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This Is The Time For Budget Surpluses, Not Relaxing Austerity – Why Keynesianism Doesn’t Work

We’re told that government borrowing is falling, the deficit closing. This therefore means that it’s possible to relax austerity, to start spending more upon sweeties for the voters. This being exactly and precisely why Keynesianism as a practical matter doesn’t work. For politicians will follow the fun bit and not the difficult part. Thus as an overall theory it simply is, to use a governmental phrase, no longer operative.

Public borrowing is on track to hit its lowest level in 16 years, leaving the Chancellor Philip Hammond with the ability to sanction additional spending in his upcoming Budget.

The improvement in the public finances may make Prime Minister Theresa May’s promise of an extra £20bn for the NHS and an end to austerity more manageable for the Chancellor.

Borrowing in September this year stood at £4.1bn, nearly a billion less that the same month in 2017 and the best September figure since 2007, according to data from the Office for National Statistics.

Think of what that basic Keynesian idea is. When the economy’s in the doldrums we should blow out the deficit in order to increase demand and thus boost the economy. But when we’re running at the resource limit then any such attempts will just turn up as inflation. So, we should stop doing that. Also, as Keynes himself pointed out, when the Sun shines is the time to repair the roof. Perhaps pay down some of that national debt so that the next time we need to blow that deficit out we’ve got space to do so.

Do note that this basic set up is also entirely consistent with modern monetary theory. When the economy is running at its limits then we should be taxing more of that created money back to prevent inflation. That is, running a smaller budget deficit, possibly even a surplus.

So, what happens to kill either theory in reality? Well, here we are. Unemployment at its lowest since the early 1970s. Employment to population ratio at its highest since then. And what are people talking about? Blowing out the deficit again to buy sweeties for voters. That is, the political imperatives just don’t militate in favour of anyone using these theories as they’re supposed to work.

We might also not that this is what happened last time. Gordon Brown had a booming economy and stacks and stacks of cash in 2001-2007. And he should have been curtailing that deficit, running a surplus. And yet the shrieks from the likes of Polly Toynbee that now was the time to spend, spend, spend, were so loud that that’s what he did. No roof got fixed in that clement weather, that’s part of our problem right now. Instead of the repair work we got an expansion of the welfare state.

Keynesianism, by experience, and MMT, by logic, doesn’t work because no politician will ever do the difficult bit.

Oh, and yes, we’ve not really had any austerity. Public spending is about the same portion of GDP now as it was in 2007. And it rose between now and then as Keynesianism says it should. And look at the whining we’re getting if anyone suggests we should do the other half of the theory.

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5 years ago

“Keynesianism, by experience, and MMT, by logic, doesn’t work because no politician will ever do the difficult bit.” ….which is precisely why in most countries the central bank has been given the ultimate say in the size of stimulus packages! That is, central banks can use interest rate increases to negate what they see as excessive fiscal stimulus by politicians. Plus the evidence seems to be that politicians (except perhaps in Argentina and Greece) are not quite as irresponsible as suggested in the above article. That is, control over a central bank by politicians does not seem to influence inflation.… Read more »

5 years ago

There is another argument against Keynsianism. Suppose everyone in receipt of government largesse spends their money on stuff from the same country, and their recipients do likewise and so on then the country’s economy may well be stimulated. But suppose a large proportion is spent buying goods and services from abroad then it will be other countries ‘ economies get stimulated. So unless the country does in fact produce the best of everything Keynesianism doesn’t work (unless imports are banned in which case the unavailability of quality goods and services will cause more damage than the stimulus helps). It may… Read more »

5 years ago
Reply to  Pat

When we cheer ourselves up by using pound coins to buy Chinese tat those Chinese now have pound coins and, ultimately, the only place they can spend them is the UK so you still get the effect, perhaps delayed. However I wonder if this is the case with the Euro.

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