Presentation on theme: "Philip Arestis and Malcolm Sawyer University of Cambridge and University of Leeds."— Presentation transcript:
Philip Arestis and Malcolm Sawyer University of Cambridge and University of Leeds
Introduction The well-known relationship G- T = S - I - NX = S – I + FA G: government expenditure; T tax revenue; S private savings; I private investment; NX net exports including net income (= -FA: financial account)
Why are there budget deficits? excess of savings intentions over investment intentions; Sustainability of deficits and sustainability of private sector surplus (e.g. UK’s position circa 2007);
Sustainability of what? Primary or total deficit? Debt or net asset position? Private surplus or public deficit?
The reverse causality argument; Low investment --low growth of the capital stock -- need for budget deficit; Leading to low growth--high public debt relationship.
The 'functional finance' idea The sustainability of the 'functional finance' deficit As interest payments on outstanding debt rises, stimulates demand, lowers required budget deficit, and debt reaches sustainable level
The role of structural budget positions, and requirements for balanced structural budgets. The problematic nature of ‘potential output’ (y*). The link of ‘potential output’ and the Phillips curve: p = pe + f(y); f(y*) = 0.
Budget deficit = Private sector net savings plus financial account A balanced structural budget requires a balanced structural private sector position Hence it requires that: S* - I* +FA* =0; where * signifies ‘average’ or ‘structural’ level of the variable concerned
Calculations of structural budget position require a consistency check: that is does SBP = S* - I* +FA* ? A shift in the structural budget position (SBP) would entail a corresponding shift in a combination of savings, investment and current account behaviour
Reducing the structural budget position does not make sense unless there is reason to believe that there is corresponding shifts in private behaviour.
What should the structural budget position look like? Question: what levels of output and employment to use in the calculations? Structural budget position should be set to ensure the desired levels of output and employment reached
Structural budget position would be sustainable (provided that the private sector behaviour is sustainable) However, average budget deficit likely to be larger than structural budget.
The UK and EMU (through ‘fiscal compact’) aim to balance their structural budgets; This has in general not been previously attained and little reason to think that it would be achievable in future; ‘There is no alternative’ to a substantial budget deficit;
The need for UK policy makers to recognize that a sustainable high employment budget position involves a significant deficit; Arguments against budget deficits on grounds of not being sustainable are in general flawed.
The reduction in the scale of structural budget position requires some combination of rise in ‘structural’ investment, decline in ‘structural savings and rise in net exports; Limits on rise in ‘structural’ investment Limits on rise in net exports
An egalitarian shift in the distribution of income would help reduce the structural budget deficit; So perhaps there is a partial and progressive alternative to structural budget deficit.