Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 14 June 2018

How UK deficit hysteria began

Laura Basu has a good book just out on UK media coverage of events from the Global Financial Crisis (GFC) until 2015, which I have reviewed for Open Democracy. Among other things, it tells the story of how what Mark Blyth calls the ‘biggest bait and switch in history’ happened in the UK. Laura argues that it can be dated almost exactly to the Budget of April 2009.

That the right wing press would start talking about the horrors of the rising UK deficit is no surprise. Osborne had decided in the previous year to oppose the Labour government’s stimulus measures because he saw in the rising deficit a way to beat Labour. The puzzle is why a broadcast media, ever conscious of balance, pushed the same line, even though it was clearly advantageous to one side politically.

The following story is mine, not Laura’s. Before the GFC, the way that the broadcast media covered budgets had become quite formulaic. Each budget would present estimates of the deficit over the next five years, and with the help of the IFS commentators broadcasters would discuss not only what tax changes had been announced, but also what might be implicit in the projections. No doubt this framework suited journalists well, because it allowed easy analogies with households. If the IFS felt that the projections were over optimistic and therefore fiscal rules might be broken, they said so and that became one of the budget talking points. The state of the economy was hardly ever discussed, because the Bank of England seemed to be doing a pretty good job of keeping things stable.

That all changed with the GFC, when monetary policy ran out of reliable levers to manage the economy. However journalists wouldn’t know that from the Bank of England, who tended to talk as if Quantitative Easing was a close substitute to interest rates as a monetary policy instrument. They would know it from academic macroeconomists, but journalists were generally too busy to make the effort to talk to them. For whatever reason, they did not fully appreciate how much the world had changed as a result of the GFC.

So when in the budget of April 2009 the Treasury showed the full extent of the deficits that the recession (and to a smaller extent the government’s stimulus measures) had created, journalists behaved exactly as they would have done before the GFC. Compared to deficits seen before the financial crisis, the numbers were indeed large. But crucially, because the Treasury estimated that the GFC had reduced the trend level of GDP, fiscal savings were necessary as a result. When these took the form of efficiency savings, the IFS were rightly skeptical.

So the coverage was all about higher taxes and lower spending, and whether they would be enough to close the record deficit. At no point in the subsequent discussion does anyone ask whether the current deficits are large enough to create a strong recovery. The growth forecasts are taken as given, and only their fiscal consequences are discussed, as if the former had nothing to do with the latter: an assumption that is only appropriate if monetary policy is in complete control of the economy. The government’s line that these deficits were necessary to ‘support’ the economy was almost entirely ignored.

Furthermore, the issue of whether the markets would purchase all this extra debt was already being raised. This is City speak, seeing a recession as involving more government debt and therefore perhaps higher rates, rather than understanding that the recession was caused by more saving and less borrowing so there would be plenty of new savings to buy the additional debt.

In other words the broadcasters had a framework for commenting on the budget which was appropriate before the financial crisis, but totally inappropriate after it. What they should have been asking is whether the Chancellor had done enough to ensure the recovery that was forecast, or whether perhaps larger deficits might be needed. In retrospect, that was exactly the right question to ask.

At the time, the reason for these deficits was clearly spelt out by the IFS as well as the Treasury. "The Treasury's assessment of the fiscal damage wrought by the current economic and financial crisis is breathtaking," said IFS director Robert Chote. "It will require two full parliaments of mounting austerity to repair." But in a telling indicator of things to come, the headline paragraph loses the bit about the GFC. As Laura’s book shows, it became so easy for a media prone to amnesia to forget about the financial crisis and blame everything on Labour profligacy, as after a time most voters began to believe. But the fundamental mistake was focusing on the deficit as a problem rather than as an instrument designed to produce a strong economy. The mistake came from the media’s inability to see how the GFC had changed the macroeconomic rules of the game.


  1. It is now nine days since your 'Idée fixe' blog and still you haven't processed the comments. If you are not interested in comments, then get rid of the facility.

  2. As we have a BBC which has not reported that the GFC saw a quicker and steeper fall in world trade than the 1929 crash, and that in the UK there has been the worst recovery since 2010 in GDP terms for over 300 years and ditto for productivity loss, I for one question the continued need for a BBC.

  3. That is to say, economists had not taught journalists that deficits per se should not be an input into spending/taxing decisions except at they affect the borrowing rate that go into decisions about the NPV of expenditures. This of course is in no way analogous to a household whose expenditures are limited by a hard credit constraint, not an almost flat supply of capital curve. If the correct principal had already been established, deficits during a period of low borrowing costs and marginal costs of expenditure inputs less than market prices (unemployed resources) would not have seemed extraordinary.

  4. And to add insult to injury the Financial Times was publishing articles by Kenneth Rogoff (who for some bizarre reason is a professor of economics at Harvard) claiming that large deficits mean the end of civilization as we know it.

  5. Another important detail is that the forecasts that scared everyone were based on the tax revenue numbers for Q4 2008 and Q1 2009. This was the absolute pits of the GFC, and in any case January is usually the lowest month for tax revenue. As the spring of 2010 went on, both GDP and revenue repeatedly surprised on the upside.

  6. This wasn't just an issue in UK, the US also had a rather poor discussion about deficits. If I recall most of the discussion was entirely focused on how the deficit would impact future generations rather than examining how the current generation was going to fare due to the crisis. The position in this article should be considered by more people. Thanks.

  7. The role of the Bank of England in this sorry tale should not be forgotten.

    I well remember Mervyn, now Lord, King proclaiming on a number of occasions that the deficits would worsen the current crisis and austerity was essential immediately. This was as gross an abuse of the 'independence' of the Bank as I can remember, and his ennoblement was probably an appropriate reward at the right time.

    Because if the Governor of the Bank of England is announcing that the Government is taking the economy down the road to ruin, it would be a brave 'neutral' journalist or commentator who challenges him.

  8. Apologies, a question for SW-L related to the economics of Brexit rather than this post:

    I know most economic forecasters predict Brexit will be a drag on UK growth, but I find Patrick Minford's reply to his critics in the link below compelling - what are your thoughts on Patrick's reply?


  9. How long does it take to check that a comment is not spam with embedded links? Up to 10 days apparently.

  10. I haven't read the book yet, but your comment fails to mention the power of the household finance analogy on people's thinking about government budget deficits. This has been true since the 1930s. It is amazing how little the GFC has changed people's assumption that deficits are a terrible thing because they will burden our grandchildren with massive repayment and interest obligations. Even liberal economists have contributed to this by publicly worrying that deficits will eventually crowd out private investment (failing to understand that investment funds are created by the banking system, not the result of prior savings--a more sophisticated manifestation of the same human inability to see beyond "common sense".) Obama was largely a creature of these homespun attitudes, as are most other politicians and pundits. Economists did little to correct public misunderstandings, beyond isolated op-eds. You don't have to look more deeply than everyday attitudes to explain the effectiveness of austerity as a political weapon.

  11. "The government’s line that these deficits were necessary to ‘support’ the economy was almost entirely ignored."
    Because it is horse shit.


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