How ambitious is Labour's deficit reduction plan?
“If we went ahead with the plan of halving the deficit in four years, in four years' time our deficit would be bigger than Portugal's is now.”
David Cameron, Prime Minister’s Questions, 26 January 2011
With Leader of the Oppostion Ed Miliband attacking him on the “disappointing” growth figures, Prime Minister David Cameron counter-punched at PMQs with the assertion that, thanks to his Government, “Britain is no longer linked with countries such as Greece, Ireland and Portugal.”
According to the PM, if Labour’s plans to halve the deficit over the course of the Parliament had been followed, this would not be the case.
In nominal terms, Mr Cameron is correct. At the time of the March 2010 Budget, when the previous Government detailed its intention to halve the deficit it stood at £164 billion. This was due to be reduced to £77 billion by 2014-15 under Labour’s plans.
By contrast, the Portuguese budget deficit for 2010 was €14.25 billion, or £12.26 billion. This is clearly much lower than the UK’s projected deficit for 2014-15.
However this is something of a misleading comparison. The UK also has a much larger economy than Portugal, and the standard method used to make international comparisons accounts for this by sizing up the deficit as a share of GDP.
Using this method, Mr Cameron’s claim comes unstuck. The March 2010 Budget shows that in 2014-15, the deficit was projected to fall from 8.6 per cent of GDP in 2011-12 to 4.2 per cent in 2014-15. The Portuguese Government announced this month that it had reduced its deficit from 9.3 per cent of GDP to 7.3 per cent in 2010.
As a share of GDP therefore, the previous Government actually planned to cut to a level much lower than Portugal’s current deficit.
The Prime Minister is not wrong to point to the nominal size of the UK and Portugal’s respective budget deficits, so long as it is clear that this is what he is doing. This is important as the standard measure used to compare national deficits – adopted by the OECD, IMF and others – takes account of the relative size of the national economies. By failing to clarify this, Mr Cameron’s assertion could easily be misconstrued.
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