Thursday, 25 October 2012

Knowing your subject again

Oh dear Simon Cowan is at it again. ( see previous article).

He conflates headline deficits with structural deficits. ( Hint if the public sector is detracting from growth you can be pretty sure the structural deficit is not deteriorating. This current budget is detracting a bit more than 3/4 of a percentage point from GDP growth. On the other hand quite a few of Costello's budget surpluses added to GDP growth!)

Please read this and then this.
Now remember as Austerity was imposed the headline deficit figure increased as a % of GDP.

Why you ask? 

The IMF  ( Oliver Blanchard and Daniel Leigh actually) recently examined public debt and paying it off etc.

Look in particular at the UK in the 1920s. This quote tells you a lot.

"the United Kingdom (1918) had the worst growth performance, with negative growth and a considerable increase in its debt burden." 

It had a substantial primary surplus over the period which inhibited economic growth.However public debt rose BECAUSE growth was so low!

Let me outsource to John Quiggin the maths behind debt rising or falling.

"This is pretty much arithmetic, since public debt (at end of) this year is the sum of public debt (at end of)last year and (an appropriate measure of) this year’s deficit.
If public debt is growing faster than nominal GDP, then public debt/GDP ratio will rise. Note that, since debt is a stock and GDP is a flow, it isn’t strictly correct to refer to debt as a “share” of GDP."

I hope Simon understands now.