One striking thing about George Osborne's Tory conference speech yesterday was his pledge to run a budget surplus in the next Parliament. You would imagine no Chancellor would have to say such a thing. It would be the obvious aim of anyone in control of the purse strings, just as it would be the obvious aim of any footballer to try and win a game. And yet years when budget surpluses actually happen are as rare as hen's teeth. Since 1963 British governments have only managed it seven times. It's a measure of how used we have become to living on debt that Osborne can make this announcement and people act surprised.
I hope Osborne can make it happen, amongst other reasons because it will flush the Keynesians-lite out of the woodwork. Since the financial crash it's surprising how many people who remained silent on economics during the Brown boom have been telling us that they were Keynesians all along, and that the solution to our problem is Keynesian deficit spending. They forget that there are two parts to Keynes, the easy and the hard part. The easy part is the spending bit. The hard part is saving money during the good times so that when recession comes the Government can pump-prime the economy. Where was Ed Balls during the Brown boom? At Gordon Brown's right hand, is where. Running a deficit, year after year. How dare he urge deficit spending now.
It was an aide of Ronald Reagan who delivered the surprising apercu that what cannot go on forever must stop. Deficits can go on for a long time, but unless the economy is growing dramatically the aggregate of debt to GDP balloons as well. When Labour came to power in 1997 the ratio was 40%, widely regarded as manageable. But because of the credit crunch and Labour's spending it has risen to about 90%, considered by economists to be not far below the level from which it becomes impossible for a state to recover, as rising interest payments increasingly dominate a government's spending. Don't forget that QE money has been poured into buying up UK gilts, keeping the prices down.
Osborne was right to warn yesterday of the risk of another recession - considerable, if the wheels come off the Euro wagon - and the consequences this would have for the UK's debt stock. In a recession we would be running a deficit again, like it or not, with an effect on debt-to-GDP which can only be imagined. As I've said repeatedly, I think Labour will win in 2015. I don't expect Chancellor Balls will be aiming for a budget surplus. The rest of us had better hope we don't have another recession.
