Tory Debt Fearmongering

One of the most commonly heard justification narratives trotted out to defend Tory policies such as George Osborne's self-defeating ideological austerity experiment and Iain Duncan Smith's brutal attacks on the welfare system is the argument that "the country is broke". There are so many examples of this crude propaganda it would be impossible to list them all, but there are several common themes. The most regular of which are the ideas that the national debt is "too high" and that Labour "wasted too much money". I'm fairly confident that everyone has heard these kinds of argument on a regular basis and it is the objective here to demonstrate these debt fearmongering arguments are both completely false, and also nothing but a crude narrative to justify elements of Tory ideological policy.

To give a specific example of debt fearmongering: On the 8th of November the Tory Police and Criminal Justice minister Damian Green appeared on the BBC show Question Time, where he was confronted with the accusation that debt fearmongering has a harmful effect on the economy. The accusation was made by David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, a guy I disagree with when it comes to monetary policy, but who made a strong argument that debt fearmongering harms confidence ("animal spirits") within the economy. Green's response to the accusation that Tory debt fearmongering has been damaging the economy was absolutely stunning, he retorted with brazen display of  inaccurate Tory debt fearmongering! Here's what he said:

"The reason that the 'animal spirit' of the economy was destroyed was that we had the worst debt of any G20 country, because the previous government spent money like water and left us bankrupt"

The use of the word "bankrupt" to describe the state of the UK economy in early 2010 is clearly inaccurate fearmongering for many reasons, not least of which is the fact that the Coalition government have continued deficit spending (adding to the national debt), meaning that if the UK was "bankrupt" in 2010, it would have been liquidated and sold off for pennies in the pound by now!

The next observation must be that his assertion that the UK economy had the worst national debt of any G20 country is an outright lie whichever way you look at it. checking the 2009 figures reveals that five of the G20 nations had significantly higher debts that the UK (68.5%) as a proportion of GDP behind Japan (192.1%), Italy (115.2%), France (79.7%), Germany (77.2%) and Canada (72.3%). In real terms the claim is just as false; the UK national debt ($2.183 trillion) was significantly smaller than the United States ($14.256 trillion), Japan ($5.068 trillion), China (4.909 trillion), Germany (3.352 trillion) and France (2.675 trillion).

If we examine the tribalistic dig at Labour for "spending money like water", it is also clear that this is a pretty spectacular misrepresentation. Until the global economic crisis hit, the national debt under Labour had never exceeded the 41.9% GDP debt they inherited from their Tory predecessors. Even after the spectacular financial sector meltdown in 2007-08, the debt under Labour rose to 52.1% which is significantly lower than the average debt in either the 19th or the 20th Centuries (the average debt throughout the 20th Century was 89.5% of GDP). In fact, even after two and a half years of catastrophically self-defeating ideological austerity and Tory economic stagnation, the UK national debt has still not even passed the 20th Century average, and is absolutely nowhere near the 1948 peak of 237% of GDP.

Given that the UK suffered the effects of the worst banking crisis in the modern capitalist era during the previous Labour administration, a resultant spike in government borrowing must be expected. Before the crisis hit Neo-Labour never exceeded 42% (lets call it 57% if we include all of Gordon Brown's dodgy PFI scams that were, and still are, misleadingly kept off the national balance sheet). This is quite high compared to the Thatcher years of industrial decline, social unrest and mass unemployment, but compared to virtually any other period in the last 200 years it is actually low.

Once the economic crisis hit, the economy contracted sharply, meaning that simply maintaining government spending plans that had been drawn up without foreknowledge of the impending crisis would mean adding to the debt. Although Labour can be blamed for intensifying the effect of the global economic crisis with their disastrous financial sector deregulations (which were supported by the Tories, but criticised for not going far enough!), their decision to abandon Gordon Brown's stupid and arbitrary 40% of GDP "golden rule", to stick to their government spending plans in order to avoid further "shocking" the economy and to attempt to stimulate the economy with policies such as the VAT cut were actually reasonably sensible. On the other hand, the decision to bail out the recklessly over-leveraged banks, (a plan which was enthusiastically supported by the Tories) was abject lunacy, but we'll gloss over that idiotic short-termist blunder for the sake of the argument.

Labour's decision to stimulate the economy by cutting VAT and not ruthlessly slashing spending, actually produced some half-decent results. After five consecutive quarters of economic contraction at the height of the global financial sector crisis, the UK returned to weak economic growth between Q3 2009 and the general election.

As you can see, this is far from a glowing review of Neo-Labour's economic record, but in comparison to the ideologically driven lunacy built upon a foundation of debt fearmongering lies and the consequent double-dip recession and vast trade deficits that have followed, it actually begins to look like reasonably competent stuff.

So to return to the subject of debt fearmongering, simply through the analysis of one specific example of Tory debt fearmongering, the premises that the debt is "too high" and that "Labour spent too much money" have been blasted to bits as the lies and misrepresentations they are.

Another factor that must be considered when we're talking about the national debt, is the fact that the Bank of England's manipulations of the government bond market with £375 billion in freshly invented money have resulted in the lowest cost of UK government borrowing since records began! If there is ever a time when more government borrowing could be justified, it is when the rate of interest on government borrowing is significantly lower than the rate of inflation. A situation where risk averse lenders are actually prepared to incur real terms losses in order to stash their money in the relative safety of the UK bond market. Obviously it would be important to spend the borrowed money wisely, on things that stimulate economic growth (fiscal multipliers such as infrastructure investment, education, science, R&D, social housing construction, welfare payments...) however, what the Tories are doing is cutting spending on all kinds of fiscal multipliers, whilst deficit spending in order to hand out ever greater sums to the wealthy (via tax cuts and the dreation of tax loopholes) and to a host of parasitic outsourcing companies and pseudo-charitable organisations that have built their business models on soaking up taxpayers' cash.

Not only are the Tories failing to cut the national debt they are fearmongering about, they are deficit spending on an absurd range of utterly wasteful corporate welfare scams and tax cuts for the wealthy instead of targeting the cheap money they have at their disposal at things that actually promote long-term economic growth (infrastructure projects, affordable housing construction, direct loans to small and medium enterprises, scientific research, education..). In fact they are not only failing to spend on proven fiscal multipliers that drive economic growth, they are actually deliberately targeting them with their ideological spending cuts.

Tory debt fearmongering is an obvious propaganda campaign aimed at duping the public into supporting their drastic ideological policies, whilst government largess continues apace when it comes to drawing up insane schemes aimed at directly distributing taxpayers cash to private sector interests to run all kinds of services including the NHS, frontline police, ridiculously inefficient welfare programmes, thousands of secondary schools, farcical Olympic security operations and even Britiain's arsenal of nuclear weapons.

The debt fearmongering narrative is built upon a foundation of transparent lies, and the policies it is intended to justify are actually adding to the nation's indebtedness by slashing investment in proven fiscal multipliers. What is even worse, is that the whole narrative of deficit reduction and spending cuts is completely thrown out of the window every time a Tory minister signs another absurdly one-sided contract to distribute ever greater cash mountains to unaccountable private sector interests.

See also

An entirely avoidable "Osbornomic" recession

Damian Green: An egregious public liar

What is... A Justification Narrative? 
  

What is... A Fiscal Multiplier?
 

Tory policy: All narrative, no substance

Even the police are protesting against this Tory lunacy

 

The maxed out national credit card false analogy

The defender of right-wing cut now, think later indiscriminate austerity policies will often be seen trotting out a particularly feeble analogy in which they make a comparison between government borrowing and household finance. Argument by analogy is rarely informative, but in this case it is a downright misleading example of argument by spurious similarity.

The kind of simplistic thinking that allows a person to make such spurious analogies between the issuing of government bonds and the maxing out of a commercial credit card is normally seen in the intellectual backwaters of Tory blogs and below-the-line Daily Telegraph comments but several highly influential politicians have also used the ridiculous maxed-out credit card analogy. Some of the most noteworthy being the Prime Minister David Cameron and the man that is nominally in charge of the UK economy George Osborne:

"Ed Miliband still won't admit Labour maxed out the nation's credit card" - Michael Fallon, Tory party deputy chairman, January 2011

 "Labour maxed out the nation's credit card, and they still want to carry on spending. Ed Miliband and Ed Balls fail to realise that when you're up to your neck in debt, it's time to pay it off" - Eric Pickles, Secretary of State for Communities and Local Government, March 2011

"we are asking the British people to reduce the record budget deficit and pay off the national credit card" - George Osborne, Chancellor of the Exchequer, April 2011

"If you have maxed out your credit card, if you put off dealing with the problem, the problem gets worse" - David Cameron, Prime Minister, June 2011

All four quotes can be summed up in two words; Asinine nonsense.

What these quotes demonstrate is that David Cameron and his party show no understanding of basic accounting. Hardly surprising from a bunch of over-privileged career politicians with barely a moments real world experience of running businesses or struggling to get by on limited family budgets between them.

The first and most obvious difference between a commercial credit card and national borrowing is the massive difference in interest repayments. A typical interest rate on a commercial credit card could be 16.9% whilst the interest on UK government bonds is below 2% as investors are flocking to buy bonds in safe haven countries that maintain their good credit ratings such as Germany, the UK, Japan, the Netherlands and Finland. In May 2012 it was announced that the yield on 10 year bonds had fallen to an all time low of 1.87%, the lowest since the Bank of England records began in 1703.

With inflation running at above 3% what these ultra-low interest yields create is a phenomenon called negative real interest rates, which occurs when the interest payout is lower than the rate of currency devaluation. This indicates that investors are so scared of the financial turmoil elsewhere, they are prepared to incur a real term loss in order to invest their money in the "safe haven" of UK (or Finnish) government bonds. An example of this can be seen in the sale of £700 million of inflation-linked 35-year gilts in January 2012, with a rate of -0.116pc, meaning investors were accepting a small real-terms loss in exchange for lending their cash to the UK government. Investors that buy this kind of gilt are in effect paying a small fee in order to protect their capital from the ravages of the neoliberalised financial markets and the risk of sovereign default elsewhere.

The right-wing apologist would argue that their beloved austerity measures aimed at cutting government borrowing are precisely the reason that the UK is becoming a "safe haven" for investors. This simplistic narrative is undermined by the fact that similar austerity measures in countries such as Spain and Greece have coincided with sharp rises in government borrowing costs and that despite the Coalition government's economically damaging indiscriminate austerity agenda, the rate of UK government borrowing is still actually on the rise.

A much more realistic explanation for the low interest rates on UK government debt is that fear of stock market instability, large scale financial sector corruption, rising inflation and the risks of sovereign default elsewhere are driving investors towards the relative safe haven of extremely low yield investments that will pay out in Pounds. Another contributory factor that cannot be ignored is the Bank of England's policy of holding interest rates at an all time low of 0.5% for three years. Anyone arguing that these all time record low interest rates and the all time low cost of government borrowing are completely coincidental and that the low borrowing costs are actually a sign of "market approval" for their favoured contractionary fiscal policies should be treated with a great deal of suspicion.

Returning to the credit card analogy, it is absolutely clear that it is an example of argument by false analogy because a credit card demands extremely high real term levels of interest repayment and current UK government borrowing actually pays a dividend in real terms.

To create a more realistic analogy: If you had a credit card that actually cost less in interest repayments than the rate of inflation, I'm pretty sure you'd use it a lot. If I had one I wouldn't use it to buy consumer goods from Chinese factories, I'd set up my own company and invest in assets with potentially strong returns (precious metals, shares in high tech industries, perhaps shares in German and Japanese alternative energy companies given their governments' recent decisions to abandon nuclear power and "go green"). Once the interest rates start to rise back above the level of inflation I'd begin to make repayments using the profits from my investment portfolio and my business income to fund them. What the government should be doing is using the all time low borrowing costs to invest in proven fiscal multipliers such as infrastructure projects, house building, education, research and welfare payments in order to boost the economy out of recession, because with a contracting economy and shrinking tax revenues, cuts in investment are likely to further reduce aggregate demand and drive the economy into an austerity death spiral.

The right-wing apologist would obviously claim that any such increase in the national debt would "chase away" investors, increasing the yields on UK bonds and undoing all of their "vital austerity work" but this fantasy scenario also relies on the ignore the facts tactic. The lowest yields of all are on Japanese government bonds (0.858% on ten year bonds) and their national debt eclipses that of the UK. If investors really were scared of large government debts the yields on Japanese bonds should be more like the unsustainably high yields on Greek bonds rather than less that half the yields on UK bonds.

My previous analogy about the negative real interest credit card shows that any comparison between government borrowing and credit card spending would rely on an absurd redefinition of "credit card", however there is another form of government borrowing that can be more accurately compared to credit card borrowing; the practice of PFI investment. This kind of borrowing occurs when the state outsources infrastructure projects to private sector corporate interests who borrow at commercial rates (typically more than double government borrowing rates) to fund the infrastructure investment and then lease the completed infrastructure project back to the state on long fixed term contracts which over the course of the deal end up costing many multiples of what it would have cost the state to fund the construction directly. The only political benefit from this kind of PFI "economic alchemy" deal is that it allows infrastructure to be built with no up front state investment costs. The downside, much like credit card spending, is that PFI contract repayments eventually cost a great deal more than paying "cash up front". If the Tories were serious about cutting wasteful public spending they would have stopped this kind of grotesquely inefficient public sector handout, instead they are signing off on as many of these deals as Neo-Labour ever did because it fits their political agenda of transferring as much state income directly into the corporate sector as possible.

The repeated use of the national credit card analogy exposes many things about the Tory mentality. Firstly that they are either economically illiterate or they hold the public in such contempt that they feel that they can get away with simplifying complex economic circumstances down to a feeble and inaccurate analogy. Secondly that they don't really believe in their feeble household finance anaolgies at all, because if they did they would be borrowing more via low negative real interest government bonds (low interest loans) in order to stop using and buy out the existing outrageously expensive PFI sector schemes (Credit Cards) altogether, like any sane budget balancing family would do. Instead they are signing up to more and more of these hugely expensive PFI deals that have been described by a Commons Select Committee as an " an extremely inefficient method of financing infrastructure projects".

To conclude, David Cameron, George Osborne and several other leading Tories would like the public to believe that borrowing at negative real interest rates to fund direct government investment in infrastructure and services is akin to a reckless credit card splurge. Whilst they frighten the public with this grotesquely inaccurate analogy they are simultaneously signing up to more and more of these outrageously expensive PFI deals that benefit the corporate sector at the expense of the taxpayer, which have been described by their fellow Tory MP Andrew Tyrie as:

"getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that....We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term."                
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