Reply to post: Re: It doesn't matter...until it does

NEVER MIND the B*LLOCKS Osbo peddles, deficits don't really matter

I ain't Spartacus Gold badge

Re: It doesn't matter...until it does

It makes sense to run a deficit in a recession - it's a way to get out of it - but you must run a surplus during the boom, or the debt will become too high to pay.

Not quite true. The bit about running compensatory deficits in busts is obviously right. The Austrians are mad. Remember those predictions from the Troika in 2010 that the Greek economy would only shrink by 4%, then 8%, if they took their medicine? Well the Greeks cut their total government spending by 25%! And their economy shrank in the same period by 26%. I believe that's the biggest peacetime cut in government spending in modern history - and not coincidentally is one of the biggest peacetime recessions in modern economic history. One for the Austrian school to ponder on perhaps...

Oh, and by the way, the Germans are big, fat liars. The Greeks sure dragged their feet a lot and squealed - and I wouldn't trust their government to run a whelk stall - but they did implelment quite a few of the reforms. According to the OECD more than any other country in Europe during this recession (although their economy started as one of the least flexible). And I think the 2nd biggest cuttters in Europe were Ireland, who cut government spending by about 6% over 2 years, not Greece's 25% over 4.

But to get back to the point, Keynes was the one who advocated running a surplus during the boom. He wanted to have some wiggle room ready for spending in the recession of course. But he was also talking about demand management, so you'd cool the boom by raising taxes or cutting spending, and then stimulate during the busts with deficit spending.

But so long as your deficit and interest bill is less than GDP growth plus inflation, then the national debt will fall as a percentage of GDP. So if you've got 2% inflation, plus 2% growth and are only paying debt interest of 3% of GDP, then you don't have an urgent need to cut. You could even run a small deficit, say 0.5% of GDP and still have the overall debt-to-GDP level fall. There are risks to this. After all Brown's over-spending wasn't awful, by historical standards, it's just that the bubble was so big and the bust so nasty that it made things materially worse. Had we had a recession that only lost us 2%-2% of GDP, without the chaos of the banking crisis, recovering would have been far less painful.

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