This article is really just a place for me to continue a conversation I’ve been having with @mcnalu and @spatchcockable on Twitter. The 140 characters started off as restrictive then descended into farce.
But you may also be able to help aid my understanding of this topic so I’ll lay out some background.
There’s been a lot of talk over the last few years about public debt, deficits and austerity. Like most people, I am not educated in economics and have to rely on reading the opinions of trained economists in newspapers and online articles. This has led me to a general understanding of the basics, so far as a lay person would be interested in the topic.
Nothing in this post or the comments below is intended to be an argument for or against austerity or Keynesian stimulus economics. I am simply trying to understand an aspect of the debate which hasn’t been clear to me thus far.
I understand the opposition to so-called “austerity”: that in times of recession or anaemic growth it is beneficial to increase public spending in order to replace the lost spending from a hesitant private sector; that this spending then goes on to create an economic stimulus and return the economy to growth. No problem. Very straight-forward.
I also understand that government debt isn’t what most people think it is (I can recommend this on that topic) and that so long as the growth rate exceeds the deficit as a percentage of GDP, then net debt as a percentage of GDP will decline. Also straight-forward.
What I don’t understand is this: there must be a limit to the level of deficit that can be accommodated in the medium and long term. Whether that be 10%, 50% or 1000% of GDP there still has to be a level at which every economist, regardless of their view on austerity, says “enough’s enough”. Right? Or even in the short-term, would any sensible economist advocate a government introducing spending 200% of GDP in one year to introduce a massive surplus? I’m using enormous figures to make the point seem ludicrous but assuming that everyone agrees that 200% isn’t sensible, doesn’t it follow that at some point between there and the “sensible” x% there is a tipping point?
So my confusion comes in what dictates that tipping point. What is the limiting factor where anti-austerians would say that “enough’s enough”? And how is it quantified? Can you point at a number and say that the UK, for example, *shouldn’t* have a deficit higher than y% for 2015, despite having a sovereign currency and independent central bank?
From my lay person’s perspective, I wondered if the limiting factors may be:
- inflation: government introduces far too much money into the country in one go, devaluing the currency and/or creating huge inflation
- interest repayments are prohibitive, making it difficult for growth to outstrip the deficit without reducing public spending to such a degree that it causes another recession
- market confidence
- higher borrowing makes it more likely that the debt is held by foreign lenders, meaning that the interest payments end up removing money from the country
I’m sure that there are more complex influences which should be considered here, so anyone with better knowledge on the subject than I have would be very welcome.
And just to re-iterate, I am not making an argument for or against austerity here. I am simply trying to understand something that I currently don’t.
So, over to you.