Thursday, 11 June 2015

What is the point in George Osborne’s new law?

by Alex Sligo-Young

During George Osborne’s Mansion House speech, it was revealed that he plans to try and bind future governments to running a budget surplus when the economy is growing. At first this seems like good legislation. This aims to prevent the left-wing governments that are more likely to be elected during boom time from overspending and causing large government deficits that seem to swamp governments when they enter recessions. However, could this be seen as the Conservatives making a political move?

When this law is considered, it seems strange. This is because no government can bind its successors. This means that if a left-wing government was to be elected, it could overturn this rule and spend as much as it liked during times of economic growth. Therefore, it can be seen that this is a law by the Tories to enforce a policy that they would have done anyway, making this a pointless law to bring in. This raises questions as to the possible motives behind Osborne’s schemes. One reason could be to try and guide the Conservatives; this is because even though they spout endless rhetoric about ending borrowing net debt has  been the highest in recent years under the Conservatives. Thus, it seems unlikely that the Conservatives are trying to impose a law on themselves that they will struggle to meet. So what is the ulterior motive?

Why Osborne is wrong (see below)
It seems to me that by doing this the Conservatives indoctrinate their views into the very makeup of the government, unifying them with the established order and making them harder to challenge. This creates a situation where any party that tries to go against this is fundamentally stating their intent to spend during booms. This will lead to more claims from the Conservatives that the opposing party is clueless about economics and business and will be a disaster for the economy like we saw during the recent election. This is because they draw upon simple and effective comparisons between a household having debt and an economy having debt. This is fundamentally wrong and could be seen as one of the greatest analogical fallacies of the modern era. It is such a highly effective strategy because most people understand that if their household were to borrow too much for too long then it would ultimately fail and go bankrupt. This logic creeps into their understanding of the economy and they then believe the only way to solve this debt problem is to vote Conservative (as shown in the general election).  

However, economies are completely different. 

This is because their debt can increase as long as it does so in line with increases in GDP. As multipliers increase the effect of spending in an economy on GDP an increase in spending will increase GDP by more. This means that an increase in spending when there is a multiplier of more than one actually decreases debt as a percentage of GDP.  Thus, it can be concluded that cuts are counter productive as the same multipliers decrease GDP more than the value of the cuts meaning that debt as a percentage of GDP increases as shown by the graph above. Therefore, this policy by Osborne can be seen to institutionalise flawed logic and make it more difficult for others to challenge making it more of a political ploy than good legislation. 

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