The FT has reported that:
George Osborne will next week announce plans to put into law a promise to balance Britain's underlying budget deficit by the middle of the next parliament, in a move partly intended as a trap for Labour.
There are three immediate observations to make, and then a more serious, conceptual one to raise.
The first, and glaringly obvious, point is that this is as petty and simultaneously surreal as Alistair Darling's Act passed in 2010 requiring a halving of the budget deficit in the current parliament. He had no idea how to do that and George Osborne has proved it was not possible. That Act was a folly by a man who knew he had no chance of having to implement the law he created and I can only presume that George Osborne is putting forward this proposal precisely because he knows there is no chance that he will be Chancellor, or even in government, after May 2015. The Liberal Democrats support for the proposal is testament to that.
Second, as a matter of fact Osborne has failed to meet any target date for balancing the budget to date: there is no reason to believe why he should do so now.
Third, if Labour have any sense they wont see this as a trap but as an opportunity to spell out just why they think it appropriate for them to have power over the economy, and that George Osborne should not be trusted with it.
Which brings me to the conceptual point, which is that the last thing we need right now is a balanced budget. I explored the reasons for this last December and they're worth repeating. As I said then, the trouble with George Osborne is that he has never studied either economics or accountancy. If he had he would realise that there is no merit in a balanced budget, let alone a budget surplus (for which he aims, to reduce our debt), not least because such a surplus is part of an accounting equation. At the macro (national) level, which is what we're talking about, there are some accounting equations that hold true in economics. One is that the economy does in fact balance. It may well balance at the wrong point with a result that we do not want, but it does balance. And what that means is that if someone is in surplus then someone else is in deficit.
There are not too many variables in this equation either: just the government, consumers (that's you and me), business and trade. So, if the government runs a surplus someone else has to run a deficit. It's pretty obvious really: the books will balance. So, a government surplus is matched by increasing consumer debt, business spending or money flows via trade.
We have remarkably little control over trade. First, we almost invariably run a deficit and secondly we have (unless we suddenly and ruinously begin using interest rates to alter exchange rates) almost no control over that rate so let's treat that as fixed to the extent that it is beyond control. And let's also be aware that such is the state of the Eurozone we should not be looking for much hope from that source — which is our biggest market.
In that case we're looking for a government surplus to be matched by consumer borrowing and business spending on investment.
Now, again, let's deal with the easy one — business spending. This would be on investment of course; we can't imagine they're going to start a free for all in pay rises for anyone but bosses. But as we know, whilst they're laden high with cash (which right now they lend, in practice, to the government) they appear to have no intention of spending that and worse still appear clueless as to what they might spend it on. There is no hope of them creating a deficit on their budget, and so they will not create one for the government.
In that case we're down to consumers to start borrowing heavily to make the government surplus happen. The simple fact is that Osborne is wholly dependent on the very thing that caused the recession - rising consumer debt - to fund his balanced budget giving his other current economic policies.
But he doesn't just need a but of a bubble, he wants us to plummet into debt. As Duncan Weldon, when at the TUC argued, George's growth plan in 2010 was predicated on consumers going into increasing household debt on the basis of their belief that a budget surplus and tax cuts would be just around the corner. This was what George called expansionary fiscal contraction at the time. It was nonsense then and it is nonsense now. Consumers had more sense: they did not believe him and so we got a recession because they saved instead of spending. But now George is back on the same band wagon — with the same tune — selling the same myth.
Will it happen? No is the simple answer: whatever growth we have is not giving rise to extra consumer spending. Consumers are not that stupid and most simply won't be offered the credit from anyone but Wonga this time, and that runs out fast, and with it Osborne's hope of a surplus. All we'll then get is a Geddes Axe, 1922 style - and we all know what followed that.
And this is utterly absurd. First we do not need a surplus: when the government has control of its currency it can run a deficit equivalent to debt multiplied by the interest rate and sand still — so £30+ billion a year of deficit is balance right now.
Second, as George has now found the multiplier he should be spending — as that is the way to clear debt.
Third, the reality is that a balanced budget is meaningless as goal. All it actually says of the person who promotes it is that they do not want to accept any responsibility for the economy that they have been elected to manage - and that because they're clueless they won't intervene in it. In that sense a balanced budget is the policy of the person who does not believe in democracy or choice and who wants power to deny it to others.
Which pretty much sums up the poverty of Osborne's economic thinking.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Would you support a policy of balancing public spending with public income over the medium term – over a fiscal cycle; say, 5 to 10 years, perhaps? Or would you say that a state with control of its currency can essentially spend as much as it likes for as long as it likes? Or perhaps something in between?
I think managing for full employment and modest inflation far more important than balancing a budget – especially when there is a strong market for government bonds, as there is
The obsession with denying people the chance to buy bonds that they clearly want seems very odd to me
That sounds rather like Garbraith on being asked what do you aim for – employment, interest rates or inflation? To which he answered which ever one you don’t currently have. In many respects that would be a far better definition of balancing an economy, balancing between those three points.
On a different note, Richard, I found the above very interesting and have long suspected that Osbourne was either incompetent or outright decietful to compare the budget to a family overdraft but could not explain why
I’m not an economist (but I am an accountant) but would like to understand more about how the economy balances as you pointed out above – are you able to point me in the right direction to learn about this?
Many thanks
Read Modern Monetary Theory is my first suggestion
If Labour has any sense? I think we all know the answer for a party that misses every open goal, took a year before deciding the bedroom tax should be opposed and are devotees of the ‘Austerian faith’. I expect nothing from them, Richard.
Pardon me but how can you suggest that Osbourne’s thinking is ‘economic’. You’re giving him too much credit Richard. He is an ‘anti-chancellor’ and his ‘thinking’ makes no economic sense whatsoever – he is an economic vandal . What we are seeing is Osbourne’s fanatical ideological thinking and a sly and knowing destruction of the state’s financial apparatus to support growth in the name of ‘free markets’.
And we also get hypocrisy: it’s OK for corporate buy outs to use debt or for a football team to be bought by a foreign investor who will then load the debt of the purchase onto the club’s books. It is OK for indivduals to take on debt to buy a new car every whatsoever but – for no good reason that I can see – it is apparently wrong for a government to have any debt at all even in the name of making improvements to the lives of voters. It’s the same old neo-lib testicular material of private = good; public = bad.
I do not share your view that he will not be chancellor after the election. Too many people have bought into the view that austerity is necessary. Darker days are looming. UKIP will skew the vote. It is highly likely that things must get worse before they get better. I mean, look at the amount and nature of the trolls you’ve had to deal with over the years? I think that there is a long way to go yet before any epiphany about the lies of neo-lib markets and economics are finally revealed to all as pure fantasy. Having said that, please keep doing what you do. One day, you and others will hopefully become as organised as the neo-libs and work together just as effectively.
Richard, honest dumb question: if the economy balances, and the Government is currently running a large deficit and has been for some time, who then is in surplus?
The answer may seem obvious to some, but it’s not clear to me. The reason I find this tricky to grasp is that in my head I am trying to fathom how simultaneously the ‘Corporate’ world can be sitting on a cash mountain; and at the same time, the likes of Ann Pettifor and others have been demonstrating how corporate debt, and particluarly debt of financial institutions has rocketed. How are those two apparently contradictory states possible?
Business is saving massively – large ones in real cash and small ones by reducing borrowing
Individuals are saving – by repaying mortgages in part
And money is coming into London
Every time we have tried to get the deficit down, we have flung the country into a recession.
Say next year, Osborne wanted to cut the deficit by 10%. The deficit is around £100 billion. That would remove at a stroke around £10 billion from the money supply, which will have to be made up with self-defeating cuts or public sector sell of or even (heaven forfend!) income tax rises.
Europe has spent six years in a futile attempt to get debt down by cutting spending, when spending is exactly what is required to get an economy moving.
We should always remember also, the public debt we have is anything but unmanageable and was not caused by government overspending but by bailing out the banks.
Time to ditch junk economics.
Agreed!
Richard – thanks. I get that, but how does that square with the assessment that there is a huge amount of corporate debt? http://www.debtonation.org/2012/04/ann-pettifor-speech-notes-for-presentation-to-the-just-banking-conference-edinburgh-20th-april-2012-2/. Big business is sitting on a huge cash pile but is simultaneously carrying huge amounts of debt.
They are different sides of the balance sheet
The reality is cash is growing and the debt is financing it
Nothing is net happening. Net business investment fell last quarter
“Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election”
http://mainlymacro.blogspot.co.uk/2014/11/understanding-george-osborne.html
Totally reasoned comment
“….the trouble with George Osborne is that he has never studied either economics or accountancy. ”
Ed Balls has but he doesn’t seem to offer much different.
Richard, surely you have to admire Osborne’s attempt to emulate King Canute in his lawmaking. Though, unlike Osborne, Canute was supposed to have known what he was doing.