Saturday, 24 October 2015

#126 The deficit

Earlier this week, one of my Facebook friends posted that she wanted to understand more about the deficit. How and when did it become a problem? Does it need fixing? This isn’t something that I know a lot about. In fact, I don’t know a lot about anything. I just enjoy blogging.

My first thought was to do some research and then write a blog post on the deficit and whether I personally felt that it needed reducing. I immediately ran into complications and then continued to run into them non-stop for about three hours. When people talk about the deficit, oftentimes, they’re not really referring to the deficit in a strict sense. They’re talking about government borrowing. The government does borrow to cover the deficit but it also borrows to invest. Borrowing does help to cover the deficit but so does a growth in GDP. 

The UK does have a government deficit but it also has an overall deficit in its cash imports and exports. The latter is consistently regarded as one of the main risks to the country’s financial stability in the Bank of England’s financial stability report. The former doesn’t feature in the report at all. All economists know things like this but when they are interviewed, some of them ignore it in order to propagate their own political viewpoints and some of them just won’t go into detail on it precisely because their account of the situation would quickly become more complicated than most people would understand, imagine or have time for.

The Wikipedia entry for the term “balanced budget" shows varied schools of thought among economists on whether having a deficit is good or bad for an economy. It also explains that in the US, there is some form of ban on running a deficit in every state except Vermont. This doesn’t necessarily mean that such bans would be right for the UK. One of the main reasons UK voters dislike deficit reduction is because it is seen as a justification of austerity. It’s difficult not to sympathise. Of course, reducing the deficit isn’t about reducing government spending down to zero. It’s only about spending less than the government is earning in taxes. As a long-term strategy, I think most people would agree that absent any other form of contributions to the government, this is sensible behaviour but given current austerity, it seems right to ask whether now is the right time.

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