Today, I saw the table below doing the rounds in social media, in an attempt to show some ‘facts’ about how ‘great’ the Tories have been with the economy. You can click on it to enlarge it.
Personally, when I see facts such as these (i.e. numbers thrown around trying to support one side over another) I am always very sceptical. After all, you can use the same number to support or reject a view, depending on how you’re going to present it.
So I used the same sources the table used, to see whether those ‘facts’ actually supported the view that the Tories have been doing great. If you can’t be bothered reading further, the outcome is actually the opposite. But if you do want to know why this is, read below:
I will first start with the NHS budget, as there is a valid reason I left the Annual Deficit last.
The NHS budget figure is an interesting one. The table shows a figure of £111.7bn for 2010 but I could not find it anywhere I searched. According to this document from the House of Commons Library, the NHS expenditure for the tax year 2002/03 was £66.2bn, while for the tax year 2009/10 was £118.3bn.
In any case, let's use the figures in the table for now. What are they actually trying to say? That the Tories are actually spending more money? They are not. Between 2003 and 2010, the NHS budget increased by 68.7% (from £66.2bn to £111.7bn). But from 2010 to 2017 it only increased by a mere 9.8% (from £111.7bn to £122.6bn). So in percentage terms, not only the Tories do not spend more money on the NHS, they have virtually ‘turned the tap off’!!!
Similarly, the defence budget between 2003 and 2010 increased by around 37% (from around £30bn in 2003 to £41bn in 2010), while in the next seven years it only increased by 11.2%. So if the Tories say that they are actually spending more money in defence, that is in fact not true.
You can see all the numbers I am using for yourself, by going to this useful website. You can enter any fiscal year you like to see detailed spending figures for every public sector.
Regarding education, between 2003 and 2010 the budget increased by 61.8% (from £54.7bn in 2003 to £88.5bn in 2010). Under the Tories, it suffered a decrease (!!!!) as you can see from the very same table!!
Similar results on the transport budget. Between 2003 and 2010 it increased by 55.4% (from £14.8bn to £23bn), while in the next seven years the spending increase was halved to 23% (from £23bn to £28.3bn).
Looking at the welfare budget, between 2003 and 2010 it increased by 69% (from £65.5bn to £110.7bn). In the next seven years it increased by a tiny 2.3%, not even matching the rate of inflation!!
The police budget increased by 64.7% between 2003 and 2010 (from £1.7bn to £2.8bn). In the following seven years it increased by 35.7%.
Similar FACTS show that for the 7 years to 2010, the minimum wage increased by 31.8% (from £4.50 in 2003 to £5.93 in 2010). However, from 2010 to 2017 it only increased by 26.5%. So, Labour wins on the minimum wage front too.
Tax free allowance
Regarding the tax free allowance limit, between 2003 and 2010 it increased by 40.3% (from £4,615 in tax year 2002/03 to £4,615 in tax year 2009/10). It’s interesting that the table uses £11,500 for 2017, while in fact the figure should be £11,000 which is the correct figure for tax year 2016/17. Anyway, the increase between 2010 and 2017 is 70%, so the Tories win this one, which is their first ‘win’ so far on the table.
The unemployment rate used is the post-2008 high rate. It is easy to see that after the crash of 2008, the UK unemployment rate shoot up from 5% in 2003 to 8% in 2010. So yes, the Tories get their second win on the table, for bringing the unemployment rate back to 2003 levels.
I left the annual deficit comparison last, because if we are only looking at the annual deficit only, rather than looking at the debt figure too, we are missing the woods for the trees. There is a big difference between an annual deficit and an annual debt. The deficit represents the difference between income and spending AT ONE POINT IN TIME. Debt, on the other hand, represents the total amount of money owed, built up over a period of time. So lets see a simple example to understand what this all means.
Let’s say that you have been overspending by £1000 a year, over a period of 7 years. This means that your annual deficit in year 7 is £1000 and your total debt is £7000. If you reduce your overspending to, say, £900 in years 8 and 9, £850 to years 10 and 11, £700 to years 12 and 13 and to £500 in year 14, what would be the actual results? Well, for year 14 your annual deficit reduced to £500 (so you halved it from what it was seven years earlier). But your debt has still increased, since you were still overspending every year. Your debt is now £7,000 + £900 + £900 + £850 + £850 + £700 + £700 + £500 = £12,400. So, even though by year 14 you had halved your annual deficit, your total debt has increased by 77% (from £7000 to £12,400). But at least you have reduced the rate of debt increase and once you start saving money, that debt will reduce.
HOWEVER, the way your own finances work is COMPLETELY DIFFERENT from how a nation’s finances work. For an individual person, his income is not affected by how much he spends. In our example, your annual income is still being paid to you, unaffected by whether you are overspending or not.
But in a national economy, every first year Economics student will tell you that: Total Income Equals Total Expenditure. If you find that hard to believe, lets briefly see what that is:
A country’s GDP is measured as follows: GDP = Total Consumption (what we spend on goods and services) + Total Investment (what is invested in machinery, equipment and houses) + Government Spending + Net exports.
This shows that a country’s GDP has to equal the country’s total spending. That is, the UK’s Gross Domestic Product must equal everything we spend or invest in equipment and property, as well as government spending and the cost of net exports.
So, when a government is taking austerity measures to try to reduce the deficit, in the hope of reducing the debt, it is actually making things worse. Why? Well, because if we use the equation above, if all other factors remain unchanged and we just reduce Government Spending, this means that the GDP will automatically reduce too. Therefore, by reducing total expenditure total income reduces too.
This is very easy to demonstrate in real life. If a government decides to implement cuts, companies and people reduce the amount of money they spend. As such, Government Spending reduction results in Total Consumption and Total Investment reductions too. Consequently, the GDP part of the equation reduces further, meaning that total income reduces further, causing a downward spiral.
And this is why, when a country is in an economic crisis, Government Spending should actually increase, to balance the reduction in Total Expenditure (as people stop spending due to the crisis) and Total Investment and try to bring them back up on the rise. Similarly, at times of an economic boom, when Total Investment and Total Consumption is on a high, the government can then reduce Government Spending in an attempt to reduce the total debt.
Let’s bring all this back to the figures shown in the table:
The UK’s public net debt between 2003 and 2010 increased by 183.7% (from £356.2bn in 2003 to £1.02tr in 2010). The massive increase was mainly due to the economic meltdown in 2008, of course. But despite the budget cuts in the following seven years, the public net debt continued to increase. It increased by 71.1% in that period, from £1.02tr to £1.7tr.
If we keep the equation I gave earlier in mind, this continuous increase in public debt is easy to explain. The Tories try to reduce Government Spending by a series of budgetary cuts and increases in VAT rates. Knowing that this will automatically result in a fall in GDP, the Bank of England reduced interest rates to their lowest ever in an attempt to increase Total Consumption (people would rather spend their money than keep them in a bank where their value would reduce due to inflation). At the same time, the Bank of England goes into a program of quantitative easing (QE), which means that it adds new money into the economy by buying assets, such as government bonds, in the hope to increase Total Consumption and Total Investment. Obviously this new money creates the danger of rising inflation.
So, on one hand we have major cuts in public spending (which affects greately the country’s welfare, health services, education, policing, etc), the impossible task to try and save money (since the interest rates in your bank account are almost zero) and the danger of inflation due to the QE. You create a downward spiral because Total Consumption will not increase (if you stall people’s wages, cut their benefits and increase the prices of goods), Total Investment will reduce too (as companies are unlikely to spend money in such uncertain times) and Net Exports could follow a similar fate.
So, while the Tories prefer to give you the annual deficit figure because it shows that the annual budget deficit is reducing, this is to be expected when looking at the massive cuts they have been implementing in the past seven years on important public services. However, despite these cuts the annual debt keeps increasing because Total Income = Total Expenditure.
I will leave the final word to you. I simply decided to give you the other side of the facts this table shows. As always, when one party throws you ‘facts’ to support its argument, never take it for granted. Do your own research. You will be surprised how easy it is to prove them wrong.