Debt, Growth and Hypocrisy
It’s interesting that back when Brown was running a surplus the Tory attack was as follows:
The Conservative Party has accused Labour of raising taxes without delivering service improvements.
So there we go – if the Government runs a deficit then that’s reckless, if they run a surplus they are ‘raising taxes without delivering service improvements’.
This shouldn’t come as a surprise – I can’t imagine any situation in which a democratically elected government could continue to run a surplus over the medium term. The clamor for more spending from the left or tax cuts from the right would quickly become unbearable.
Now I imagine many commentators are about to graffiti this post with supposedly insightful comments such as ‘This proves Keynes wrong, he said you should run a surplus in the good times and you say the government can’t’.
Which really just proves that the General Theory is a true classic – i.e. often cited but little read.
If those commentators could point me to the bits of old Maynard’s writing where he for this argues this then I’d be very grateful.
Of course the government should repair the public finances after a recession, and as I’ve said before running a structural deficit after a 15 year boom was hardly ideal (although my caveats are as important as my main point), but the notion that in non-recessionary times the government should always run at a surplus is, at best, highly unrealistic.
We have a very large deficit at the moment and at the first signs that it might be slightly smaller than anticipated this year the Tory right are already demanding tax cuts, imagine their attitude if we had an actual surplus.
The chart below shows the cyclically-adjusted current budget surplus/deficit and the debt/GDP ratio for the UK since 1975. (All data from the IFS).
It’s worth noting that the UK ran a deficit each and every year from 1987/88 until 1999/2000.
And what happened to the debt/GDP ratio during these 12 years of profligacy?
It fell from 36.8% of GDP in 1987/88 to 35.6% in 1999/2000. How is this possible? Simple – GDP grew quicker than debt.
Maybe growth matters after all…