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This is the transcript:
We are constantly told that a government deficit is proof of economic failure. That claim is repeated by politicians, commentators, and most economists, but it is wrong.
The truth is simple. A government deficit is often exactly what the economy needs. In fact, the deficit tells us something very important about how money is flowing in the economy.
So the real question is not, is there a deficit? The real question is, why is there a deficit, and what does it mean?
A government deficit simply means the government has spent more into the economy than it has taken out in tax. This is not inherently bad. In fact, most of the time it's absolutely essential because when a government runs a deficit, it is adding money to the private sector.
It is supporting demand in the economy, and it is often compensating for private sector weaknesses. In accounting terms, the government deficit is somebody else's surplus, and that someone else is households and businesses.
There are many times when deficits are exactly the right policy for a government. For example, during recessions, when private sector spending collapses, and when government needs to invest in infrastructure, health, or education, and when societies face crises such as financial crashes, pandemics, or climate change.
In those situations, deficits stabilise the economy. Trying to eliminate deficits at those moments does the opposite. It cuts demand, weakens public services, and pushes economies deeper into crisis.
The real danger then is not the deficit; the real danger is political obsession with eliminating it, because when governments treat deficits as failure, they impose austerity. They cut investment. They weaken the services that people depend upon, and the result is predictable. We get weaker economies, greater inequality, and poorer public infrastructure.
So let's be clear, the deficit is not evidence of failure. Sometimes, evidence that the government is doing exactly what it should be doing, which is to support the economy and society when it needs it most.
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This is confusing me. I’m 23. We in the UK have not had deficits in my lifetime, therefore there has been no austerity.
Never mind people saying they’d like a balanced budget, it’s a lot easier to deal with their budgetary actions not their statements. There hasn’t been austerity.
Where am I wrong.
You are confusing two very different things: the existence of a deficit and the level of public spending.
The UK has, in fact, run government deficits every year of your lifetime. So on that point you are incorrect. But that does not mean there has been no austerity. In any case, austerity does not mean eliminating the deficit. It means cutting or restraining government spending relative to the needs of society and the size of the economy.
That is exactly what happened after 2010.
Three points explain this.
First, government spending was deliberately cut or frozen in many areas. Local government funding was reduced by roughly 40% in real terms. Social care budgets were squeezed. Court services, prisons, further education, and many other public services were cut back.
Second, even where spending was not cut in cash terms, it was often not increased fast enough to keep up with inflation or population growth. This is very apparent in the NHS .That is also austerity. Services have to cope with more demand using effectively less real funding.
Third, the government’s objective was explicitly to reduce the deficit by restraining spending, not to eliminate the deficit immediately. That policy was openly described as austerity by the governments pursuing it.
So the key point is this:
• A deficit simply means the government spends more than it taxes.
• Austerity describes a political choice to restrict public spending.
You can have both at the same time. And in the UK we did.
In fact, the reason the deficit never disappeared is partly because austerity damaged economic growth. When the state cuts spending, demand in the economy falls, tax revenues weaken, and the deficit often proves stubborn.
So the mistake is assuming that “deficit = no austerity”. It does not.
The real question is not whether there was a deficit. The real question is whether public services were funded well enough to meet the needs of society.
On that measure, the evidence of austerity is everywhere.
Agreed .
The other thing Andii does not consider is the aggregate of austerity measures and the year on year lack of spending which builds up backlogs to the point where the neglect in both financial and management terms is deemed insurmountable and, well, we end up where we are now – pot holes, delays in the courts, being treated in corridors – well, a long list.
And seeing government spending as investment is key.
I think you have me confusediwith another poster here…
I have no idea. `i don’tr recall all people show have posted 16 times. There have been 358,625 commente on this blog. Sorry. I replied to James Mulhall.
Yes I have Andii – I was not wearing my glasses – sorry.
I understand Richard. I think that it was Pilgrim Slight Return that made the comment I was responding to. I think what may have happened is that the way the ‘reply’ box is set up can seem to misthread replies to replies. I’m not sure who they were responding to, but it doesn’t make sense in relation to the response I put. I was merely ‘protesting’ that my name was being taken in vain, so to speak.
I am seeing if we can improve the comments section at present. There may be better software available.
Perhaps we need a different word that “deficit”? It has connotations that pull strongly against the helpful framing you elucidate.’Liquidity support”? “Fiscal lubrication”? “Money supply maintenance”? … ?
Investment.
That is what it is.
Investment in the counrtry.
The BBC broadcasting the usual Just-So stories on the Today programme this morning.
Mohamed El-Erian explaining (without challenge) that oil and gas price rises will lead to inflation, so investors will demand larger returns to invest, so interest rates will rise, so the government will have to pay more to the bond market to keep them happy, so there will be less public spending on everything else. Jesus wept.
I believe that the deficit includes savings, money that has been saved is not taxed and so increases the deficit. It sesames a bit odd that the government incentifys savings which increases the debt.
You are partly right, but the relationship is a little different from how you describe it.
When people save rather than spend, the money they receive is not immediately recycled through the economy. As a result, the government may collect less tax, because VAT, income tax and other taxes are often linked to spending and income flows. That can contribute to a higher government deficit.
More importantly, from a macroeconomic perspective the government deficit is the mirror image of the private sector surplus. If households and businesses want to save more than they invest, and the country also runs a current account deficit, then the government will normally run a deficit.
So higher private saving often corresponds with higher government deficits.
Policies that encourage saving do not “create debt” directly, but they can increase the private sector’s desire to accumulate financial assets, which the government deficit helps supply.