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Approaching Budget Deficits, Debts and Money in a Socially Responsible Manner

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Frontiers of Heterodox Macroeconomics

Part of the book series: International Papers in Political Economy ((IPPE))

Abstract

Government can always finance its expenditure with the cooperation of the central bank. Key issue should be the desirability of proposed expenditure, resource and funding implications. It is argued that ‘people’s quantitative easing’ does not contribute beyond what traditional fiscal policy could achieve. The ‘golden rule’ whereby borrowing is permissible for public investment is critiqued. It is argued that the target budget deficit should be set to secure macroeconomic objectives and focus on ‘full employment’, noting the difficulties of defining full employment and capacity. The budget constraint coming from full employment is set out. The structural budget balance alternative is critiqued and argued to be in general infeasible. The possible role of interest rates is discussed. It is then argued that a debt arising from budget deficit along the lines indicated in this contribution is sustainable. It is argued that governments should operate where there is no fiscal space left.

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Notes

  1. 1.

    See, for example, Cesaratto (2016) on the general topic of ‘the State spends first’.

  2. 2.

    I have argued that at length in Sawyer (2017a).

  3. 3.

    The terminology comes from the circuitist literature: see Graziani (2003). For discussion of government and central bank money in a circuitist context, see Sawyer (2014).

  4. 4.

    See https://bankunderground.co.uk/2015/09/28/are-reserves-still-special/.

  5. 5.

    These remarks are much influenced by Coppola (2018).

  6. 6.

    This is to recognise that the achievement of full employment requires not only an appropriate level of demand but also sufficient capital equipment in the relevant locations, and that industrial and regional policies are needed to complement fiscal policy.

  7. 7.

    Hence, the convergence criteria for membership of the euro under the Maastricht Treaty of 3% deficit, 60% debt ratio can be viewed as mutually consistent under conditions of 5% nominal growth.

  8. 8.

    See Aspromourgos (2014) for extensive discussion on this point and more generally the relationship between Keynes and Lerner.

  9. 9.

    Including Michael Boskin, John Cogan, Niall Ferguson, Ronald McKinnon, and John Taylor. Letter available at: https://economics21.org/html/open-letter-ben-bernanke-287.html.

  10. 10.

    See Arestis et al. (2007) for a similar exercise.

  11. 11.

    This approach has been adopted by the UK Labour Party (2017). Further, “when the Monetary Policy Committee decides that monetary policy cannot operate (the ‘zero-lower bound’), the Rule as a whole is suspended so that fiscal policy can support the economy. Only the MPC can make this decision” (p. 2).

  12. 12.

    Carney (2019) cites Bridges et al. (2017), Borio et al. (2018), Taylor and Schularick (2012) and Aikman et al. (2018).

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Authors and Affiliations

  1. Emeritus Professor of Economics, University of Leeds, Leeds, UK

    Malcolm Sawyer

  2. Fellow, FMM, Germany

    Malcolm Sawyer

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  1. Malcolm Sawyer
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  1. Department of Land Economy, University of Cambridge, Cambridge, UK

    Philip Arestis

  2. University of Leeds, Leeds, UK

    Malcolm Sawyer

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Sawyer, M. (2019). Approaching Budget Deficits, Debts and Money in a Socially Responsible Manner. In: Arestis, P., Sawyer, M. (eds) Frontiers of Heterodox Macroeconomics. International Papers in Political Economy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-23929-9_2

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