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) gt 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