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):
Y = GDP
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.
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You are making a basic error here. Several actually.
The budget deficit is falling – but overall government spending has not been falling. Austerity policies simply have meant it has not been rising as fast.
Accounting identities are hardly the best way to look at GDP, but budget deficits or surpluses simply don’t come into the identity you provide above. “G” is the only thing that does and that is total government spend, not how it is funded. Your claim is that G is falling, but this is simply not the case.
“In other words, these two outcomes of a balanced current budget and lower growth are inextricably linked.”
No, they really are not, and certainly this can’t be claimed from the accounting identity you use above – which does not take into account at all how government spending is funded or the size of any budget deficit or surplus. Your claim is manifestly false.
Using accounting identities like this also allows people like you to argue (as you have done) that government spending should always be increased, but of course accounting identities miss most of the picture, and inevitably people who use them to make economic claims don’t really know what they are talking about.
I am well aware that overall government spending is rising.
But then you are igno0ring the fact that so is population, so it should or we’d be in an even bigger mess than we are now.
And I did not say G was falling: I was discussing it’s funding. That’s something else, altogether.
I am afraid to say that you are making an entirely bogus ‘straw man’ argument that has nothing at all to do with what I said, which would hold true whatever the size of G was and whether rising or falling, which rather proves the irrelevance of your claims
Compare and contrast:
“I am well aware that overall government spending is rising.”
“when a government deliberately shrinks its spending”
“Second, consumers with less income, because the government has spent less”
Population is not a factor in the accounting identity you provide.
“And I did not say G was falling: I was discussing it’s funding. That’s something else, altogether”
The title of this post talks about budget deficits and GDP growth. You then use the accounting identity G which means total government spending, and has nothing to do with how it is funded, deficits or surpluses. Your argument might be stronger if you actually used relevant terms, and an equation where budget deficits have literally no bearing on the outcome. You also handily ignore all the other terms in your accounting identity. Which means that your title is even more spurious.
This is truly terrible economics.
So terrible it’s widely recognised by economics professors to be true
But to make the point: the government has deliberately shrunk its spending compared to what is required and as a proportion of GDP: you ignore the fact that 99% of all readers would know this and I presume I do not have to spoon feed
And the fact is that many consumers do have less – that’s what the attack on those on benefits is all about. Perhaps you were unaware, but if so, how?
And the formula is clearly a funding one
And yes, the arguments do flow and all the terms are right
And I strongly suspect you’re here to roll from a right-wing perspective because nothing else explains your commentary
Sarah says: Various things and I don’t understand why.
“The budget deficit is falling — but overall government spending has not been falling.
I’m suspicious of the little graph I saw (in the FT) the other day, showing this purported fall in the deficit, my natural (or perhaps nurtured) cynicism inclines me to the view that some accounting jiggery pokery makes this picture a defensible ‘statement’ of partial and deliberately misleading truth. Alarm bells ring when you defend the position by stating the ‘government spending has not been falling’.
If government spending has not been falling I am wondering what you think it is spending this still, (albeit more slowly) rising amount of money on. ? I know where I think it’s going, but I’d like to have your take on it. Particularly given your comment
that “Austerity policies simply have meant it has not been rising as fast.”
That sounds like a tacit approval of Austerity policies to me. And in my considered opinion there is nothing ‘simple’ about austerity polities except the mind that conceives them to be in someway a good thing – particularly given the way they have been deliberately targetted.
“Accounting identities are hardly the best way to look at GDP……” There isn’t a good way to look at GDP. It’s a highly deceptive metric which should have been discarded years if not decades ago.
“[Richard Murphy’s] claim is that G is falling, but this is simply not the case.” So where is the money being spent, because it sure as hell isn’t being spent on any thing visibly useful. The NHS and social care provision is falling apart at the seams. Education is stressed at primary level, secondary level and student loans should in theory have de-stressed tertiary education, but all indications are that it has done nothing of the sort.
I thought I was with you for a moment when you go on to say:
“Using accounting identities like this ……(Whoop Whoop ad hominem attack: also allows people like you to argue (as you have done))…… that government spending should always be increased, but of course accounting identities miss most of the picture, and inevitably……. ”
But then you spoil it completely “…….people who use them to make economic claims don’t really know what they are talking about.”
I venture to suggest they know exactly what they are talking about: accounting identities. Yawn….z.zzzzz . And you are doing the same thing arguing the toss about arcane semantics.
Sure, you are quite right that government spending doesn’t always have to be increased. Even though it seems to be doing so, according to you (and I don’t dispute it) anyway. But the effect of increasing government spending too slowly as we have done over the past eight years and spent what increase there has been on the non-productive economy firmly indicates that if government spending is too low and inappropriate it shuts down the economy.
I could have told you it would do that in 2011. So I’m not in the least surprised; except that in so far as it has taken quite so long for the governments rather useless figures to reflect what was inevitable; austerity strangles the economy and makes people unhappy, unwell and in some cases dead.
Try it with your own household budget if you don’t believe me.
You don’t have to be an economist or a mathematician to understand the relationship that Richard makes clear here . I have been driving for 52 years; never until the last two years have I seen our roads in such a terrible state . This is a matter of policy driven by the ideology of a balanced budget which implies either ignorance of the function of government in money creation ( and its relationship with tax ), or a deliberate refusal to acknowledge the reality that we see evidence of all around us , that insufficient money is being created by government to do what needs to be done and the result is a lack of growth .
This, and an understanding of twin deficits hypothesis and sectoral balances is all a layman needs to understand that most rightwing economics which attacks government activity is economically illiterate.
Attack benefits and people may draw down savings (or binge on credit which for purposes of the accounting identity is the same thing) and consumption may grow for a bit thus supporting a reduction in govt deficit. But it’s totally unsustainable, and the UK has reached that point now looking at Q1 growth and the crisis on the High Street.
Add in the Brexit demolition of Business Investment and one wonders where growth is going to come from in the near term.
You’re both wrong.
The figures are shite because it snowed. It said so in the paper so it must be true.