Today’s Financial Times leading article on deficits and debt is clueless.

The article starts:

It is now clear that curbing Britain’s public debt is going to be much harder than the coalition government originally predicted. While David Cameron admitted as much earlier this week, official confirmation will come next week with the publication of the Office of Budget Responsibility’s report on the state of the UK’s public finances. While disappointing, this does not undermine what still appears to be a sensible plan. The problem for the government is that weaker actual and potential growth has made the task of reining in the deficit much harder than forecast.

Now why would “weaker growth” result in “reining in the deficit” being “much harder”? Reason is that weak growth necessitates a bigger deficit, or to be more exact, weaker growth requires more stimulus, which itself requires a bigger deficit.

But what’s wrong with such a deficit? If the private sector fails to spend, the remedy is to have government spend more (and/or cut taxes so that the private sector is encouraged to spend more). So what’s wrong with such a deficit – the fact that it results in more debt?

POPPYCOCK! As both Keynes and Milton Friedman pointed out, a “stimulus deficit” can be funded EITHER by borrowed money OR printed money. If interest rates are round about zero, there is no harm in borrowing more. But if interest rates become significantly positive, then all government needs do is to go for the print option. So there is no problem there.

But the next sentence of the FT article is bizarre. It says,

Chancellor George Osborne’s hopes of eliminating the current structural deficit by 2014-5 now look impossible.

Well as made clear above, the part of the deficit that may have to expand if weak growth persists is NOT THE STRUCTURAL DEFICIT. It’s the stimulus part of the deficit.

Put another way, the structural deficit is the part of the total deficit which has no influence on growth.

Or as the Reuters definition puts it “The portion of a country's budget deficit that is not the result of changes in the economic cycle. The structural deficit will exist even when the economy is at the peak of the cycle.”

Wiki says much the same: “a structural deficit exists even when the economy is at its potential”

(There are actually a number of other and silly definitions of the phrase “structural deficit” out there. I may do a post on this, as well as contacting the authors of those definitions.)

Now if the structural deficit has no influence of growth, it follows (by definition) that removing this part of the total deficit will have no “anti-growth” effect, i.e. no “anti-stimulatory” effect!

So if it’s the structural deficit and debt that the FT is talking about, it is untrue to say that, “curbing Britain’s public debt is going to be much harder” because of poor growth figures.

As to the actual mechanics of reducing the structural deficit without harming growth, see here.


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