Thursday, 11 December 2014

How to eliminate the UK deficit - the trick revealed.

Magic RabbitIn the UK Labour has revealed how the trick will be done. How they will eliminate the deficit in the UK.

They will do it in the classic Labour fashion by...

...redefining the term deficit.

From now on when they refer to 'deficit' they mean the deficit on the current budget. Which of course means that any shortfall caused by private sector excess saving will be matched by government spending that can be classified as 'investment'.

A clever trick - if it can be pulled off. The problem of course is with the definition of 'investment', which generally doesn't include investment in human capital.

And that means that the expenditure will be on capital assets and intellectual property (or yet another fudge to redefine the term 'investment').

The increase in investment spending should bring down unemployment and increase the tax take which will close the deficit unless there is a sudden change in savings behaviour.

Of course as MMT warns, that approach is 'pump priming' at the high skilled/high capital usage level of the economy, which, if there isn't sufficient taxation or planning controls to free up those construction and development resources, will lead to supply-side shortages and wage spirals.

Given that we are in a mini building boom and you can currently earn a king's ransom as a bricklayer then there might be some rocky roads ahead.

And once you have invested in something you generally have to do something with it - which often requires an increase in the current budget to staff out the service. Of course if you limit the investment to capital replacement and stuff used solely by the private sector (roads and council houses spring to mind) then you can avoid a current budget impact.

But I will give Ed Balls his due. He did slip this into the speech in January if you look hard enough.

And I missed it.