“Are budget deficits or surpluses good or bad?”

Here’s another extract from a recent “Billy Blog” by economist Bill Mitchell on “MMT Budgetary Principles“. The context to this as Bill writes is:

“This is a background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. This blog provides some general principles that should govern the design of a budget.”

Bill is an Aussie, and is writing here for a home audience, but the following extract is equally applicable to the UK economy (or the US, Canada etc). It cuts right through the usual fact-free ruminations about the deficit which we are subjected to on a daily basis.

“Are budget deficits or surpluses good or bad?

The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.

There is nothing intrinsically good or bad about any specific budget outcome.

In response to the 1982 attempt by conservative politicians to pass a Balanced Budget Act in the US Congress, the revered macroeconomist Gardner Ackley said:

“My own position on deficits has always been, and remains,      that deficits, per se, are neither good nor bad. There are times when they are not only appropriate but even highly desirable, and there are times when they are inappropriate and dangerous. During a recession or a period of “stagflation”, deficits are nearly unavoidable, and are likely to be constructive rather than harmful.”

…It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.

That goal is constrained by the availability of real resources that the nation commands – labour, capital, land, etc – but not by the financial capacity of the currency-issuing government.”

Do read the whole thing here. If you want to learn about economics and the current mess we are in, you could do a lot worse than spend a few hours browsing Bill’s blogging back catalogue.

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