Thursday, March 15, 2012

Osborne is clueless on the structural deficit.

Not that the Labour Party are any better.

According to shadow chief secretary to the Treasury Rachel Reeves, George Osborne wants to "achieve a cyclically-adjusted current balance by the end of the rolling, five-year forecast period".

And as Rachel Reeves points out, this amounts to “eliminating the structural deficit five years forward from any given point…”

Now a structural deficit by definition provides no stimulus. Or put another way, the structural part of the current deficit is that part which provides no stimulus. Or put it yet a third way, a structural deficit is a deficit which arises purely out of politicians’ failure to collect enough tax, not out of a desire to impart stimulus.

So what’s the big problem in disposing of a structural deficit? That is, if you want to dispose of a structural deficit, there is no earthly point in waiting five years to do so. All you need do is to rectify the fact that insufficient tax is being collected. That is, taxes need to be raised and borrowing needs to be cut.

As to the AMOUNT of tax cut and borrowing reduction required, this needs to be such that the overall effect on aggregate demand is zero. And that almost certainly means that the annual hike in taxes will NOT EQUAL the annual reduction in borrowing.

Of course the numpties who think in accountancy or microeconomic terms tend to think that the above two numbers need to be equal. But as Abba Lerner pointed out, when it comes to macroeconomics, the important consideration is the EFFECT of any change, policy, etc, not the numbers.

And too argue, as some do, that the structural deficit cannot be cut too quickly because that might stifle the recovery is a PLAIN SIMPLE CONTRADICTION IN TERMS.



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