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This is the transcript:
Politicians love to talk about government surpluses as if they are something that is proof of their prudence, their discipline and economic competence. But that claim misunderstands how the economy actually works because when a government runs a surplus, something else must happen in the economy, and that is that someone else must run a deficit. In other words, they must borrow.
This is not about ideology. This is about basic accounting. This is always true, and it tells us something that politicians rarely admit. They will not admit that when a government takes more out of the economy in tax than it has spent back in, it might be running a surplus, but at the same time, the government is shrinking private sector wealth.
When the government runs a surplus, households and businesses must spend more than they receive from the government. In other words, they must go into debt. This is not theory. It is the fundamental accounting relationship between the government sector, the private sector, and the rest of the world.
One sector's surplus is another sector's deficit. This is why sustained government surpluses are very often dangerous and frankly should not be run because they force the private sector to borrow, and private sector debt can be dangerous, as history tells us.
Private sector debt creates:
- Financial instability.
- Asset bubbles, and even
- Economic crises.
We saw this before the global financial crash in 2008. The government in the UK ran a surplus before that event happened, but those surpluses were mirrored by exploding private debt, and then we had the collapse.
So let's be clear. A government surplus is not necessarily virtuous. A government surplus may simply mean households are borrowing too much, businesses are taking on too much debt, and financial fragility is growing in the economy.
The real goal of economic policy should not be chasing surpluses. It should be maintaining a stable and sustainable economy, and sometimes that means governments must run deficits so that households and businesses do not have to do so instead.
Let's get over this paranoia about surpluses. Governments that want to grow the economy and who need a little bit of inflation must grow their money supplies, and the only way they can do that is by running a deficit. Let's talk about reality.
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The sectoral balances identity itself does not directly say anything about GDP growth. It is an accounting relationship, not a growth equation. It only shows how financial balances between sectors must add up.
GDP growth depends on changes in spending. The sectoral balances identity only tells us how financial balances must line up afterward.
The sectoral balances identity:
-Does not determine GDP growth
-Always holds by accounting definition
-Constrains how growth can occur by linking sector financial balances.
It is best thought of as a financial consistency condition, not a growth model.
Countries like Germany grow with government surpluses because they have large export surpluses. Which means that your claims that governments need to run deficits to promote growth are not true.
The sectoral balance model is also static – it does not take into account any growth terms, such as existing savings or debt, inflation, money supply. In short, it always starts and ends at zero and does not tell us a great deal about how growth is generated, only the balances within the economy.
You entirely misunderstand the video. Your claims are all wrong. Double enrry is always dynamic, for example. I suggest you go and do alor of thinking and learning.
Hi Richard,
Just for clarity — this is predicated on no injection of cash from ‘outside’ – such as an increase in exports?
so:
“when a government runs a surplus, something else must happen in the economy, and that is that someone else must run a deficit.” becomes,
“when a government runs a surplus, without a corresponding change in the balance of exports, something else must happen in the economy, and that is that someone else must run a deficit.”
In reality, for the UK, I think we haven’t run a positive balance of exports in recent decades? Whereas Germany has.
We have a massive surplus on our capital account. The books balance.