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Balancing the Budget Should Remain a Priority after the Autumn Statement

    When Philip Hammond was appointed Chancellor of the Exchequer and signalled that he was dropping Osborne’s targets, there was much talk of an end to austerity. Parts of the media portrayed it as a repudiation of austerity’s goals, rather than a recognition that the targets wouldn’t be met. The government remains notionally committed to a balanced budget, but the Autumn Statement makes it clear that the government plans to run a deficit of £20 billion in 2020/21, a far cry from closing the deficit by 2015/16 as Osborne once promised. Achieving a balanced budget is still an important goal, and I will outline why.

    The deficit is viable in the short term because the markets still have confidence that the government will pay it back, making our debt a low-risk investment; this is why the government can presently borrow with a low, at the time of writing, 1.457% yield on 10 year bonds. If we appear to lack seriousness about balancing our budget, our ability to repay debts will come into question, and rates will rise; in Greece they are 6.957%, in Brazil 11.87%.

    Deficits are strongly linked to higher effective interest rates, because in effect interest rates are the cost of debt and government borrowing raises demand for debt, and higher interest rates effectively constrain growth. In other words, if we continue running large deficits in the long term, the cost of debt will rise and growth will fall, making our debts harder and harder to pay off, until we either return to balancing the budget or enter a fiscal death spiral ending with a default, like that in Argentina, which led to their economy plummeting 10.9%.

    The effects of trying to fund deficits by printing money indefinitely are also handily illustrated by Argentina, which managed 38% inflation in 2014, impoverishing savers, pensioners and people on fixed incomes. I would suggest such a path is not desirable.

    Certain critics on the Left will make the argument that reducing government spending will harm growth, but there is a great deal of evidence that higher government spending actually reduces growth, investment and employment. These effects can be accounted for by the impact of taxes removing money from the economy, perverse incentives provided by, and inefficiencies in, government spending, and the crowding out effect government borrowing has on private investment.

    The IMF has found that the added growth for each pound spent by the government is lower in trade-orientated economies, and around zero in countries with a free-floating currency or public debts over 60% of GDP. All of these are attributes of the UK economy. In other words, moves to balance the budget won’t notably harm the economy, and may well improve it.

    If we are to keep the government sustainable and the economy in good health in the long run, it is as important now as ever that the government works towards balancing the budget. Were that it would.

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    Comments

    Jag Patel - About 422 days ago

    With such a bleak outlook for the public finances, there is all the more reason for Government to consider replacing the public subsidy given to certain industrial players like Defence Contractors, with Private Sector funding. Not only will such a bold move ease the pressure on the Exchequer, but it will also go some way towards tackling the budget deficit – and with it, the bourgeoning national debt.

    This innovative proposal is at the heart of a Defence Industrial Strategy that puts the National Interest first, not military equipment manufacturers’ interests. It comes in the form of written evidence submitted to and published by the Business, Energy and Industrial Strategy Committee, which is conducting an inquiry into Industrial Strategy.

    The submission observes:

    “It is called the Private Sector for a reason – so that it can use Private Sector funds, not Public Sector subsidy to innovate, grow, create jobs and make a profit. It is the job of Government to foster an environment which causes this to happen, within the context of a modern Industrial Strategy.

    If the Government is going to intervene in the market with public funds to stimulate economic activity and boost export-led growth, then provision of this subsidy should be made conditional upon Private Sector players making an equivalent contribution of investment capital to increase the competitiveness of their own products and services, both in the domestic and export markets.

    As for the Ministry of Defence, there exists no evidence that its long-standing policy of securing input of Private Sector investment capital into defence equipment programmes is being applied, which means that they continue to be funded exclusively by the taxpayer – yet, the Intellectual Property Rights for the resultant fully engineered equipment, which rightly belong to the Exchequer, is simply handed over to the main Contractor for nothing in return!

    Accordingly, to avoid repeating mistakes of the past, a revamped Defence Industrial Strategy should have at its heart, a built-in mechanism which elicits Private Sector capital into defence equipment acquisition programmes, as its first and foremost priority.

    This submission shows how to go about doing exactly that.”

    And it concludes:

    “At a time when senior members of this Government are firmly behind the view that this country should put economic security first and balance its books at the earliest, there exists an excellent opportunity to introduce a Defence Industrial Strategy which gradually replaces the public subsidy given to Defence Contractors with Private Sector funds.

    Ask not what Government can do for Business, but what Business can do for Government.”

    The full submission can be downloaded via this link:

    http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/business-innovation-and-skills-committee/industrial-strategy/written/36606.pdf
    @JagPatel3 on twitter

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    Julian Hawksworth - About 418 days ago

    Short-termism in government policies, seems to be the norm; these days. When attempting to boost economic growth through spending, it tends to pick "winners and losers"; whilst potentially stifling private enterprise. Our politicians should be putting Britain's economy first, instead of making decisions based on political expediency; rather than what would be prudent fiscal policy? An excellent article, Mr. Fiuza.

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