1. The fiscal consolidation programme: fundamental problems and progressive alternatives Malcolm Sawyer University of Leeds

2. Outline Reminder of some basic relationships Why cannot the budget deficits just ‘unwind’ as recovery comes ? Moving the goal posts: objectives Moving the goal posts: potential output

3. Outline Why balanced budgets undesirable Why structural balanced budgets unachievable ‘Three ways to full employment’ : reducing inequality and savings

4. Two basic relationships G – T = S – I + M – X G: government expenditure, T tax revenue, S, savings, I investment, M imports, X exports

5. Two basic relationships b = d/g (b Debt to GDP ratio; d budget deficit to GDP ratio, g nominal growth rate) d’ = b(g – i) (d’ primary budget deficit to GDP, i interest rate on bonds When g = i, borrowing from rentiers to pay interest to rentiers

6. Budget deficits and public expenditure cuts The budget deficit rose because of recession; why not let recovery come and reduce budget deficit ? Financial crisis and tax receipts Reductions in discretionary expenditure

7. Budget deficits and public expenditure cuts The objective is now balanced structural budget. Replaces ‘golden rule’ of public finances Effect of that decision is to seek to budget deficit on average 3 per cent of GDP smaller. Equivalent to reducing public expenditure by order of 6 to 7 per cent; allowing for taxes on expenditure 10 per cent.

8. Budget deficits and public expenditure cuts What has happened to potential output Y* ? Reduction of the order of 5 per cent : implications for costs of financial crisis Lowers tax receipts at potential by order of 2 per cent of GDP Does the economy have to operate at potential output ?

9. Impossibility of zero deficits Trend to aim of zero structural budget deficits The contrast with the historic experience G – T = (S – I) + (M – X) indicates that the achievement of zero deficit as compared with previous experience would require corresponding changes in S, I, M, X

10. Impossibility of zero deficits The ‘impossibility’ of zero structural budget deficit when S(Y*) – I(Y*) +M(Y*) – X(YT) > 0 where Y* is potential output. The ‘stupidity’ of present UK and EMU budget policies

11. Impossibility of zero deficits UK forecast to achieve zero deficit at potential output in 2015 : is that possible ? Based on rapid growth of investment, exports and the economy Investment/GDP at highest level this century, exports grow almost twice as fast as imports, current account surplus

12. ‘Three ways to full employment’ Budget deficit, stimulation of investment, redistribution of income (Kalecki, 1944) Limits on stimulation of investment (as compared with recent experience) Raising net exports ?

13. ‘Three ways to full employment’ The rise in inequality and implications for demand and debt Role of corporate savings and household debt

14. ‘Three ways to full employment’ Changing savings propensity through higher taxation Redistribution from profits to wages to lower savings Changing income inequality to lower savings

15. Re-distribution policies Wages rising faster than productivity Minimum and ‘living wages’ Progressive taxation Guessing orders of magnitude

16. Concluding comments Public expenditure cuts are a matter of choice not necessity Attempts to have structural balanced budget will not succeed Reducing inequality is the progressive way to reduce budget deficits