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The fiscal consolidation programme:
fundamental problems and
progressive alternatives
Malcolm Sawyer
University of Leeds
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
Outline
• Why balanced budgets undesirable
• Why structural balanced budgets
unachievable
• ‘Three ways to full employment’ : reducing
inequality and savings
Two basic relationships
• G–T=S–I+M–X
• G: government expenditure, T tax
revenue, S, savings, I investment, M
imports, X exports
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
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
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.
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 ?
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
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
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
‘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 ?
‘Three ways to full employment’
• The rise in inequality and implications
for demand and debt
• Role of corporate savings and
household debt
‘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
Re-distribution policies
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•
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Wages rising faster than productivity
Minimum and ‘living wages’
Progressive taxation
Guessing orders of magnitude
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