UK budget announcements inevitably lead to a deluge of reporting on how the chancellor’s latest plans for the economy will affect our wallets, pensions and investments, as well as the bottom lines of businesses, charities and entire industries.
Sifting through all of this reporting can be confusing. Not just because of the sheer volume of budget-related news and analysis, but also because it’s difficult to accurately break down the real-life impacts of complex policy decisions for a wide audience, many of whom don’t have a background in economics or business.
A BBC review of the impartiality of its reporting on fiscal policy – taxes, spending, government debt and so on – was certainly critical of the British broadcaster’s attempts to explain the economy. The report, published in November 2022, reflected many of the frustrations that academic economists like me have about the reporting of economic issues.
It’s unclear how much impact the BBC report will have on financial journalism, but we can at least use it to help people that aren’t economists spot when the reporting of economic issues may be more misleading than informative.
Recent figures showing unexpectedly high government tax takings provide a great example. The data led to suggestions that the chancellor, Jeremy Hunt, will have more money to spend or give away in his budget.
But this treats the government as if it was a cash-constrained household, unable to borrow or save. Most governments find it easier to borrow than households and firms. They can also create money through their central banks (as the UK did during the pandemic). So remember: any references to the government “maxing out its credit card” should be ignored.
Debt isn’t always bad
Assumptions that debt and deficits are inherently bad are also incorrect. For example, you might hear about “worrying” or “alarming” increases in government debt, which implies the government should be doing something to stop it – or even that it reflects government irresponsibility.
This kind of reporting was particularly prevalent under the UK coalition government of 2010-15. Some research shows it did a great deal of harm in terms of encouraging public acceptance of spending cuts that have led to today’s impoverished public sector – and yet it persists.
In reality, debt and deficits allow governments to avoid cutting spending every time taxes are temporarily low (in a recession, for example) by borrowing instead.
Most economists would say what actually matters is that the ratio of government debt to GDP should be stable in the long run – over decades rather than years. A record recession, like that of 2008-2009, is bound to produce record deficits. But economists generally have very little idea what the optimum level of government debt should be. In fact, governments can allow their debt to rise in recessions, as long as it stabilises (as a ratio of GDP) when the recession is over.
Reporting about debt sometimes also reflects two more general problems with economic news. The first is political, and involves internalising government policies. For example, you might read that a rising deficit means the government will have to cut spending.
What a news article on this topic should actually report is that a rising deficit means the government will say it has to cut spending. In fact, other choices like higher taxes or accepting higher borrowing are also possible. It is seldom true in economics that there is no alternative.
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A related problem is when data is presented incorrectly, particularly in a way that creates alarm. The BBC review starts with the example of a chart showing the value of government debt since 2020, with steady and sometimes quite rapid growth. But this value can be expected to rise over time because of inflation and economic growth.
So, be suspicious of charts that fail to “normalise variables” by, at the very least, adjusting the figures to account for inflation. Better still, such charts should show these figures as ratios to GDP, which will reveal any true underlying trends.
Selective statistics
We all know about the dangers of selective statistics. A notorious example that academic economists warn against is the comparison of GDP growth rates across countries in a single year. The winners and losers in such comparisons can vary a lot depending on the year chosen. It is always better to make longer-term comparisons.
But even when charts are used to show a decade or two of data, they can still be misleading if longer runs of data are available. The ratio of debt to GDP may look high today compared with 40 years ago, but it remains much lower than in the decades after the second world war.
NHS spending provides a good example of the last two problems combined. Even if you normalise NHS spending as a ratio of GDP over time, it tends to rise (the decade after 2010 is an exception). This can suggest the NHS is getting the resources it needs. However, the ratio of healthcare spending to GDP has been rising steadily in many countries since the second world war, for reasons including ageing populations and advances in medicine.
Rising healthcare spending
So the key question is not whether NHS spending is rising, but whether this spending relative to UK GDP is above or below the underlying positive trend seen in other countries over decades.
Economics is, of course, not alone in being misrepresented by media reports. But I would argue that reporting that gets the economics wrong has had an important impact on politics over the last 15 years.
