As of April, the deficit - the amount of government spending in excess of revenue from taxation - was at around £90bn. Over the last five years the deficit has been reduced from £154bn. However, because there is still a deficit, the overall debt has continued to climb - from around £1 trillion up to around £1.5 trillion (Ashworth-Hayes, 2015).
Those are, admittedly, pretty scary numbers. But what is the reality behind them?
What are the parties offering?
There are two main groups of parties taking opposing positions: the Conservatives and UKIP on one side (BBC, 2015), Labour and the SNP on the other (Phelps, 2015). While the Conservative side is focussing heavily on bringing down the deficit and the debt substantially through further cuts to public spending, the Labour side has focussed instead on much shallower cuts, ostensibly to protect the economy from the shock of further public sector cuts (Peston, 2015).
In order to achieve their deficit reduction, the Conservatives will have to make massive cuts to public services (Robinson, 2015). They will need to cut as much as a third from the budget of each of the unprotected areas of public spending, plus £12bn from non-pensions welfare spending - of which jobseekers allowance only makes up £3bn of £74bn, with housing benefit taking up £18bn (Elliott & Wintour, 2015).
All of these Conservative efforts are aimed squarely at tackling, and eliminating, sovereign debt. By contrast, Labour believe that the way to cut the deficit is to improve the economy - encouraging growth and so increasing government revenues (Robinson, 2015).
With two potentially viable means to achieve the same end, the judgement as to who is right would seem to depend on outside factors (Peston, 2015{2}).
"...your judgement about who is right depends on your assessment of how big you want the public sector to be, and how likely you think it is that there is another economic crisis around the corner - because the more imminent such a shock may be, the more haste is appropriate for debt reduction."
That brings us to the question: how much of a risk is sovereign debt?
Keynes and cyclically balanced budgets
To answer that question it is worth revisiting the work of John Maynard Keynes. Keynes was an Eton and Cambridge educated economist and member of the old Liberal Party. He had worked for the treasury, but his experiences during negotiations over German reparations at the end of the First World War led to his resignation.
He then wrote The Economic Consequences of the Peace, which roundly criticised, on economic grounds, the process by which the German people were being punished with reparations for the actions of the German State and warned of the dangers inherent to that course. The work established his credentials as an economist.
In later works - such as the The Means to Prosperity and The General Theory of Employment, Interest and Money - Keynes' ideas went on to focus on the important economic role played by demand. Economics, of all stripes, is centred on the relationship between supply and demand. In a change from classical economic attitudes, Keynes saw demand as the one that drives the other - and so saw it as necessary for something to be done about making up for the slump in demand that occurred during contraction periods in the economic cycle.
The means to achieving that would be government debt and deficit spending. By borrowing and sending more on public services and public works, the government could keep people employed, thus keeping money in their pockets and so keep demand at a level that can support supply until the economy recovers. In a failure to do this, Keynes saw potentially catastrophic problems caused by the collapse of demand, as unemployment led to recession which led to more unemployment (The Independent Report, 2012).
However, the role that sovereign debt and deficit spending played was only intended by Keynes to be part of a more comprehensive fiscal strategy of cyclically balanced budgets - with surpluses created during the good times to allow for the deficit spending needed during the slumps.
Yet public debts have, over the past seven years, gone a long way beyond that. Sovereign debt has piled up thanks to governments taking private capitalist debts into their own hands to save the private business, and particularly banks, from catastrophe (Filger, 2010) - although the IMF estimates that only 40% of the total debt is the result of stimulus efforts and bail-outs, with 60% coming simply from lower tax revenues due to higher unemployment and lower profits (The Economist, 2013).
Further, the IMF has suggested that while public debt isn't helpful - compounding problems by questioning solvency, so driving up interest rates which makes borrowing and repayments more expensive, and undermining the freedom for governments to spend to stimulate the economy - austerity cuts aimed at tackling the debt have actually hindered growth (The Economist, 2013).
What may seem a fairly cavalier attitude towards public debt seem to be justified by analysis. Historically, it appears, sovereign default - where a country is unable to meet its debts and so is forced to restructure repayments - does not come with the risks generally associated with it. The effects on economic growth of default are a drop of around 2.5% in the short term, but are quickly overcome and recovering is relatively fast (Panizza & Borensztein, 2010).
The real dangers appear to be the political effects.
Back during Great War reparations negotiations, Keynes had argued that there was a limit to the capacity of a state to manage its debts. To pressure a state into pursuing repayments it could not afford could have dangerous ramifications (Miller & Skidelsky, 2012). Policies by creditor countries regarding debts would have to be handled in a way sensitive to both economic and political outcomes. The failure to do so would be expressed in the rise of extremism - as people turn to simplistic and drastic solutions in the face of the powerlessness of the centre.
So how does all of this answer our key questions: how much tax should be raised and from who? How much of the deficit and debt should be paid off, and when? How much of a risk is sovereign debt?
Conclusions with reservations
For Keynes, the moment for austerity cuts was during the good times, not during the bad. If debts became unmanageable, then it would eventually be better simply to cancel those debts and have everyone benefit from the renewed growth. However, debts and deficit spendings should be purposeful, with deliberate productive outcomes that will ultimately help balance out spending when the economy returns to expansion.
Taking all of these things into account, it should not be a huge surprise that Keynes would be unlikely to agree outright with either the Labour or Conservative side of the argument, but rather with the Liberal Democrats - the heirs of the old Liberal Party of which he was a member.
Of the mainstream parties, the Lib Dems are the most openly committed to what they call a middle course - to cyclically balanced budgets, tax rises rather than increasingly deep cuts to tackle the deficit more immediately than Labour and then keeping spending increases in line with revenue increases to spend more than the Conservatives (Crawford et al, 2014).
However, all of this analysis presumes the continued validity of the mainstream economic system - something about which questions have been raised in the last five years. Therein lies deeper questions of values that are much harder to answer: does the mainstream system still reflect what we expect from our lives? And, is anyone actually offering a real alternative system?
Anti-austerity parties, from the more mainstream Greens to more fringe groups like Socialist Labour, offer alternatives consisting of higher taxes and more public spending. But they not do not offer a comprehensively different system (Whale, 2015; BBC, 2015{2}).
There is the choice. Do we look now to the alternatives, that may not be ready or fully realised, or do we try to make the best of the present system, with as much fairness as possible, according to our best understanding of how it functions?
Yanis Varoufakis, Greek radical left economist and Finance Minister under the Syriza government, addressed that choice by stressing the need for progressives to be pragmatic during these times of crisis (Varoufakis, 2015). From his perspective the Revolutionary Marxists were wrong - crisis would not benefit the Left, but rather the Right. For Varoufakis, the priority is a 'modest agenda for stabilising a system that I criticise', in order to 'minimise the unnecessary human toll from this crisis'.
The rising cost of servicing debt, along with austerity applied during tough times, can damage the general wellbeing and lead to rising extremism. Progressives need to decide on which course they believe to be best able to protect the common good in the present, and will set us up for moving towards greater prosperity in the future.
References
Sam Ashworth-Hayes' 'Election 2015: Debt and Deficit'; on Full Fact; 24 April 2015.
'UKIP will back Conservative deficit plans, says Farage'; on the BBC; 27 February 2015.
Shelley Phelps' 'Reality Check: Is Osborne right on Labour and SNP?'; on the BBC; 23 April 2015.
Robert Peston's 'The huge choice for voters'; on the BBC; 23 April 2015.
Nick Robinson's 'Election - Forget the stats, focus on the big choice'; on the BBC; 23 April 2015.
Larry Elliott & Patrick Wintour's 'IFS challenges George Osborne over £12bn welfare spending cut plan'; in The Guardian; 20 March 2015.
Robert Peston's 'Osborne's famine followed by feast'; on the BBC; 18 March 2015{2}.
John Maynard Keynes' 'The Economic Consequences of the Peace'; 1919. [Buy Now
]John Maynard Keynes' 'The Means to Prosperity'; 1933. [Buy Now
]John Maynard Keynes' 'The General Theory of Employment, Interest and Money'; 1936. [Buy Now
]'John Maynard Keynes Was Right (and not for the reason you think)'; on The Independent Report; 16 March 2012.
Sheldon Filger's 'Keynesian Economics Dissected: Deficits and John Maynard Keynes'; in The Huffington Post; 24 April 2010.
'Stimulus v austerity: Sovereign doubts'; in The Economist; 28 September 2013.
Ugo Panizza & Eduardo Borensztein's 'The costs of sovereign default: Theory and reality'; on Vox EU - CEPR's Policy Portal; 6 May 2010.
Marcus Miller & Robert Skidelsky's 'How Keynes would solve the eurozone crisis'; in the Financial Times; 15 May 2012.
Rowena Crawford, Carl Emmerson, Soumaya Keynes & Gemma Tetlow's 'How do the parties' fiscal targets compare?'; from the IFS; 19 September 2014.
Sebastian Whale's 'Green Party launches ‘anti-austerity’ manifesto'; on Politics Home; 14 April 2015.
'Election 2015: Socialist Labour aims to 'end capitalism''; on the BBC; 22 April 2015{2}.
Yanis Varoufakis' 'How I became an erratic Marxist'; in The Guardian; 18 February 2015; adapted from a lecture originally delivered at the 6th Subversive Festival in Zagreb in 2013.
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