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Philip Arestis and Malcolm Sawyer University of Cambridge and University of Leeds
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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)
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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);
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Sustainability of what? Primary or total deficit? Debt or net asset position? Private surplus or public deficit?
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The reverse causality argument; Low investment --low growth of the capital stock -- need for budget deficit; Leading to low growth--high public debt relationship.
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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
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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.
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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
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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
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Reducing the structural budget position does not make sense unless there is reason to believe that there is corresponding shifts in private behaviour.
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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
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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.
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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;
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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.
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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
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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.
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