Daily Archives: February 18, 2014

Want a Budget Surplus? Easy. Devalue the Pound!

The present day Labour Party is keen to be seen as more pro-business having jettisoned the old Clause IV a decade or more ago.  There’s nothing wrong with being pro-business or pro-market economy.  But, with the right management, a market economy is much more compatible with the old Clause IV than is generally supposed. Both main parties, in the persona of Ed Balls (Lab) are George Osborne  (Con) are making the mistake of assuming that the market economy works in the way neo-liberal monetarists, with their austerity economics, claim it does.

For example, austerity economics holds that all deficits are bad. This ignores the simple accounting principle that total assets for all sectors have to add to zero. Therefore, if the government sector is in deficit the non government sector has to be in surplus. And vice versa. Someone has to be in deficit and its either you or I or the government! For my own part, I prefer it to be the government!

The role of government deficit spending, and its relationship to the external (trade) deficit also is not well understood. Its misrepresented as being purely related to the size of the state. So why does Britain need a government budget deficit when Germany doesn’t? Their state is at least as big, proportionately, as the UKs.

The simple answer is that Germany runs a trade surplus. Money drains out of the UK economy to pay for imports. The government sells treasury securities to get that money back and recycles it into the economy by deficit spending. If it didn’t, the economy , the private sector, would quickly run out of money and an economic slump would follow. Exactly that happened in the USA and Britain following the government surpluses of the late 90’s. In the USA too in 2007.

So, if Britain wants to run an export surplus like Germany, a budget surplus is easily possible too. That would need a devaluation of the pound, to make exports more competitive, which can be engineered by various means, including by reducing treasury security sales, but there is an obvious downside to that.

If that’s what the electorate want then fine, but they should be fully aware of the issues before they decide.