning against US debt too. Not as a comment on Bernanke or Osborne, but merely that the economy will pick up, and negative real returns on low-risk assets are unsustainable. Yields will rise, so developed market debt is not a great place to be long-term.
Secondly, the UK is considered a safe heaven because, investors are reassured the Bank of England will buy up bonds in an event of any sell off – which increases the price of bonds and reduces the effective rate. Note, how rates fell across the EU recently when the ECB announced its bond buying program. Thirdly, because, we are not in the Euro we can devalue our currency to increase exports. Moreover, UK bonds are attractive because, we haven’t defaulted on its debt for over 300 yrs.
Let’s leave aside the mangling of the English tongue. The UK will not default because the Bank of England can print enough money to meet its needs. Trivially true. This does NOT mean the UK faces no limit on Government spending. Small truth, Ramesh, Big error.
David Cameron would like people to believe the markets lend in the same way as retail banks lend to you and I.
You and *ME*, Ramesh. All politicians use the household debt metaphor, to try to explain what is going on. Yes national debt is different to credit card debt. But most of the public will not understand why.
“If you tell a lie big enough and keep repeating it, people will eventually come to believe it” Joseph Goebbels
You mean like the lie that as National debt isn’t like a credit card, there’s no limit?
So what are the limits to national debt? Well there’s the observation that debt burdens over 80% of GDP (Like Germany had for many years, and as France has now) seem to depress economic growth. When debt reaches 120% of GDP, which is where Italy is now, it seems to kill growth entirely. Japan when confronted with its asset bubble collapse, attempted to “stimulate” it’s way out of stagnation. It failed, and growth has been negligible for 20 or more years, and she bears a debt burden of over 200% of GDP. The only reason this is sustainable at all is most of it is lent to Japanese citizens. For those countries whose debt is more likely to be held outside the country, like the UK, our ability to sustain debt is much lower.
Ramesh Patel doesn’t mention the difference between internal and external debt. The UK has very, very high external debt. Nor does he mention the effect of debt burdens on growth. Nor does he put the snapshots he gives of the debt into context. He claims to not be a leftie but he’s written pure Labour propaganda. His assertions amount to nothing more than a racist saying “some of my best friends…”.
In short, there are plenty of good economic bloggers out there. Tim Worstall on the Right, Chris Dillow on the left. Ramesh Patel isn’t one of them.
Update, I can confirm that No. Ramesh Patel did NOT get paid by Huffpo, who I think asked me to write a response. Not unless paid. I’m a vicious capitalist you see.