2 Ingelesez: “When Jeremy Corbyn first came into prominence to take over the leadership of the British Labour Party, his offsider, now Shadow Chancellor John McDonnell started talking about “deficit deniers” and he and the Labour Party were avowedly not so inclined, as if questioning the fiscal surplus obsession was a demonstration of stupidity. In fact, for a political group claiming to be the ‘end of austerity’, who aimed to seize control of the Party from the neo-liberal Blairites – those austerity-lite mavens – I thought he was sounded distinctly neo-liberal himself.

(…)

Britain is not an example of a successful austerity implementation. It looks rather Keynesian to me. John McDonnell decided he had better make a U-turn of his own in the last few days. This one won’t save the nation and will probably sink British Labour further into the mire. Why McDonnell supported Osborne’s crazy ‘Charter of Budget Responsibility’ two weeks is one question. It showed a monumental lack of understanding of what it would mean for the nation to lock the government in, legally, to achieving overall fiscal surpluses. The U-turn now betrays a capricious approach to policy and one that will fail to cut through and offer a truly progressive path. Very sad really.”

3 Ingelesez:

“1. External deficits will persist and worsen if Britain picks up its growth rate given the rise in imports that would follow. But rising investment incomes from abroad could offset that increase. The Office for Budget Responsibility certainly thinks that.

The external deficit is currently around 5.5 per cent of GDP. The OBR is forecasting the external deficit to be around 3.2 per cent in 2016.

2. What would a small fiscal surplus (say of 1 per cent of GDP) by 2016 imply for the private domestic sector, where households are already over-indebted? We are presuming for argument sake that the OBR forecast will be realised (I doubt it will but still).

The sectoral balances tell us that (S – I) = (G – T) + (X – M).

Substituting the values where appropriate we get (S – I) = -1 + (-3.2) = -4.2 per cent of GDP. That means the private domestic sector would be running a deficit of 4.2 per cent of GDP and accumulating further debt.”

4 Ingelesez: “We do not know what the drivers of that private domestic deficit would be (Household saving plunging and/or a rapid investment growth rate).

The current private investment to GDP ratio is very poor (11.6 per cent of GDP) having falling dramatically during Blair’s period from 14.8 per cent in 1998.

A reasonable surmise is that the private domestic deficit will be driven by a drop in savings and a rise in household indebtedness beyond the already excessively risky levels.

Is this the Britain Mr Umunna aspires to? He is worried about the buildup of household debt but is advocating fiscal outcomes that would make that debt worse. I guess he doesn’t really understand the inconsistency in his story. That is the problem – political statements are continually made to elicit support from an ignorant public that cannot possibly be realised.

But in trying to realise the impossible, fiscal policy becomes skewed towards austerity and full employment shifts further away from the reality.

(…)

On September 26, 2015, John McDonnell wrote that the Labour Party would go along with George Osborne’s fiscal surplus plans as outlined in the ridiculously titled Charter of Budget Responsibility (Source).

(…)

… I was told to be patient. That is was just a cunning political ploy to trap Osborne.

I provided a critique of that position in this blog – British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’.”

5 Ingelesez: “John McDonnell wrote a letter to Labour MPs on Monday entitled – Charter for Budget Responsibility and the Fiscal Mandate

Among other things it said:

So I believe that we need to underline our position as an anti-austerity party by voting against the Charter on Wednesday. We will make clear our commitment to reducing the deficit in a fair and balanced way by publishing for the debate our own statement on budget responsibility. We will set out our plan for tackling the deficit not through punishing the most vulnerable and damaging our public services but by ending the unfair tax cuts to the wealthy, tackling tax evasion and investing for growth.

In subsequent press interviews, McDonnell was keen to stress that “Labour will tackle the deficit – we are not deficit deniers” (Source).

Did he really misunderstand that the Charter required an absolute rather than a current fiscal surplus to be the goal?”

6I ngelesez: “The general point remains. There is nothing canny about this U-turn. It was wrong to endorse the Charter in the first place even if he believed it only constrained the current fiscal balance to be in surplus.

Deficit deniers, if that is the term he wishes to use, are the ones who actually understand the relationship between the fiscal balance, the external balance and the private domestic balance and the implications of movements of one for the others.

I am a deficit denier using their terminology. To say that the Labour Party will still be “tackling the deficit” indicates that he thinks it is a policy target.

The fiscal balance should never be a policy target. It should just respond to the pursuit of the more legitimate policy targets such as full employment.

Further, there is no salvation to be had in saying that the Labour Party will bear down on the deficit but do it in a fairer way.

The equity implications of the government mix of spending and taxation is not at all important from a macroeconomic perspective although it is clearly very important from a progressive perspective.”

7 Ingelesez: “By that I mean, that the fiscal deficit has to be large enough to satisfy the non-government sector’s desire to net save overall at levels of income and output which would generate full employment.

Not a penny more or less than that.

For Norway, that means a fiscal surplus is appropriate because the spending impulse it receives from its external (resource) sector is so strong.

For Britain, which an external deficit, unless domestic investment by firms is very strong (which it hasn’t been for a long time), a fiscal surplus is the anathema of responsible macroeconomic policy.

So a fairly sizeable deficit is required if the government wants to provide the space for the private domestic sector to run down debt, given the external deficit.

Once that is accepted then equity issues might be entertained. But that sort of reasoning is light-years away from austerity-lite.

McDonnell should be educating the public to understand that fiscal deficits will be the inevitable outcome of the nation achieving important goals such as social inclusion and full employment. A nation that can sustain those things should celebrate and realise that the fiscal deficit is the reason they can enjoy such success.

Why not start with that sort of narrative rather than getting trapped into all this Tory anti-‘deficit denial’ nomeclature and construction and then being forced to make embarassing U-turns because it becomes clear that the Scottish will never support you again among other things.”