Balancing the budget is least of our worries
MR ROBLIN (“Deficit financing will wreck the economy”, Letters, May 29) needs to get some up-to-date economics textbooks. The quantity theory of money was a decent first approximation when David Hume put it forward in the 18th century, but it is not now regarded as a good guide to what will happen to inflation.
The reason is that the average speed with which a unit of money, say a £10 note, changes hands, what we economists call the velocity of circulation, can be very variable. What is regarded as money changes over time because of financial innovation. Once it would not have included paper money, only coins with intrinsic value. These days money usually means notes and coins in circulation plus easy access bank deposits (broad money). In 2020 broad money grew by about 12%, but inflation was below the Bank of England’s target of 2%. Of course huge increases in the money supply can lead to inflation if the economy is already at full capacity, but that is not a serious issue in the UK at the moment. Nor is any such increase required by “socialist” policies.
He is similarly confused about government deficits. Of course government spending financed by borrowing can put pressure on capacity and that can be damaging. But that does not mean that it will necessarily do so, nor that governments should not run deficits. Gordon Brown’s Golden Rule was perfectly sensible as a long run guide. It said that government in the long run should only borrow to finance capital investment, things like roads, schools, hospitals etc which are long lasting assets that deliver a stream of benefits over time.
There is absolutely no reason why such assets need to be paid for all up front. You would not do that for a house, nor need businesses do so for production facilities for a new product. In this instance there is no reason for governments to be any different.
Two points need to be made. The first is there is no absolutely no substance to the idea that deficits are a uniquely left-wing phenomenon. Surpluses and deficits occurred under both Tories and Labour.
The second is that the big increases in deficits were usually the result of recessions, when government revenue collapses. The exception is of course the coronavirus pandemic. The government’s response in both 2008 and 2020 was entirely the right one. Attempts to balance budgets in the face of the world financial crisis or the pandemic would have made things worse not better.
I might add that the premature attempt to balance the books in 2010, which happened across Europe and the UK, and to a lesser extent in the US, did indeed make things worse not better. We are now reaping the consequences with hollowed out public services, which have hampered our response to the pandemic through, for example, inadequate PPE supplies, reduced hospital capacity and reduced medical staff.
Finally it is bizarre to be worrying
about deficits at the moment. Interest rates, despite the very large budget deficits, are at historic lows. It’s easy for governments to borrow. The cost of servicing debt as a share of national income is at historic lows. We have far more important things to be worrying about than an ideological fixation with balanced budgets.
Michael Phelps Penarth