We had a significant deficit problem way before the recession. In fact, much of the deficit is structural. A problem built up before the recession, caused by government spending and planning to spend more than we could afford. It had nothing to do with the recession. And so growth will not sort it out.
The first two sentences are each technically true, but the link that he then draws between them is sleight of hand.
Distinguishing structural from cyclical factors in the deficit is, shall we say, a fine art, requiring estimates of how the economy is doing relative to its potential, and these are always debatable. But here are the numbers the March Budget gave for government borrowing, both actual and adjusted for the economic cycle:
(The 2009/10 estimate is already out of date, as the deficit turned out lower than expected.)What this shows is that, yes, Brown was running a pretty much entirely structural deficit during the good years, of 2-3% of GDP. And yes, most of the deficit now is structural. But these two facts don’t really connect, because there’s been a huge rise in the structural deficit - not as a result of irresponsible spending but because the recession caused structural damage to the economy as well as reducing output across the board. (In particular, the housing and finance sectors took a big hit.) This caused a sharp drop in tax revenues, and was accompanied by a mild increase in public spending.
About 80% of the deficit has appeared since the start of the recession.
The fact that the structure of the economy (and of the taxes it produces) changes all the time, particularly during a sharp recession, illustrates why untangling the structural and cyclical aspects of the deficit is a tricky theoretical exercise. No doubt the recovery – assuming that the recent European tumult and the looming spending cuts don’t derail it – will see more structural changes, as some sectors grow faster than others.
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