Why I don't care

In the long list of things I don't give a toss about, the UK's budget deficit is near the top. The dead trees might be fretting about the UK's record monthly borrowing, but I'm not. Here's why.
1. The people who matter aren't worried. Index-linked gilt yields are near a record low, at under 1.6 per cent, and they rose a mere one basis point yesterday on the news of higher than expected borrowing. If the mugs investors who are lending the government money aren't worrying, why should I? What's more, there's little sign that public borrowing is crowding out private spending through Ricardian equivalence channels. Sure, retail sales have stagnated since September, but I challenge anyone to prove that this is due to anticipations of higher taxes.
2. Deficits are hard to forecast, especially so early in the financial year. At this time of year, the margin of error is around £10bn. What's more, tax receipts are very seasonal; in 2004-05 the three biggest months accounted for 36.3 per cent of income tax revenues and 58.9 per cent of corporation tax receipts. A couple of good months (July, October and January are the key ones) could  see a huge improvement in the deficit.
3. The deficit, in itself, will not cause taxes to rise. With bond yields so low, there's no market pressure on ther Chancellor to narrow the deficit. The pressure is largely self-imposed - as a result of a desire to meet his self-imposed and arbitrary golden rule.
4. Budget deficits are - by definition - the counterpart of an excess of private savings over investment. This excess is a global phenomenon. But it's also a parochial one; last year UK companies' retained profits exceeded their capital spending by £18.2bn. If this excess disappears, so too will the deficit. And if it doesn't disappear, the more fundamental problem for the econoy will be the fact that companies aren't investing, not that the Chancellor is borrowing.
There are three implications in all this. First, there's some free advice for George Osborne; it would be a bad idea to lambast the Chancellor for alleged imprudence now; the finances could yet turn around.
Secondly, it's the level of taxes and spending that is the problem, not the difference between the two.
And finally, can we ditch this idea that the public finances are somehow "manageable"? The truth is, the Chancellor's got less control over them than anyone thinks.

Comments

[mhopkins]

On point #4, in your "definition" you either forgot about the trade deficit, or are assuming none exists... That is, national income accounting suggests that the budget deficit, (G-T) = S(pvt) - I - NX. Not sure which it was, but you might want to clarify...

[chris]

I was overlooking it for three reasons.
First, budget deficits are a worldwide phenomenon; the US, Japan, eurozone etc. As the world has no trade deficit (or at least it shouldn't), we can legitimately see global budget deficits as the counterpart of private savings.
Second, I didn't want to get dragged into the question of whether the global savings glut is causing the UK's budget deficit. You could tell a story whereby massive Asian savings cause the UK to run a current account deficit (by creating a capital inflow), and the counterpart of this is a budget deficit. I'd rather not do this.
Thirdly, it's a rough historical fact that swings in the UK's budget deficit have been highly correlated with swings in the gap between corporate savings and investment, rather than with swings in the external deficit. That's why I preferred to focus on this.

[Monjo]

Private savings are interesting. The UK rate is at 6.5% or so of earnings. The US is at 0.8%. Eurozone averages are a little higher at around 8pc. One can argue that European fund managers are investing into the huge profits of US firms (10.1pc US GDP, up from 7.8pc in 2001) and it is hard-working US workers doing 60hour weeks who are funding European pensions.
Also it is European savers (and historically Japanese ones) who bankroll strong US consumer spending (and therefore strong US GDP growth).

BTW Not every country has a budget deficit - a few of the oil-rich ones are having bumper years in 2004 and now 2005! However, it is not really a surprise that most countries will follow the US model.