Sunday, September 26, 2010

Some policy advice for Ed Miliband


Congratulations to Ed Miliband on his victory and to all the other candidates for their contribution to the renewal of the party. One of the first things that Ed Miliband should do is to avoid being trapped by journalists or the coalition on the necessity of cuts to reduce the deficit.I have said this and written about it on a number of occasions but it bears repeating.
The ratio of the national debt to GDP for Britain was five times greater in 1946 than now some 240 % of the GDP versus a little over 50 % today.The latest data from the British Office for National statistics as of September 21, 2010 shows the net debt to GDP ratio as of Aug 2010 as 56.3 %. This figure excludes the temporary financial provisions that grew out of the crisis. If we include them the ratio rises to 64 %. Either way there is no cause for alarm.

Britain had a much smaller economy in 1946 measured in terms of the real GDP. The GDP per capita today is far greater so the much smaller sovereign debt burden is far less of a problem. It is simple deficit hysteria to claim as the coalition does that there is some sort of crisis that demands swingeing cuts. As the economy recovers and unemployment falls the deficit will shrink as long as the interest rates are kept below the growth rate in the GDP. the debt to the GDP ratio will also stabilize and then fall as the economy grows.
So Ed Miliband and the Labour party leadership should avoid the Coalition trap of signing onto a debate that will harm Britain and the prospects of the party's renewal.
Making the public sector run more efficiently is always good policy. But making or agreeing to cuts in response to deficit hysteria is always bad policy.


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