The fiscal consolidation programme: fundamental problems and progressive alternatives

1. The fiscal consolidation programme: fundamental problems and progressive alternatives Malcolm Sawyer University of Leeds

2. Outline • Reminder of some basic relationships • Why cannot the budget deficits just ‘unwind’ as recovery comes ? • Moving the goal posts: objectives • Moving the goal posts: potential output

3. Outline • Why balanced budgets undesirable • Why structural balanced budgets unachievable • ‘Three ways to full employment’ : reducing inequality and savings

4. Two basic relationships • G – T = S – I + M – X • G: government expenditure, T tax revenue, S, savings, I investment, M imports, X exports

5. Two basic relationships • b = d/g (b Debt to GDP ratio; d budget deficit to GDP ratio, g nominal growth rate) • d’ = b(g – i) (d’ primary budget deficit to GDP, i interest rate on bonds • When g = i, borrowing from rentiers to pay interest to rentiers

6. Budget deficits and public expenditure cuts • The budget deficit rose because of recession; why not let recovery come and reduce budget deficit ? • Financial crisis and tax receipts • Reductions in discretionary expenditure

7. Budget deficits and public expenditure cuts • The objective is now balanced structural budget. • Replaces ‘golden rule’ of public finances • Effect of that decision is to seek to budget deficit on average 3 per cent of GDP smaller. • Equivalent to reducing public expenditure by order of 6 to 7 per cent; allowing for taxes on expenditure 10 per cent.

8. Budget deficits and public expenditure cuts • What has happened to potential output Y* ? • Reduction of the order of 5 per cent : implications for costs of financial crisis • Lowers tax receipts at potential by order of 2 per cent of GDP • Does the economy have to operate at potential output ?

9. Impossibility of zero deficits • Trend to aim of zero structural budget deficits • The contrast with the historic experience • G – T = (S – I) + (M – X) indicates that the achievement of zero deficit as compared with previous experience would require corresponding changes in S, I, M, X

10. Impossibility of zero deficits • The ‘impossibility’ of zero structural budget deficit when S(Y*) – I(Y*) +M(Y*) – X(YT) > 0 where Y* is potential output. • The ‘stupidity’ of present UK and EMU budget policies

11. Impossibility of zero deficits • UK forecast to achieve zero deficit at potential output in 2015 : is that possible ? • Based on rapid growth of investment, exports and the economy • Investment/GDP at highest level this century, exports grow almost twice as fast as imports, current account surplus

12. ‘Three ways to full employment’ • Budget deficit, stimulation of investment, redistribution of income (Kalecki, 1944) • Limits on stimulation of investment (as compared with recent experience) • Raising net exports ?

13. ‘Three ways to full employment’ • The rise in inequality and implications for demand and debt • Role of corporate savings and household debt

14. ‘Three ways to full employment’ • Changing savings propensity through higher taxation • Redistribution from profits to wages to lower savings • Changing income inequality to lower savings

15. Re-distribution policies • Wages rising faster than productivity • Minimum and ‘living wages’ • Progressive taxation • Guessing orders of magnitude

16. Concluding comments • Public expenditure cuts are a matter of choice not necessity • Attempts to have structural balanced budget will not succeed • Reducing inequality is the progressive way to reduce budget deficits