The basics of budget balance

Posted on

My friend and occasional co-author Prof George Irvin has written an excellent blog for under the above title. As he says in his introduction:

Understanding basic macroeconomics is important, and what’s more, it’s easy. Without macroeconomics, we can’t hope to understand the ‚Äòbudget cuts’ debate. Yet one of the most difficult issues to put over to the voting public is precisely the question of whether budget cuts are necessary? The typical voter thinks they are‚Äî-and that in hard times, everybody (households and governments alike) must tighten their belts.

‚ÄòIt’s only common sense’ you may think, but the common sense tells us the earth is flat. In truth, if the economy is to grow when households tighten their belts, governments must spend more, not less. Moreover, this follows from basic macroeconomic principles‚Äîabout which more below. But first, how did we get into this mess?

And as he concludes:

The problem at present is that Angela Merkel, like David Cameron, is trying to override the automatic stabilisers by insisting on large cuts to balance the budget quickly. Such cuts are almost certain to prove counterproductive, all the more so because if all advanced countries cut their budgets at the same time, this results in the export of deflation—the present-day equivalent to the beggar-my-neighbour competitive devaluations of the 1930s.

None of the above is particularly ‚ÄòKeynesian’; rather, what I have set out is the logic of basic national accounting identities. It’s time our leaders learned a bit more about macroeconomics.

I recommend the filling in the middle to all readers here.