A balanced budget and low growth was inevitable and not a matter of chance

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The Guardian reported earlier this week that:

Britain’s budget deficit has dropped to the lowest level since before the financial crisis, laying the ground for Philip Hammond to raise government spending on public services later this year.

The Office for National Statistics said public sector net borrowing, excluding the state-owned banks, dropped by £3.5bn to £42.6bn in the last financial year, cutting the budget deficit to the lowest level since the year ending March 2007.

And then yesterday it reported:

Britain’s economy slowed to a virtual standstill in the first three months of 2018, the weakest period of activity in more than five years.

Office for National Statistics figures showed a sharp contraction in the construction sector, weaker manufacturing growth and a squeeze on consumer spending power contributed to GDP growth of 0.1% in the first quarter.

Are those two events linked? I would suggest that quite emphatically they are. My reasoning is simple. One of the identities that describes the make-up of our gross domestic product is:

Y = C + G + I + (X-M)

where)and I know I simplify, but not in any way that changes this argument):


C = Consumption

G = Government spending

I = Investment

X = Exports

M - Imports

In other words, government spending is part of our national incomes. And that has to be the case precisely because what our government spends does, literally by definition, or because of the inevitability of double-entry book-keeping, become someone else's income.

And what that means is that when a government deliberately shrinks its spending in an attempt to balance its books it shrinks national income.

The only way around that is if, of course, exports, consumption and investment rose to compensate. But why would they? First, much investment relates to government activity, directly or indirectly, so if it is not partaking in the market then less investment is likely. Second, consumers with less income, because the government has spent less, will also spend less. And third, exports usually only grow when productivity rises, but the government is not investing in that, and nor (as we know) is the private sector which prefers instead to sit on a cash mountain partly gifted to it by cuts in corporation tax.

In other words, these two outcomes of a balanced current budget and lower growth are inextricably linked.

And don't say ' but isn't lower growth a good thing?' because that's only something you can assume if the current distribution of income is one you are happy with, and I am most definitely unhappy with the current UK distribution of income.

Osborne and Hammond have conspired to give us an unequal, uncompetitive, economy. And all because of a false ideology and a lack of understanding that government spending is other people's income and does not disappear into a black hole never to be seen again as it seems both believed.