The small matter of the bill, Professor...

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the-small-matter-of-the-bill-professor

Professor David Blanchflower has a post on the New Statesman blog today arguing that David Cameron's credit card analogy for the national debt is wrong:

Cameron shows no understanding of basic accounting. I guess that isn't surprising for someone who has never run a business and had to file basic accounts. Folks with silver spoons don't need to do that. Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament, and even Downing Street.

Basically, Prof Blanchflower's argument is that government expenditure isn't analogous to credit card spending because, if done right, government spending would buy assets that would deliver higher long-term growth. Well, maybe. But the problem with this argument is that most government spending isn't capital expenditure – roads and new schools – but current expenditure. That's things like wages, welfare payments, pensions, debt interest, and other things that don't deliver an increased economic return.

As far as I understand Prof Blanchflower's blogpost, David Cameron is an economic simpleton because his maxed-out credit card analogy doesn't account for capital spending. But this implies that most (or much) of the government's expenditure goes on capital projects, which is simply untrue. Total Managed Expenditure (TME) was around £696.8bn in 2010-2011. Of this, capital expenditure was £59.5bn – just £9.5bn higher than the total interest on government debt that year.

In other words, the capital investment that Prof Blanchflower is talking about accounted for just 8.5% of total government expenditure in 2010-11. That's not quite the picture you'd get if you read his post by itself, and it gives the lie to the notion that we don't have a debt problem.