“Politically, if not intellectually, the austerians have won,” says Chris Dillow on his Stumbling and Mumbling blog – thereby condensing all the the rage and frustration of the neo-Keynesian, debt-funded stimulus lobby into just eight words.
With Britain’s economic recovery now fully underway, those who oppose George Osborne’s plan to balance the books need a new argument – which the ingenious Dillow supplies:
“There is a risk that the euro area could fall into a Japan-style lost decade of stagnation. This would gravely weaken the case for tighter fiscal policy. If a market which accounts for two-fifths of our exports stagnates, then tax revenues will falter and attempts to swiftly reduce the deficit would further depress the economy and might prove counter-productive.”
It’s certainly true that the Eurozone is an ongoing disaster – even if the worst of the crisis has receded for the moment. Nevertheless, now that the British economy has escaped Europe’s downward pull, the idea that Osborne would suddenly perform a U-turn, admitting that his opponents were right all along, is blatantly absurd.
But what if it’s a matter of having rather than wanting to reverse course?
“To put this another way, think about financial balances. One aspect of euro stagnation would be that the region will continue to run a big current account surplus (pdf); this would be the counterpart of tight fiscal policy in the region, plus weak capital spending. If our biggest trading partner runs a current account surplus, we will probably have to continue to run a current account deficit.”
Any country that runs a trade deficit has to fund it – i.e. if you spend money that you haven’t earned then you need to borrow it instead. Dillow believes that the only sector of the British economy in a position to borrow is the public sector:
“The OBR foresees companies continuing to run a surplus. This means that the government can return to balance if and only if households become huge net borrowers. But what if this doesn’t happen – say because tighter macroprudential regulation prevents it or because households prefer to reduce debt? In this case, the government will have to run a deficit, possibly a big one.”
So there you have it: thanks to the Eurozone, a return to balanced budgets in Britain is impossible. Or is it?
There are a few holes in the Dillow argument. For a start, it might be nice to acknowledge that the ultimate cause of all of this trouble is the existence of the single currency, not the entirely reasonable ambition of Her Majesty’s Government to run a balanced budget.
But even if one simply accepts the grotesque error of the Eurozone as a given, the argument that the UK must therefore run a massive deficit still doesn’t hold water.
Yes, Europe is our largest trading partner – but if two-fifths of our export market is stagnant, that leaves another three-fifths (and rising) in which we could earn the money we need instead of borrowing it.
In any case, why should the Government step in to make-up any shortfall? We certainly don’t want the household sector maxing out its credit cards again, but much of the business sector has the capacity to borrow and spend. The OBR may well foresee “British businesses continuing to run a surplus” but what the OBR foresees doesn’t always come to pass. If the Eurozone economies are that desperate to sell us stuff, then surely it’s up to them to persuade British companies to splash out.
It’s also worth noting that if households don’t borrow and businesses don’t borrow and the government doesn’t borrow – then, by definition, there can’t and won’t be a trade deficit with Europe
Admittedly, that would mean even less demand in the ailing Eurozone economies – but, who knows, that might just encourage them to do something about their number one problem, which isn’t Britain’s determination to pay its way in the world.