From the TUC

Budget surplus target plays politics with economic growth

10 Jun 2015, by in Economics

Is it possible that anybody thinks the budget surplus law apparently to be announced in the Mansion House speech is about anything other than politics? It’s definitely stupid economics.  

Inevitably spending was higher and taxes were lower in the UK after the financial crash, and we had a small budget deficit going into it. In an ideal world a better-balanced economy would have been generating higher revenues before the crash, but the idea that running a small surplus would have done anything to offset the damage done by an international banking crisis is idiotic.  

While the financial crisis raised many questions that still remain unanswered, the essential and immediate question for the government budgetary policy is why five years of significant spending cuts have failed in their central objective of reducing the public deficit, and resulted in the slowest recovery and worst living standards crisis on record.  Is it really reasonable to consider that another five years of (more severe) spending cuts, under more unstable economic conditions (slowing growth, disinflation), is genuinely likely to turn things round?  The same questions go for the eurozone, only moreso. In the meantime the world has become reliant on QE/extensions in central bank balance sheets to an extent that is surely very worrying.   

The Chancellor avoids the genuine economic dilemmas of the present, in order to play the ugly political games of the past.   

He might genuinely like to pontificate on budget surpluses, but his present strategy is highly unlikely to deliver any such thing. For a budget surplus is an outcome of the interplay between government fiscal policy and the economy as a whole. To spell out the perfectly straightforward detail: austerity reduced growth more than the government (and the OBR) expected and likewise growth in labour income (i.e. employment multiplied by wages); reduced labour income has meant reduced taxes and a failure to reduce the deficit by to anything like the extent planned. For the current financial year (2015-16) the government originally expected to be borrowing £20bn, instead the OBR now expect borrowing of £75bn.

 The opposite course of events might be illustrated by the policies of the post-war Labour government. Beginning from the biggest debt on record after the Second World War, they introduced the NHS, universal education, built houses, built infrastructure and set up the welfare state. After demobilisation, spending increased every year, but the post-war deficit had become a surplus by as soon as 1948 and public debt as a share of GDP was on a reducing trajectory throughout. Growth was advantaged both as a result of these spending initiatives as well as a tightly restricted banking sector, focused on the needs of business and industry. 

The Chancellor would do better to look closer at the relationship between his spending policies and economic growth, rather than playing political games with the electorate. 

2 Responses to Budget surplus target plays politics with economic growth

  1. Postkey
    Jun 11th 2015, 9:17 am

    ” It’s definitely stupid economics.”

    ” 3. Fact: U.S. depressions tend to come on the heels of federal surpluses.

    1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
    1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
    1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
    1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
    1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
    1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

    4. Fact: Recessions tend to come on the heels of reductions in federal debt/money growth (See graph, below), while debt/money growth has increased when recessions were resolving. Taxes reduce debt/money growth. No government can tax itself into prosperity, but many government’s tax themselves into recession. ”

    http://mythfighter.com/2009/09/07/introduction/

  2. Postkey
    Jun 11th 2015, 9:18 am

    ” . . . as well as a tightly restricted banking sector, focused on the needs of business and industry.”

    R. Werner believes that the ‘man-made problem’ was the issuing of the ‘wrong’ type of credit. There is ‘productive’ and ‘unproductive’ credit.

    “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power – something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”
    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf