Quote of the day 25th November 2017

"Labour’s shadow chancellor, John McDonnell, was unable to put a figure on how much his party’s plans to invest around £50 billion would add to the national debt.

And the answer he did give suggests he doesn’t understand how government debt actually works."

This was the original title of a Channel 4 Factcheck article about the shadow chancellor's Andrew Marr interview.

After I had put it up here, the title of the article was subsequently changed to

"John McDonnell doesn't tell the whole story about Labour's borrowing plans."

and the article was slightly reworded - in the words of the notice at the end of the revised article,

"Amendments were made to this article on November 25 to clarify the difference between paying the interest on the national debt and paying the debt off. The headline was changed and an incorrect figure was removed."

Bear with me, I think it is worth explaining what has and has not changed in what Channel 4's Factcheck article says.

The original article suggested that McDonnell "appears to be conflating GDP growth with tax revenue" which in my opinion is a completely reasonable interpretation of the gap between what he said and the whole picture.

Channel 4's revised article still says that

"what he didn’t mention is how much Labour’s plans would add to the underlying national debt.

And the key to answering that is working out how much their investment would yield in tax revenue."

The original article went on to say that:

"Put simply, Mr McDonnell said that his planned investment won’t add to the government debt because he seems to think that:

• £1 of government investment = £1 of GDP growth = £1 tax revenue

When in fact, the formula looks like this:

• £1 of government investment = £1 of GDP growth = £0.35 of tax revenue"

This has now been revised to the following very similar statement

"Put simply, you might take Mr McDonnell’s claim that the planned investment would “pay for itself” to mean that:

• £1 of government investment = £1 of GDP growth = £1 tax revenue

When in fact, the formula looks like this:

• £1 of government investment = £1 of GDP growth = £0.35 of tax revenue"

They original article concluded that ..

"he was answering a question about how much his plans would add to the national debt.

He suggested that for every extra pound the government spends on investment, it will get the same back in tax revenue “immediately” because it “puts more people back into work, they pay their taxes and as a result of that you recover your costs.”

Mr McDonnell said the increase in debt payments under Labour would be “minimal”.

But that’s based on a false assumption that every pound of government investment will bring in an extra pound in tax revenue. In fact, for every £1 of additional investment, the government can only expect about 35p more in tax revenue.

On that basis, we can’t see how Mr McDonnell can sustain the claim that Labour’s plans will pay for themselves through taxes."

The revised version still accuses John McDonnell of not accurately describing the full picture.

However, while still disagreeing with him, C4 now interprets the shadow chancellor's comments differently and instead of suggesting that he appears to be conflating national income with tax revenue, C4 now suggests that his statement is based on the claim that the extra government income might cover the interest on the extra debt but they add that he is failing to mention that the extra government revenue will not begin to cover the extra debt.

The article now continues

"It’s possible for Labour to claim that tax revenue might offset the interest on the additional debt.

But there’s no way that enough revenue could be raised to cover the additional debt itself.

Does it matter if we have more debt?

The Institute of Fiscal Studies carried out a detailed analysis of Labour’s spending plans before the last election.

They said Labour’s extra spending on infrastructure “could still be consistent with debt falling as a share of national income”.

But they said the national debt would fall much more slowly than under Conservative plans.

And Labour would have to raise taxes substantially too."

They conclude

"So the national debt would inevitably grow under Labour plans, and take longer to pay off."



Both versions refer to a good article by Julian Jessop, chief economist at the Institue of Economic Affairs,

"Why there really aren't any magic money trees"

which explains the analysis above in more detail. Jessop sounded a word of warning to people on both sides of the political spectrum but particularly Labour, and explained why the rare economic conditions in which the idea that government tax revenues increase to pay back government spending could come anywhere near being true simply do not apply to the UK today.

(Obviously this article has been rewritten several times to reflect changes in the Channel 4 article it describes.)