{"id":30110,"date":"2015-02-05T17:33:51","date_gmt":"2015-02-05T07:33:51","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=30110"},"modified":"2015-02-05T17:33:51","modified_gmt":"2015-02-05T07:33:51","slug":"a-primary-deficit-never-ever-i-dont-think-so","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=30110","title":{"rendered":"A primary fiscal deficit Never ever? I don’t think so"},"content":{"rendered":"

\t\t\t\tI know I am an armchair commentator hiding out in my research environment and not really accountable to anybody other than the funding agencies I win grants from. I am certainly not a Finance Minister with a nation in crisis on my hands. But with that said I wonder how any Finance Minister who aims to create full employment and expand equity and undo years of deliberately imposed neo-liberal hardship can claim his nation will “Never, never, never!” record a primary fiscal deficit again. That comment has to be dismissed as political rhetoric rather than an expression of a serious evaluation of reality. What worries me about Greece at the moment is that we are seeing a trend around the world where politicians over promise (or lie straight out) about their intentions to apparently appease the multitude of vested interests then proceed to do what they like. I discussed how this is now backfiring in the recent blog – Time is running out for neo-liberalism<\/a>. An understanding of macroeconomics will tell you (and I know the Finance Minister in question knows all this) that a government cannot guarantee to never run a primary fiscal deficit forever unless they are prepared to allow for large swings in unemployment, something I thought the new Greek government was averse to, and it is that aversion, which defines their popular appeal.
\n<\/p>\n

The quote came from an interesting interview that the new Greek Finance Minister gave to the German weekly newspaper – Die Zeit<\/a> (The Times) (February 4, 2015) – “I’m the finance minister of a bankrupt country”<\/a>.<\/p>\n

The relevant Q&A in the interview was:<\/p>\n

\nZEIT ONLINE: During the campaign, Syriza announced a spending programme worth billions. Can it be implemented without new debts?<\/p>\n

Varoufakis: It has to. I can promise you: Excluding interest payments, Greece will never present a budget deficit again. Never, never, never!\n<\/p><\/blockquote>\n

Lets get some terms write first.<\/p>\n

The government overall fiscal balance that is regularly reported is the difference between two flows – total revenue and total outlays. So if total revenue is greater than outlays, the fiscal balance is in surplus and vice versa.<\/p>\n

Within that balance though are two components that are often separated out:<\/p>\n

1. The primary fiscal balance – the difference between total government revenue and total public spending less interest payments on outstanding debt.<\/p>\n

2. The interest payments on outstanding debt.<\/p>\n

So the Finance Minister is talking about Greece never recording a primary fiscal deficit again.<\/p>\n

Further, the primary fiscal balance is not something that the government can particularly control once it sets its objectives to be the maintenance of full employment.<\/p>\n

I suggest you read this blog – The full employment fiscal deficit condition<\/a> – if you are uncertain of the components of the fiscal balance and how they relate to the real economy.<\/p>\n

We have noted in the past that movements in the final budget balance (net or gross of interest payments on outstanding debt) do not provide a reliable indication of the discretionary intent of the government.<\/p>\n

We cannot conclude that if there is a fiscal surplus (primary or overall) that the fiscal impact of government is designed to be contractionary (withdrawing net spending to reduce economic activity), just as we cannot conclude that a fiscal deficit signals that the government is wanting to expand the real economy.<\/p>\n

This uncertainty arises because there are so-called automatic stabilisers operating as a result of swings in overal economic activity, which are, in part, influenced by the discretionary shifts in government fiscal policy. But more fundamentally, these swings are driven by non-government spending (and saving) decisions.<\/p>\n

Ignoring interest payments on outstanding public debt, then we have:<\/p>\n

Fiscal Balance = Total revenue – Total spending (net of interest payments)<\/p>\n

We can decompose that a step further to recognise the cyclical nature of the fiscal outcome:<\/p>\n

Fiscal Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)<\/p>\n

We know that Tax Revenue and Welfare Payments move inversely with respect to each other, with the latter rising when GDP growth falls and the former rises with GDP growth.<\/p>\n

Why? Tax revenue falls when employment drops and people lose their incomes. Many of the same people go onto welfare benefits.<\/p>\n

These are the so-called automatic stabilisers. Without any discretionary policy changes, the Fiscal Balance will vary in a pro-cyclical manner over the course of the economic cycle.<\/p>\n

When the economy is weak – tax revenue falls and welfare payments rise and so the Fiscal Balance moves towards deficit (or an increasing deficit).<\/p>\n

When the economy is stronger – tax revenue rises and welfare payments fall and the Fiscal Balance becomes increasingly positive.<\/p>\n

Automatic stabilisers attenuate the amplitude in the economic cycle by expanding the fiscal deficit (or reducing a surplus) in a recession and vice versa in a boom.<\/p>\n

So just because the Fiscal Balance goes into deficit doesn’t allow us to conclude that the Government has suddenly become of an expansionary mind.<\/p>\n

We can now appreciate that the Fiscal Balance is not a standalone accounting outcome. It is intrinsically linked to the spending and saving decisions of the non-government sector, which can, itself, be decomposed into the external sector and the private domestic sector (households and firms).<\/p>\n

Modern Monetary Theory (MMT) uses the concept of sectoral accounting to derive so-called sectoral balances to demonstrate the intrinsic nature of these interrelationships. It is a recurring theme in my blog but needs to be repeated often to ensure that standalone statements about what the fiscal outcome might or might not be or become are assessed carefully.<\/p>\n

The sources of spending which flow and add to total spending (aggregate demand in the textbooks) are:<\/p>\n