A Deficit of Humanity

Economics is always at the forefront of political discussion as elections near. It’s an important issue, and with every side claiming that their economic theory is correct (and with some research, generally, there to support every argument) it can be difficult to determine who really has the best plan.

The easiest divide to analyse is the ‘spending versus austerity’ debate, which has dominated in recent years.

The first important point to grasp here  is that the deficit – that entity so often cited as the thing that must be reduced via government action – rises and falls completely independently of the government. The deficit is the difference between the amount that is raised in taxes and the amount the government spends, and is not the same as national debt. If the economy is growing, tax revenue will be greater and unemployment benefit lower quite naturally, which will lower the deficit or perhaps even create a surplus. Equally, if the economy is shrinking, the opposite will happen, and the deficit will increase.

Thus, what the government needs to do is stimulate growth. This is the opposite to recession which is, quite simply, the private sector trying to make savings and cuts – while potentially prudent for individual businesses it then lowers demand, which requires more cuts from more people…and the economy spirals into recession.

Although the term ‘austerity’ is often used synonymously with ‘cuts’, it does not necessarily mean, as one might expect, literally saving money. The first year of the coalition’s austerity measures in 2010 saw the government running a deficit of 9.3% of GDP. Although this meant that the government was still losing money (and adding to debt), it was austerity because 9.3% was lower than the deficit running the year before (11%).

The problem with analysing different economic models at all is the fact that there are so many things that affect the economy. One cannot isolate single factors as in a scientific experiment, and consequently there is a great deal of room to interpret data differently.

What follows is an overview of some of the most credited ideas, and what they might mean in the context of the coming election.

 

How Austerity can Work

Ideally, if one is going to implement austerity as an economic policy, one needs to cut taxes alongside cutting state services. Although seemingly counter-intuitive, this would allow interest rates to be ‘tightened’ or raised. This would make the pound stronger against other currencies, which would make imports cheaper and thus reduce inflation, making the cost of everyday items lower. This, then, would encourage consumer spending – increasing demand and helping to boost the private sector and grow the economy.

Austerity is an easy policy to sell in some ways – saving money when in debt makes sense from the point of view of an individual, and therefore does not really require the politician promoting it to go in-depth into how the economy works. It is also a good platform from which to discredit another politician who does wish to spend.

 

Austerity Downsides

Although when coupled with tax cuts, austerity might be a valid economic choice to stimulate the economy, there are a lot of drawbacks. Primarily, these can be encompassed as ‘strain on public services’. This strain can be made even worse by demographic and technological changes, particularly in services like the NHS. An older population, needing ever greater amounts of care, coupled with the need for investment in new technology, means that the health service is in no position to even withstand a freeze in funding – and in real-terms austerity measures are decreasing funding to it (despite the fact that spending is, literally, being increased year on year).

Furthermore, if interest rates cannot go down – and they cannot, for reasons stated above – cutting welfare reduces the public’s ability to spend money. Once again, this lessens demand, harms businesses and weakens the economy.

Some economists even warn that imposing austerity on an already weak economy could cause the deficit to rise further.

Finally, if those implementing austerity decide to protect certain services from cuts, it will only worsen the cuts necessary for other services – potentially eliminating very valuable provisions.

 

The Case for Spending

The IFS has stated that government borrowing for investment could currently promote long-term growth, as low interest rates do have the advantage of making borrowing very cheap. They have also noted that it is spending for investment purposes which has the most stimulatory impact on the economy overall.

Higher levels of government spending generally are also likely to promote faster economic growth than any austerity programme would, as spending would help address problems caused by the private sector making cuts.

 

Spending Drawbacks

The drawbacks (ironically) in increasing spending, lie in the selling of the concept. Firstly, in order to tighten interest rates and encourage consumer spending, one ideally needs to raise taxes quite widely. If people are currently struggling, the prospect of losing more income is unlikely to be a vote-winner. Furthermore, just as ‘saving’ makes sense when one thinks of the economy like personal finances, spending seems counter-intuitive. Thus, the politician who decides to follow this path has a much harder task ahead: because they need to discuss economics in more depth. They cannot simply rely on slogans and buzzwords.

 

Election 2017

In this election, neither of the two major parties are offering the ideal combination to best serve the economy. The Conservatives are sticking with their austerity line, and while they are being evasive regarding their tax plans, it seems pretty clear that they do not intend to lower them. Meanwhile, Labour is prepared to spend and, moreover, invest – but its taxation rises are not comprehensive, targeting only the richest 5% and corporations.

Therefore, if you want to vote based on economic credibility, neither Labour nor the Conservatives are solid choices. Both include elements in their policies which could help or hinder the economy – it is uncertain.

As this is the case – and as economics is an inexact science at the best of times – surely it is better to judge the intent of the manifestos, and to think about who has the potential to lose or gain from what is proposed. Increasing the size of the state stands to benefit the most vulnerable. Decreasing it could hurt them immeasurably.

If the numbers don’t add up, the least we can do is vote kindly.

If you’re not in need, think of all those who are.

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