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Scrutiny
  
Time to stop the rabble rousing Mr. Cameron!
Why the deficit control measures given by UK Prime Minister David Cameron suspiciously point to his lack of understanding of economics
22/07/2010

Ronald Reagan, the 40th American President once avowed in the context of rising US deficit, “I’m not worried about the deficit. It is big enough to take care of itself.” The relevance of this statement lay hidden in a clearly less than astute understanding of deficit economics that Reagan had (something that led to the term ‘Reaganomics’ becoming common sarcastic usage), which had its basis on the key points of reducing marginal income tax rates, regulation, money supply and unfortunately government spending too. While reducing the former two was considered pro-growth, for the rest, it was considered suicidal for economic growth. Fortunately for the erstwhile Hollywood actor, the baby boomers in US ensured that the nation had years of consecutive growth, with or without his policies.

On June 22, 2010, when David Cameron, UK Prime Minister, presented the UK budget through Chancellor George Osborne, it seemed an unbelievable replica of Reaganomics – capital gains taxes not raised for basic rate taxpayers, personal income tax allowances increased by £1000 to £7475, higher rate taxpayers’ income tax rates unchanged but capital gains tax increased to 28%, and corporation taxes cut too. The logic being forwarded by Cameron and Osborne is that by 2015, the budget deficit – which is currently at 11.5% of UK’s GDP – will be “in balance” by 2015. Yes, part of what he’s saying seems brilliant – especially the tax movements (leave the illogic of not increasing the higher tax payers’ rates).

Even during his campaigning days for the UK Prime Ministerial elections, Cameron used the deficit card and it worked successfully. After winning, Cameron has tried hard to continue holding the placard, as he indicated in a speech on June 7, 2010, “The most urgent issue facing Britain today is our massive deficit and our growing debt.” In that speech, Cameron kept harping on the fact that while UK currently pays around £35 billion annually as interest payments, the amount was expected to go up to £70 billion annually in the next five years – something that he wanted to control urgently.
Most amusingly, the current budget released by his government shows an expected total interest outflow of £250 billion by 2015, which is much higher than even the worst estimates before budget. Is Cameron even reading what Osborne is preparing? It doesn’t stop here. UK’s public debt today stands at £903 billion – equivalent to 68.5% of GDP – and the net debt stands at 62.2% of GDP. Guess what Cameron accepts that he is going to achieve through his budget – the net debt will actually grow to 70% of GDP in 2014. Are we imagining it or has the Osborne-Cameron combine not remembered to stand up to their words of a week before? Even if we consider UK’s current national debt, which stands at 51% of GDP, it’s quite alright by international standards. Many other countries have higher national debt to GDP ratios than UK’s. For example, Japan’s national debt is close to 194% of the GDP, Italy’s is over 100%, even the US is close to 71%. The fact is that by not cutting net debt, the duo is actually doing good for UK.

Let’s jump to Cameron’s understanding of the deficit. Britain’s deficit last year was actually considerably lower than previously calculated. Deficit has actually come down from £178 billion in 2007 (5.5% of GDP), to £163 billion in 2008, and finally to £156 billion in 2009 (11.5% of GDP). What worries Cameron is the figure of 11.5%. Although this is the third largest percentage amongst EU nations, there’s less cause for concern as the deficit was mainly due to two reasons – one, the recession, and two, the bailout of UK banks, both of which are not expected to continue in the future.

But Cameron’s biggest and perhaps gravest mistake for the UK economy is his decision to curtail government spending. While in 2008 and 2009, government spending was £582.1 billion and £638 billion, Cameron has promised to cap it at £637 billion for 2010/11, conservatively increasing it to reach £711 billion in 2015/16. The problem is that the moment the rate of growth of government spending falls, it’s the biggest discouragement for GDP growth. Add to this the timing – which is right after the slowdown, when the nation requires increased spending – and we have the makings of a most dangerous GDP stagnation era.

Deficit, debt and government spending were the three things Cameron shouldn’t have worried about – especially after having done the great work on taxes. Sadly, he did just that. The rabble rousing worked – people love him.

By:- Akram Hoque
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