It’s a fact that in modern economies, government financial deficit is the norm. The only exceptions to this are the oil states, and small specific economies running vast export surpluses. Moreover, deficit is universally increasing. World Bank data shows that the world economy in total ran consistently in deficit from 2% of GDP in 2003 to 3.4% in 2013. The European Union as a whole increased its deficit over this 10 year period from 1.7% to 3% of GDP, the UK from 0.9% to 5.5% of GDP, and the US from 3.7% to 4.2% of GDP.
This despite the fact that the UK’s outgoing Chancellor of the Exchequer has relentlessly pursued austerity policy to eliminate the deficit. We are told that we cannot continue to ‘live beyond our means’ whilst burdening our grandchildren with an immense debt which they will never be able to repay. The same Chancellor has however had to constantly delay the date by which a budget surplus is promised. Recent noises have even suggested that the deficit might not matter so much, and that there comes a point when crucial government spending must be maintained.
Given that deficit persists despite such determined efforts of politicians to eliminate it, we ought to ask why this is the case. Politicians look like King Canute trying to rebuff the waves.
I offer a thought experiment. In a totally automated economy where a machine could be plugged into the earth to produce the total GDP of goods and services we need, the only way of distributing the output would be by government vouchers issued to people each year. This model has two important implications. First, the total GDP becomes a basic income distributed to citizens. Second the total GDP becomes a ‘voucher’ deficit. The argument is that to the extent that an economy is automated with high technology, high productivity output, then, to that same extent, basic citizen income is a necessity, and financial deficit an inevitability. This thesis fits the facts of stagnating aggregate real wage, insufficient macroeconomic demand, and apparent perpetual deficit.
Our mistake has been to think of the economy in accounting terms which demand balanced budgets, and to think of money as having value derived historically from gold reserves, or currently from the sale of government bonds. Money is in fact virtual and derives its value wholly and uniquely from output GDP. Proposals for a basic income are also ultimately funded by output GDP.
The tail chasing deficit elimination policy is therefore misguided. It has had important harmful consequence of austerity policy which has unnecessarily harmed the poor. It’s time to reconsider. Deficit is inevitable and manageable. In reality, that is already the case.
Geoff Crocker is a professional economist and advocate of basic income. He is the author of ‘A Managerial Philosophy of Technology’ at www.philosophyoftechnology.com