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150123bombshell171billion

Don’t you love articles by economic experts that put George Osborne down hard? This one, by Professor Simon Wren-Lewis on Mainly Macro, manages a double by putting down “biased newspapers” as well. Here he is:

Paul Johnson of the IFS has written that under Labour “national debt [could be] around £170 billion higher (in today’s terms) by the end of the 2020s than would be achieved through a balanced budget.” That was all that certain newspapers needed to start talking about a borrowing bombshell under Labour.

£170 billion is a meaningless number, and the end of the 2020s is a meaningless date. First, we should put everything as shares of GDP. £170 billion is about 10% of GDP, and debt is currently around 80% of GDP. However it would be completely wrong to infer that under Labour debt to GDP would be 90% of GDP by 2030. If they achieved current balance by financial year 2017/18, then my Excel spreadsheet says that with nominal GDP growth of 4% a year, by 2030 debt to GDP would be around 65% of GDP. (A few points below 65% if investment remained at 1.5% of GDP, a few points above it became 2% of GDP.) If the Conservatives balanced the overall deficit each year debt to GDP would be about 47% of GDP by 2030.

So a £170 billion bombshell actually means debt to GDP would have been reduced from 80% of GDP to around 65% of GDP. So the correct headline should have been “debt to GDP cut by a fifth in 2030 under Labour’s plans”. That is debt, which is much more difficult to reduce than the deficit. To say this is a ‘different interpretation’ is too polite – newspaper reports got it completely wrong. Who should you blame for this: Paul Johnson, innumerate journalists, biased newspapers? I’ll leave that to you.

For the more interesting part, in which Professor Wren-Lewis discusses the speed at which the debt-to-GDP ratio really should be reduced – a matter that has been pressed onto most voters’ minds recently – along with that dig at George Osborne, visit Mainly Macro.

Note also that, although he admits that the Tories would have a lower debt-to-GDP ratio by 2030 under these conditions, Professor Wren-Lewis does not speculate on the amount of damage this would cause to the state infrastructure and the British way of life.

Follow me on Twitter: @MidWalesMike

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