Tim Worstall points to the estimate* that the UK ran a cyclically adjusted government deficit of 5.2% of GDP in 2007 and says:
It’s really most unKeynesian to be running a deficit of that sort of size at the top of the longest boom in modern history, isn’t it?...
Keynesianism doesn’t work..because policitians will never run the associated surpluses in the booms.
However, I'm not sure this episode supports Tim's scepticism. The structural budget deficit is the sort of pseudo-scientific concept that brings economics into disrepute.
Let's imagine GDP is at its potential level. What should government borrowing be? It all depends upon the private sector's financial balance; this, by definition, is the counterpart of the government's financial balance. If the private sector has a net deficit - because it is investing more than it is saving, then the government will have a surplus. And because, ex hypothesi, GDP is on trend, it'll have a cyclically-adjusted surplus.This is what happened in the late 80s.
If, however, the private sector has a surplus, then the government will have a deficit. This is what happened in 2007.Companies and foreigners were then running surpluses. So someone had to run a deficit. Because households weren't running a big enough deficit, that someone had to be the government.
To put this another way, companies weren't investing as much as they should have, and foreigners weren't buying enough of our goods. Government spending filled the gap. Yes, economic activity was strong. But this was because the government ran a deficit to sustain economic activity. In this sense, the deficit was entirely consistent with orthodox Keynesianism.
Two things make me say that the government was a passive responder here, rather than a profligate borrower:
1.As the government deficit rose, real interest rates fell; long-dated linkers yielded 1% in late 2007, half the rate they did in 2003. This is consistent with a savings glut - by foreigners and corporates - driving down real interest rates, which the government tried to resist by borrowing more. If markets had been spooked by a "structural deficit" in 2007, rates would have risen. They didn't.
2. Inflation was quite well-behaved in the mid-00s; it ended 2007 at 2.1%, near enough bang on target. This suggests the government deficit was not adding much to inflation, as not overheating the economy.
You might object that whilst there was little goods and services inflation, there assuredly was house price inflation.
True. But this was, arguably, despite the fiscal deficit, not because of it.Imagine the government had tried to run a surplus in the mid-00s in the face of the corporate and overseas savings gluts. This would have added to the incipient weakness in activity. The Bank of England would have responded by cutting interest rates. And this might have raised mortgage lending and house price inflation even more.In this sense, one could criticise the Labour government for not running a big enough deficit - for not doing enough to raise interest rates to choke off what proved to be a ruinous asset price bubble.
Now of course, you can criticize Labour for spending badly, and for choosing to spend rather than cut taxes. But you shouldn't blame it for running a deficit. And you shouldn't think it anti-Keynesian to have done so.
* I think the Telegraph report is referring to statistical table 2 of this pdf: old media aren't good at links.