Budget deficits are neither good nor bad

This is going to be a re-blog of a re-blog, which is a bit lazy of me, but I’m repeating it again because I think it’s rather pertinent at the moment, what with the talk about long term economic plans to generate budget surpluses and spending cuts and tax hikes supposedly totalling £50bn on the way. It’s so far removed from the usual debate about austerity, I try and repeat it as often as possible. Anyway, this is from an old Bill Mitchell blog (my favourite economist) and he’s writing about whether budget deficits or surpluses are good or bad (Bill’s Australian by the way if you didn’t already know):

“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.

This blog – A voice from the past – budget deficits are neither good nor bad – has more discussion about Gardner Ackley.

To add meaning to the discussion we have to relate the budget outcome to the circumstances in the economy rather than be side-tracked by some pre-conceived notion that some balance is desirable and another is not.

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.

In most budgetary discussions, it is erroneously assumed that the national government has a financial constraint and has to budget like a household.

The analogy neo-liberals draw between household budgets and government budgets is false. Households use the currency and must finance their spending.

However, government issues the currency and must first spend (i.e. credit private bank accounts) before it can tax (i.e. debit bank accounts). The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system.

The Euro nations are an exception to this rule. They surrendered currency sovereignty, and thus have to borrow to cover deficits. This makes them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk. The current Euro problem lies in the flawed design of its monetary system, which was a neo-liberal ploy to limit the capacity of these governments to borrow and spend.

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. Neo-liberal claims that bond markets limit government spending are false.

The fact is that the only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A. When there is mass unemployment, for example, we can conclude that the government has no real constraint at that point in time and can bring those labour resources into productive use through higher spending.”

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