Government deficits and the news

There were two reports released and written up in the media yesterday about the UK public finances. The deputy director of the Institute for Fiscal Studies put out a short study about the size of the government deficit and what would ending austerity would look like, and the Office for Budget Responsibility released a 'fiscal risks report' about the level of government borrowing and what might happen in the event of an unforeseen economic shock.

Neither of these reports say anything that's at all shocking. The IFS paper starts to chase its own tail when it comes to drawing any decisive conclusions, but the main takeaway is that the government has a large amount of room to manoeuvre when it comes to public spending. If all the planned spending cuts and duty increases over the next five years are cancelled and things are maintained as they are now - "no further net tax rises, benefit cuts or cuts to spending on public services" - the deficit in 2021-22 would be 2.4% of GDP. That's smaller than the US deficit, smaller than the deficits Germany ran through most of the 2000s, in general not something that anyone should be worried about.

The OBR tells a slightly different story. Some crucial background is that the OBR was created by George Osborne in 2010 to provide an external audit of the public finances. By design and culture it's an institution that cares about cutting the deficit and worries about increases in debt, more or less to the exclusion of anything else. It's empowered to independently assess how well the government is progressing towards its own deficit reduction targets, but it doesn't evaluate those targets themselves.

Bearing that in mind, it's best to look past the gloomy tone to the pretty unsurprising substance of the report, which says that weakness in the economy would make deficit reduction harder. The attention-grabbing chapter, that the FT's write-up focused on, is the 'stress test': what would happen to the public finances in the case of a severe recession? The answer is that the deficit would be dramatically larger, but that's... obvious, and particularly obvious when you consider that the OBR is modelling the impact of a recession which:
  • An initial fall in GDP which is comparable to the 2008 recession, followed by a slower recovery than in the post-2008 years
  • A hit to long-term economic potential which is worse than the 2008 recession
  • A fall in house prices that's twice as large as the fall in the 2008 recession, and a slower recovery
  • A larger rise in unemployment than in 2008
  • A sharp and sustained increase in inflation; no developed economy has really experienced a recession like this since the early 1990s
In this scenario - which the OBR emphasises it doesn't actually think will happen - public borrowing would be much higher, and the deficit would (even before any stimulus borrowing) be almost as big as it got during the financial crisis. I do not personally understand why this extremely obvious conclusion is worth writing a chapter of a report about, let alone putting in a newspaper.

But that speaks to something broader about the way debt and deficit are covered in most news media. The basically consistent story that emerges from these somewhat tonally different reports is that the UK budget deficit is now quite small but structurally persistent, and that lingering debt from the last recession makes the deficit sensitive to increases in interest rates. There's no reason to think interest rates will rise soon; since the deficit is small, there's no pressing reason to cut it (if it stays this size, the debt burden will fall just through ordinary economic growth); and the fact that the economy is slowing this year means there's good macroeconomic reason not to pursue deficit reduction.

In short: right now, the government deficit should be a non-issue in national politics. But the FT writes up a dry and unsurprising borrowing report as if it indicates a brewing crisis. The Guardian's report on the IFS paper is even more mangled, particularly the headline claiming that Phillip Hammond "needs to find £33bn to end austerity". What the IFS has actually said is that Hammond could cancel all the austerity he currently has planned, putting £33bn a year back into the economy, and still keep the deficit at its present, reasonable level. He doesn't need to 'find' anything; the story is that ending austerity (at least its current round) would be easy and unproblematic.

There's not really any news value in "deficit situation basically okay", and since the deficit - spending more than you take in - is a simple concept and the problems with a large deficit seem intuitive, stories about debt problems are basically evergreen. (A couple of years ago there was an Australian kerfuffle about the Intergenerational Report, another fundamentally boring report cooked up to spread panic about government deficits.) The point isn't that there's dishonesty or partisanship in the media about this issue; both the FT and the Guardian have had editorials and columnists ably point out some of the incoherencies of austerity politics since 2010.

Outside editorial, though, there's a structural issue that it's possible - and easy - to write a news story about the deficit that presents it as something to worry about, and pretty much impossible to write a news story whose premise is that the deficit isn't worth stressing over. So when two reports get published that don't, objectively read, give any cause for public debt-related hand-wringing, they still make it into the newspapers as stories of budget complexity, tough decisions and overspending.