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.

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6 responses to “Want a Budget Surplus? Easy. Devalue the Pound!

  1. Yes! I see that as a way by devaluation of the pound however all the dots and crosses can link in your post @Peter but there might just be a problem with the main ingredient? what will we sale or manufacture and our man levels of productive hours aren’t going to compete with China, India, Brazil and so on

  2. Peter-

    Its natural for higher income nations to import from lower income nations now that technology has essentially flattened the productive differences between nations.

    For example, with today’s level of automation, an uneducated Chinaperson can produce just as many cars per hour as Brit with a doctorate can.

    Why do you want your fellow Brits to earn less money (in real terms) so they can compete with poor Indians?

    • Auburn,

      Its not me that’s saying or wants that.

      Both major parties in the UK have promised a government surplus in the next Parliament. That is before 2020. The government is like a household – it shouldn’t spend more that it earns etc etc. I’m sure you’ve heard all that nonsense.

      Some Tory politicians have made the point that its quite possible to have a budget surplus and have used Germany and Switzerland as examples of supposedly “Good Housekeeping.”

      They don’t give the full picture though.

      They don’t explain that Germany and Switzerland have to tax export receipts away to prevent inflation so the supposed economic competence of these countries is questionable.

    • Auburn, I think there is an argument for the quality of goods however I also think that surplus economies always tend to need bigger fields to fed there enormous hunger, eventually overflowing into other pastures which in turn creates wars.

  3. Brother Peter:

    “Its not me that’s saying or wants that.”

    Quite right you are. My apologies for misappropriating that position to you. I

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