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October 20, 2010


Luis Enrique

if inflation (hence nominal tax revenue) rises faster and spending budgets are fixed in nominal terms, won't the deficit close quicker, relieving pressure on budgets?


Time for Gideon and the other super wealthy to get out the Bollinger!

After all we all in it together; unless your part of the 90 per cent who are going to be poorer or Homeless or dead as a result of the Rich Mans cuts by the Rich mans party.

Chris Carter

Aren't public sector wages being held down?
So public sector inflation will likely be lower than general inflation, over this period at least?

Innocent Abroad

LE is right, historically: it is only because politicians (of all stripes) consider it more respectable to consult economists rather than economic historians that they believe deficits can be "cured" by cuts. The track record is that if you want to cut your deficit, you inflate.

However, CC's point is also good - and it is hard to see there being much wage inflation in the private sector, either. The principal cause of inflation will be commodity prices, and I doubt that even Chris Dillow has a fancy graph or Wikipedia link to predict those.

The other great unknown is the next banking crisis: the general view is that bankers, like Louis XVIII, have learnt nothing and forgotten nothing. Sub-primes, derivatives of derivatives of derivatives and all the rest will reappear, suitably reclothed - they're probably out there already.

Over the next decade or so, global market forces of one sort or another will cut our standard of living in half - to the level of that of, say, Hungary or Portugal. I have no idea whether or not our political system will stand the strain.

Niklas Smith

LE is right, historically: it is only because politicians (of all stripes) consider it more respectable to consult economists rather than economic historians that they believe deficits can be "cured" by cuts. The track record is that if you want to cut your deficit, you inflate.

Really? The Weimar Republic tried to get out of a big budget deficit by inflating, which brought on the hyperinflation. The only way it was stopped was by cutting public expenditure to close the budget deficit and by banning the central bank from lending to the government.

If you are trying to advocate monetising the deficit (the Bank of England buying up all the gilts issued to fund it) then we will face runaway inflation.

And surely faster inflation will cut real government expenditure if it is held at a certain level in cash terms? The government also has to buy goods (school textbooks, medical devices and so on) and its employees would not accept big falls in their real wages. This is precisely Chris Dillow's point.

Niklas Smith

Sorry, I tried to put the first paragraph in italics as it is a quote...

The upper lower middle

Unless your life revolves around driving a Ford Focus and eating fast food, surely this table suggests that living standards in the UK have been getting lower and lower for the last ten years for anyone who has to rely on their wage rather than their property for income:
Scroll down for the price comparison between 1999 and 2009.

Innocent Abroad

Niklas, please explain to me which bit of our economic situation corresponds to the reparations the Weimar Republic had to pay under the terms of the Versailles Treaty, preferably with reasons.

Niklas Smith

Sorry, you're right, Weimar was too extreme an example. But it was the one that popped into my head first.

I'm afraid since I'm no longer at university I don't have subscriptions to OECD and IMF statistics so I'm struggling to find detailed statistics, but I'm pretty sure that a number of European governments (France? Italy?) tried to deal with deficits through inflation and roundly failed. Can you give any examples of when a deficit was successfully (i.e. permanently) cut through inflationary policy?

Everyone agrees that inflation reduces the real value of the stock of government debt, but that's not the same thing as closing a deficit.


The deficit in the uk and elsewhere is not the result of too much spending but a fall in revenue from the financial crisis.

More money National output produced by monetary and fiscal poicy expansion would increase state income especially if the tax system is sensative to price rises (eg capital gains )and so cut the deficit as the deficit is the money difference between money income and spend.

I hope that is clear.

How do the commentators here know what potential uk productivity is or will be? There is no reason to think the uk cannot increase its wealth over time in the normal way as it always has.

The biggest bar to growth is idiot Gideon and the other fools who cannot understand the concept of aggregate demand and the difference between real and money GDP

Niklas Smith

@Keith: "The deficit in the uk and elsewhere is not the result of too much spending but a fall in revenue from the financial crisis."

That's partly true. The problem is that some of those revenues (stamp duty and bumper financial sector profits) are never going to return to their pre-crisis share of GDP. Either other taxes have to be raised or spending cut to fill that gap, surely?

And I say "partly true" because we were already running deficits during the boom years (from 2002 to the present, in fact). Sweden and the UK are next to each other on the Eurostat deficit table [1] and make an instructive comparison: between 1998 and 2009 Sweden only had budget deficits in 2002, 2003 and 2009.

In Sweden a long-running Social Democratic government (1994-2006) cleaned up public finances after the government had run big deficits during a serious banking crisis in the early nineties. Thanks to that responsible policy (continued by the current centre-right government) Sweden was able to provide a discretionary stimulus more than twice as large as Britain's (2.7% of 2008 GDP versus 1.2%) [2] as well as larger automatic stabilisers. They were able to do this without letting public debt soar - in fact Swedish government debt is expected to be lower in 2011 than it was in 2006; Britain's will have nearly doubled over that time. [3]

I share your worry that the coalition may be cutting too quickly and so clobbering demand, but that doesn't absolve Gordon Brown of his responsibility for putting us in such a poor position before the banks went bust. (And incidentally I think his handling of the banking crisis itself was creditable, certainly better than what George Osborne was proposing at the time.)

[1] "Government deficit and surplus" here: http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/data/main_tables

[2] http://www.adbi.org/files/2009.12.14.wp178.fpc.tab.2.pdf

[3] Compare the two countries (or any others) here: http://www.economist.com/content/global_debt_clock


Frankly I would not bother my head about the deficit; it is only money and there are more important things in life! as keynes said economics is a moral Science: Human welfare and flourishing is our proper end not sums beong equal or unequal.

First I will put growth in real and Nominal GDP as the goal to increase the tax take. A progressive tax system should raise more as a share of GDP as GDP grows.

second assuming growth is inadequate to close the gap the tax take can be slowly increased but only slowly and in a progressive way.

Growth in spending can be reduced if one must.

Our outstanding National debt is small compared to its size at the end of the second world war or the Napoleonic war so there is a long way to go before we run out of rope.

There seem to be lots of Savings to borrow and borrowing savings that are idle is a good thing to do.

The idea that somehow it is more difficult to fund the welfare state now than in 1950 or 1945 is a total lie, with much more real welth to tax and less National debt in GDP terms than when it was introduced. Attlee and Bevan seem to have managed to do quite a lot despite having a Nation far closer being bust. Did they have a magic box full of money? No. But they had the will to act for the public good in an impoverished post war Britain.

Stealing welfare benefits from the disabled is not equivalent to beating Adolf Hitler.To merely imply it is quivalent shows the absurd misuse
of language going on today intended to fool the public into accepting class war cuts.

If the National interest was at the heart of the Coalitions policies then they should control the Banks and finance rather than jump to their tune.

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