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In 2010 the government set out its deficit reduction plan. The aim was to reduce the amount the government borrowed each year through tax rises and expenditure cuts and they dared to hope they might start repaying debt by 2015.This plan lies in ruins and yesterday it was revealed that so far this year the government have borrowed five billion pounds more than they planned.
There are good reasons for this situation. In 2010 everyone expected growth to be much higher than it proved to be. The government were, as they must be, more optimistic than others, but the slowness of the recovery worldwide has taken its toll.
When the economy shrinks the automatic stabilisers kick in. Government tax revenue falls and expenditure rises. While this moderates the depth of any downturn it has the exact opposite effect to the planned the public finances
The linked Guardian editorial highlights the difficulties of achieving all macroeconomic aims at the same time. The government needs economic growth but the measures it could take to promote this in the short term will cause the deficit to become larger. There are painful choices to be made.
Obviously a deficit to any economy's current account is a concern, particulrly if it long term as this one apears it will be however government cuts all over the place aren't going to make the population very happy. I think the best way to deal with this is to stop making such a fuss over it and focus more on the advantages and ways of solving the problem long term.
ReplyDeleteAdvantages of this situation are obviously that a deficit by definition means that we are consuming more than we are producing, which is clearly a good thing as we know the goods we buy must make us happy or else we wouldn't buy them. Another is that the reduce in demand creates a downward pressure on inflation which has obviously been one of the economy's main focuses over the past few years.
Creating more debt sounds like a ridiculous idea however if used properly I believe this would be the best way around the problem. By borrowing money in order to build more capital and improve our technology, we can expect to be more efficient in our production in the future and so have a better chance of repaying our debts to other countries by exporting goods or producing our own so as to reduce import costs.
A persistant deficit may cause problems such as a fall in exchange rates however if it dealt with quickly and efficiently, so long as the current account can return to a rough balance, it hopefully shouldn't be too much of a problem in the future.
Having a deficit is a ordinary thing, few countries have surpluses, and its not unexpected for the UK to have one, considering we are still in a 'mid-recovery' position from the financial crisis. The fact that its growing means spending has increased, this is both good and bad, it shifts AD right but it also increases the Price Level, increasing inflation. The focus for the UK economy shouldn't be on the short run, we want to raise AS, so introducing monetary policy such as won't affect anything.
ReplyDeleteThe main thing will be to ensure the debt doesn't get too vast, so as to make it unpayable and become debt ridden. Our policy aim will be to increase AS which will reduce the PL, and if it reduces relative to other nations, then our exports become cheaper, more are bought and the balance of payments gets better.
Sakshat