Thursday, 24 November 2016

The losers will still lose

I’m sure that I have more than a vague memory that in the last two UK general elections the winning party told us that eliminating the deficit was absolutely essential and that the sky would fall in if we didn’t.  Something along those lines anyway.  After the first of those elections, they told us it would have to be done by the end of that parliament, and their then best mates the Lib Dems agreed with them, albeit whilst quibbling about some of the details.  And after the second of those elections, they told us it would have to be done by the end of this parliament, and that it would be a lot easier without needing to have those little quibbles with their now former best mates.
Yesterday, they told us that actually, that wasn’t necessary either, and it doesn’t matter if the target isn’t achieved in this parliament – indeed, it doesn’t even matter if there’s no longer any particular target date.  Inevitably, they are blaming – in part, at least – Brexit, the argument being that a change of circumstances leads to a change of policy.  The funny thing is, though, that I don’t remember them saying in either of those two elections that there was any dependency on any particular set of circumstances or events; the need was both pressing and absolute. 
Those of us who suggested that this was all much more to do with ideology than economics were dismissed as spendthrifts, and the media – particularly the BBC – did its bit to support what was then the orthodox position by hostile questioning of any politician who had no plan to eliminate the deficit.  Labour, as usual, caved in to that pressure and agreed that the deficit needed to be eliminated, arguing only about the timescale and method.
But what yesterday confirmed is what some were saying all along.  Firstly, the deficit isn’t something which exists in splendid isolation regardless of economic circumstances – its existence and size inevitably vary over time depending on the point in the economic cycle.  It was always economic madness to seek to eliminate it at a time when the economy was weak.  And secondly, the government’s finances are not like those of a household.  Within limits, it really is possible to run a deficit more or less indefinitely, depending on a range of factors including the rate of economic growth and the rate of inflation.  I can understand why that ‘feels’ wrong to so many people, but ‘feeling’ wrong doesn’t make it actually wrong.
Blaming Brexit is something of a soft option, allowing the government a fig leaf to cover a policy U-turn.  But it’s only a partial U-turn, in the sense that whilst policy towards running a deficit has changed, policy on who should benefit from government actions – and who should pay the costs – still looks remarkably consistent with that of the previous government.  On that score, only the rhetoric has changed.


Anonymous said...

'Within limits, it really is possible to run a deficit more or less indefinitely ...'.

So you want us to follow the Italian example, do you?

No thanks.

John Dixon said...

A singularly unhelpful and unenlightening non-sequitur. Many countries run regular long term deficits; not all get into the same situation as Italy. See this chart for one example: the US has run a deficit almost every year for over a century. Although you included the words "within limits" in your quote from the post you seem either not to have understood them or else deliberately ignored them.

Democritus said...

Where the limits lie is elastic and particularly unclear in turbulent, uncertain global conditions where bond markets bear the first impact of events and are liable to stretch and snap back quite drastically with global events and market sentiment. Supply of buyers is affected by the availability of alternative investment options, but the ultimate key is money market confidence that borrowers can and will meet the repayment obligations they have incurred.

The UK and the US enjoy complete control over the fiat currencies in which they choose to borrow and can ultimately inflate away their debt repayment obligations as happened postwar by creating more money. Italy should never have been allowed to join the Euro because of it's unsustainable debt which never met the Maastricht criteria. Like Greece it is now in a debt spiral where it is becoming unable to sell enough new bonds at any yield to meet its obligations. As the saying goes if you owe the bank a grand you are at their mercy - if you owe them a billion they're at yours. This is the relationship between Italy and Germany in a nutshell ...

John Dixon said...

"Where the limits lie is elastic and particularly unclear" I agree with that, which is why I didn't say that there are no limits - although I wouldn't even add your qualification about turbulent and uncertain global conditions! Where the limits are is one of the essentially unknowables of economics. And I'd agree with those who would argue that we don't want to find out where the limit is by hitting it. But the idea that there is an absolute limit in terms of both scale and timescale in the way that Cameron and Osborne argued was ideological, and I'd be a lot less critical of people if they admitted that they were making a judgement call and explaining why they were making it at a particular level than I am of those who simply assert that we've already reached the limit because it suits their political standpoint.

"The UK and the US enjoy complete control over the fiat currencies in which they choose to borrow and can ultimately inflate away their debt repayment obligations" I agree with that as well (and it also applies to the ECB, although it's more complicated for them to achieve the objective). It's what I meant when I said that growth and inflation rates are key factors in determining whether and to what extent a budget deficit can run almost indefinitely. There needs to be some care taken of course - high inflation in one currency zone which isn't replicated in others can only continue so long before interest rates might start to undo the effect. But as long as people are queueing up to lend money to HM Government at low interest rates (which is where we are at the moment), a budget deficit is unlikely to be a problem.

Should Italy have been allowed into the Euro? I think that's a difficult one to answer. In terms of strict adherence to the Maastricht criteria, the Euro would have ended up applying to a significantly smaller subset of EU members; whether that would have led to a better or worse outcome is hard to say. Paradoxically, for all the UK negativity towards the Euro, it would probably have been a lot more successful had the UK joined in. Firstly, it would have removed one competing reserve currency from the mix, and secondly it would have enmeshed the City within the project instead of standing outside it and betting against it. But 'what-might-have-beens' help no-one, I guess.