Government Deficit Phobia



We learn early and often that ‘deficits’ are bad. We don’t know why they are bad, but we sure know that they are. So Governments promise to put an end to their deficits, and Oppositions feel compelled to say “we too”.

Mainstream media are obsessed with the idea that the Government’s Budget surplus is important, but have no idea why, other than a kind of Freudian distaste for debt. They seek to hold Governments (and Oppositions for that matter) to account on this matter. The media neither know why nor whether deficits are bad, but they do know how to sniff out a broken promise.

With the Budget coming up this week, we are going to get a Budget deficit. So National is now playing down the issue it successfully framed the last election around; see Lisa Owen interviews Finance Minister Bill English, Scoop, 2 May, re TV3’s The Nation. Bernard Hickey, on the subsequent panel discussion, was right to note that the balanced budget is a political rather than an economic target.

The question that matters is, WHO should be running deficits? Who should this decade’s massive amounts of unspent income be being advanced to? There are essentially six possible answers to this question about who should be running deficits:
1. Households withdrawing their savings to buy goods and services.

2. Businesses producing new goods and services.

3. Households buying homes or consumer durables.

4. Households and businesses buying assets that already exist.

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5. The poor.

6. Governments.
All economists regard the first three as appropriate deficit options. The problems are: that many households do not withdraw their savings; that businesses collectively run more surpluses than deficits; and households also for the most part are choosing to run surpluses. (You run a surplus if your saving plus debt repayment exceeds your withdrawals plus new debts.)

The surplus-deficit game is a zero-sum game. As an accounting tautology, the total sum of surpluses must equal the total sum of deficits. So if 1-to-3 are surplus sectors, then the deficits must fall in sectors 4-to-6.

Governments become an obvious candidate to run deficits. But if governments are also choosing to run surpluses, then only sectors 4 and 5 are left to run the deficits that must exist.

The financial boom before the 2008 financial crisis was largely underpinned by lending to the poor. Sub‑prime mortgages and credit cards come to mind. So do loan sharks, and pawn-broking more generally. These neo-Dickensian loans, that allowed people on low wages to participate in the consumer society, really just made up for low wages and benefits. Economies rocked when the poor ran large deficits. But the global financial crisis took place when the credit lines to the poor ran dry. Too many of the poor either wouldn’t borrow, couldn’t borrow, or couldn’t service what they had borrowed.

Should governments prefer that the poor run deficits than that governments run deficits?

This decade the deficits are being incurred by sector 4. Here the deficits are disguised. Households taking on huge speculative debts are experiencing notional appreciations in the values of the assets (mainly land) that are being used as security. Deficits they are, nevertheless. People speculating on rising prices of assets they have title to are spending more than they are earning. Other people are running deficits by making withdrawals in the form of house sales and spending the proceeds on ocean cruises and the like; but too few to stabilise asset prices.

Should governments prefer that asset speculators run deficits than that governments run deficits?

The reality is that neither the deficits of the poor nor the deficits of asset speculators are sustainable. However, they do eventually resolve, in part by bankruptcy, and in part by governments becoming deficiteers of last resort (as occurred in and after 2008).

In Japan the government opts to take on this ‘last resort’ role permanently; it is the most appropriate sector to run persistent deficits. With public debt at well over 200% of GDP, Japan’s government deficits have been the solution; its safety valve. Japanese are content to lend to their government, even at negative effective interest rates, and the government is content to spend incomes that financially conservative Japanese households will not spend. It’s a perfect solution so long as both parties assent to that solution.

In Keynesian orthodoxy, governments run surpluses in boom years (such as this year). Grant Robertson was right to note that, by this criterion, there easily should be a cyclical Budget surplus in 2015. But times have changed. This decade the private sectors almost everywhere (as in Japan) are running structural surpluses, which means that governments are pretty much obliged to run deficits across the economic cycle (as in Japan). When governments resist this obligation then it is only the poor and the speculators who can oblige in their place.

Who should run budget deficits when businesses and normal thrifty households will not? A:governments. B:the poor. C:property speculators. Lisa Owen or Corrin Dann should ask this question.

The present answer of the deficit-phobic New Zealand government is C.


  1. “The media neither know why nor whether deficits are bad, but they do know how to sniff out a broken promise.”

    They sure do know why! So do you:

    “You run a surplus if your saving plus debt repayment exceeds your withdrawals plus new debts.”

    i.e. Income – Expenditure

    As you rightly pointed out, new spending by households and businesses should result in a deficit, whilst also, depending on the purchase create a +1 in the Asset or Liability column.

    But governments? Using this simple analogy, this government has been spending up large in order to incur what will become 8 straight deficits. What exactly is it that has caused this operating failure that couldn’t be resolved in this time? To my simplistic way of thinking, they’ve overspent somewhere, and the only way that could reasonably deal with it is to either cut sending dramatically (by many millions of dollars per week), take a risk on investing in new assets and selling off assets that are negatively performing.

    As it happens, they’ve decided to sell off assets, that haven’t done anything to help out with the surplus problem, nor the overall debt creation.

    Much like the description of the housing bubble: It’s now a race to sell your house, and get the hell out of Auckland. Yes, the effects would be felt countrywide to some degree (and it has already, if you care to compare house prices over the past 20 years in many regional towns and cities), but nowhere near as badly as the cesspool that will become Auckland if you happen to stay, all the while thinking that your assets have matured to the point where you can feel retirement knocking on your door – only to find it’s the finance sector’s version of the loan shark enforcer, and they want their money back.

    The same deal for our government. Just like in the 1980’s with the IMF, I fear that’s exactly where we’re headed now. With an even bigger debt (the last one I was a mere boy and yet 30 billion dollars sounded like a foreign concept to me).

    Just, where are we going to find the money to even begin to pay back what will be an interest-incurring mega billion dollar inter-generational loan when we can’t even post a surplus, in order to know we can service said loan? Answers on a postcard to:

    Oh… wait: They’re not going to sell NZPost & KiwiBank too, are they?

    • ““You run a surplus if your saving plus debt repayment exceeds your withdrawals plus new debts.”

      i.e. Income – Expenditure”

      Um, no, not quite, that would be cashflow, a related but more fundamental concept, and IMO, one that should be focused on instead of the debt/surplus question.

      or rather lets rephrase things into a truly rapid neo-liberal way.
      Surplus == more tax income than is truly required to maintain status quo level of spending
      Deficit == tax take levels are not high enough to maintain the status quo level of spending without borrowing more.

      Neither of these consider *why * we are borrowing in the first place. We could be borrowing to increase the national cashflow ( more small business, regulatory and startup advise services etc), to stablise projected future expenditure ( healthcare, education) or to pay for something of little future value ( referendum on the design of the flag comes to mind).

      my point is the deficit or surplus is only one indicator, and one that means very little in isolation. The only thing that focusing on this one indicated amongst many does, it forces a very short term view on politics. Get rich now or die, never mind that the get rich is the result of what your predecessors did or did not do.

      -edit: spelling-

    • This is government debt. It is wrong to call government debt ‘national debt’, even if most people in the media do confuse the indebtedness of a government with the indebtedness of a country.

      Also, note that this level of government debt is small (about 40%) compared to GDP.

      Who do you think, other than the government, should have taken on these deficits, given the surpluses that exist elsewhere in the global system?

  2. So what happens in Japan when it’s debt-to-GDP ratio reaches 1000%?

    The current economic system we are in is not the final or best one.

    • Possibly nothing. Nothing will necessarily happen. But we might note that a policy of negative real interest rates in Japan has ensured that it’s present government debt levels are stable, even though it’s government continues to run deficits.

  3. Oh man, if you tried to explain this to Corrin Dann he’d get the same confused look on his face he had when he was interviewing Glenn Greenwald

  4. National didn’t seem to have any problem with running a deficit (in a faltering economy) partially caused by their tax cuts for their rich mates in their first three years. Naturally they blamed the financial crisis rather than themselves. But they seem to have a problem with running a deficit if it is caused by having to increase spending on social problems, health, education, etc. when they claim the economy is growing. Shows pretty clearly what and who their priorities lie with.
    On the other hand they probably thought that since Michael Cullen had carefully built up reserves and reduced debt, that they could afford to give it away and still come up laughing.
    By now the only people in this country who are still laughing are the speculators. The only ones left who still think National are good economic managers are the Nationalphiles. Everyone else sees them for what they are: b.s artists.

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