Confessions of a deficit denier

Guest Post

The phrase ‘deficit denier’ is thrown around as an insult almost on a par with the denial of major historic disasters. As an event I clearly cannot deny the existence of a budget deficit at the present time, nor deny that there have been budget deficits for the vast majority of my lifetime.

I am though a ‘deficit denier’ in two important respects. The first is that I (and many others) deny the proposition that the budget deficit is the ‘most important economic problem’ facing the UK. Think of the economic problems facing us – poverty, unemployment, need for a greener economy and tackling climate change, low productivity growth, current account deficit, lack of housing etc.— against which any budget deficit problem fades into near insignificance. Even if the budget deficit is regarded as an issue, it should be seen as a sign of imbalances in the rest of the economy, and it is those imbalances which need to be addressed. When the deficit rose sharply in late 2008 and into 2009 it reflected the imbalances, at that time particularly the collapse of investment and of consumer demand. At present a growing imbalance is the current account deficit, and it is that deficit which needs to be addressed.

The second denial concerns the need to eliminate the budget deficit as the end point of fiscal policy. The austerity brigade promote the view that government budgets have to be balanced or in surplus (as now proposed by Osborne). And some anti-austerity campaigners still adhere to some need to eliminate the budget deficit, even if it is the sense of St Augustine ‘Lord, grant me chastity and continence; but not yet.’ Let us first recognise that to some degree growth would reduce the budget deficit, notably as tax revenues rise, and that allowing recovery to continue would allow the deficit to fall. The usual rule of thumb is that a 1 per cent increase in output would reduce budget deficit by the order of 0.5 per cent of GDP. Hence it would appear that 8 per cent higher output would be sufficient to clear the present budget deficit. However, growth which continued (and did not just represent a recovery from recession) and which involved growth of productivity and real wages would lead to public expenditure being higher as public sector wages linked with private sector wages and pensions and other transfer payments indexed to wages. In that setting the deficit would only be significantly reduced with growth if public sector wages and pensions were reduced relative to private sector wages.

The appropriate target for the budget position (whether deficit or surplus) is to ensure that fiscal policy is consistent with the achievement of high and sustainable levels of employment which we could recognize as full employment. How big or small such a deficit (or surplus) would be clearly depends on what is happening elsewhere in the private sector – what is the levels of investment and savings, what is the scale of exports, imports and the current account position. The calculation of the necessary budget position is not an easy one to make, and the budget position so required shifts over time. It is also not an easy view point to put across. But, to coin a phrase, there is no alternative if high levels of employment are to be achieved.

Malcolm Sawyer

(m.c.sawyer@lubs.leeds.ac.uk)

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