The recent disagreement between the First Minister and HM Treasury has been widely portrayed as a matter of grave public significance. However, suggests David Eiser, once the numbers are crunched, the disagreement appears to rather miss the point. This article originally appeared in The National.
In a speech in February, Nicola Sturgeon argued for a more gradual approach to cutting the UK Government’s deficit and debt. She argued that, even if departmental spending was increased by 0.5% per year in real terms in the next parliament, debt would fall as a percentage of GDP from 2015/16 onwards.
The Treasury has costed this policy. The Treasury costings imply that debt as a percentage of GDP under the Sturgeon proposal would grow in the first two years of the parliament and then begin falling in 2018/19 from 82.2% to 81.4% in 2019/20.
Thus Sturgeon does appear justified in saying that the debt to GDP ratio could fall even if real terms departmental spending is increasing, although the speed of this fall is not as rapid as she suggested, and the debt to GDP at the end of the parliament is fractionally higher than at the beginning (81.1%).
The reason for the differences between the Sturgeon and HMT costings appear to be driven largely by assumptions about how the additional borrowing adds to debt interest repayments. Ultimately however, it is difficult to ascertain exactly the extent to which different assumptions made by each ‘side’ are driving the result. The SNP does not appear to have produced an exposition of their analysis, while the HMT analysis could certainly be more transparent (an attempt to replicate their figures requires cross-referencing various tables and debt ready reckoners published by the OBR, the interpretation of which in combination is not always unambiguous).
This all poses a number of questions.
First, does it make sense for the Treasury to cost opposition party policy? There would seem to be a stronger case for this role to be undertaken by an independent body. But George Osborne previously ruled out the idea of the OBR performing this role.
Second, how meaningful is it to use the Autumn Statement as the baseline against which the Sturgeon proposals are assessed? As has been pointed out by the IFS, the fiscal tightening implied by the Autumn Statement is stronger than that proposed by any of the main UK parties, including the Conservatives.
Third, and most importantly, how significant is the difference between the estimated debt/GDP ratio under the Sturgeon plans made by the Treasury (81%) with that suggested by Sturgeon (79%)? Arguably, this is a fairly minor difference. In both cases, the debt/GDP ratio remains high in the context of the period since the 1970s (see Fig 5.2).
But whether the ratio is 79% or 81% doesn’t undermine the general point that Sturgeon was making. With growth remaining lacklustre, economic output below potential, and with interest rates at the Zero Lower Bound, there is a strong argument for saying that now is not the right time to pursue rapid austerity. Instead, use fiscal policy to help stimulate demand, and pursue austerity when interest rates can be reduced to offset the negative effect of austerity on demand.
Both sides could improve the transparency of their policy costings. But Sturgeon’s case for a slower path of deficit reduction is not undermined by splitting hairs on whether debt:gdp might be 79% or 81% in five years’ time.