In today’s Guardian newspaper, 77 economists have signed a letter sharply criticising the UK chancellor’s plan to enshrine in law that the government must run budget surpluses in ‘normal’ economic times. This is good to see, although they are, I am sure, partly preaching to an already converted readership. Nevertheless this sort of thing needs to be said in public. As my previous post made clear, if the public sector runs persistent surpluses, even if they are small, this puts the onus on private sector borrowing and debt accumulation to generate growth. The only way out of this dilemma is if foreign trade and investment performance improves dramatically. This will need faster growth in the global economy and in the EU in particular, as the UK’s largest export market, which has recently been a drag on foreign trade growth.
If the UK current account was in surplus, then the government could also run a budget surplus of similar magnitude, while the private sector could be in balance. In this way, the stock of public debt could be paid down quite quickly. Of course, economies and their financial balances tend not to stay constant as they evolve over time, but this sort of outcome could be a great help to sustaining prosperity for a number of years and helping to prevent another severe crisis over the medium term, while preventing unsustainable debt accumulation.
The government is not omnipotent in terms of its control over the economy, but it does have influence, and should aim to improve matters. Osborne’s plan is based on faulty analysis and merely shows his cunning as a political tactician. He is aiming to outflank the Labour party once again, through peddling economic myths and dressing them up as responsibility. This is not something to be proud of.