Chris's article is as ever thought-provoking and he raises a critically important issue. As he says, the main thrust of our argument about the parlous state of the UK's public finances revolves around the fact that the so-called structural deficit is not only the biggest on record but also expected by the OECD to be the biggest among the major economies in2011. But, as Chris points out, neither we, the OECD or indeed HM Treasury actually know how big the UK's structural deficit is. So, maybe we're all worrying about nothing?

 

It's a nice thought, but wrong in our view. As we point out in our article, the big difference between the public perception, fostered by the Government, and the reality of the UK's deficit is that it was already largely in place before the financial crisis broke. ONS data show that the net debt/GDP ratio would still be 55% today (as opposed to 59.9%), if the cost of the bank bailouts were excluded. As we note, since 1997 the government spending/GDP ratio has risen by 11 points, or by £240bn in real terms, of which at most 2% points can be accounted for net investment. The rest is consumption, most of that is wages, and hence almost all of it is structural. The tax take by contrast has not so far kept up with spending. Hence the deficit.

 

So, while Chris is right to say that we do not know how big the structural deficit is, we can be pretty certain that there is one. And while we acknowledge that the uncertainties surrounding this number are currently greater than usual, they at best might mean that the structural part of the deficit might be a few percentage points of GDP lower at best. Although he doesn't actually say so in his article, that we feel, is the real point that Chris wants to make. Maybe he's right, it would be nice if it were much smaller. But we would not suggest that any government should base its policy on the assumption that a number that cannot be directly measured might be a bit smaller than its best estimates suggest it is.

But the important point is that none of this means that the concept of a structural deficit is useless. Far from it. It has a clear logic and implications for policy. So, with tongue firmly in cheek, we had a quick poll at Fathom Towers and came up with this little list of other economic concepts that cannot be directly measured, but that in our view, matter quite a lot:

We could dispense with these too, but then what would we argue about?