Gordon's Financial Management

I'll admit that I don't normally do macro: micro-economics is much more to my taste, trying to work out why people do what they do and how incentives can be restructured so that they do things we desire more is a great deal more fun.

But dimly remembered from the days when I was introduced to Keynsian economics (and I'm pretty certain that everyone thinks this is still true: note that in economics the questions never change, only the answers) is the thought that as the economy plummets into a recession then the Government can get it back out again, alleviate that pain, by deficit spending. This rather requires that the government can actually finance such spending by borrowing.

That, in turn, means that the borrowing taken out to finance the last burst of such spending, to alleviate the last recession, be paid back in the good times. Otherwise, the public debt spirals ever upwards and there comes a point when such borrowing is only possible at ruinous interest rates, obviating the entire exercise: high interest rates hold us in a recession anyway.

OK, that analysis wouldn't pass the muster of a purist or expert in the subject but it's good enough as a pencil sketch. Germany seems well placed for this moment in the cycle:

Germany’s preliminary budget numbers look very good indeed; they’re looking at a budget surplus of a couple of billion euros, the first since reunification (not counting the UMTS mobile phone licence auction in 2000).

And how is the UK looking?

The gloomy forecasts were underlined by official figures showing a £2.5 billion black hole in the public finances last month, with the Government's borrowing deficit hitting record levels.

Ah: we've had many more than 7 fat years and here come the lean. Yet the cupboard is bare. If we do go into recession (or even a substantial slow down of growth) then tax revenues will fall off a cliff and that deficit will naturally get a great deal larger. Which means that there will be no room at all for any conscious attempts to increase deficit spending to get us out of said recession (to the extent that the borrowing already built in won't).

All of which is something of a reflection on Gordon's financial management. We should have been saving for the inevitable downturn (no one really thinks the business cycle has been abolished) and we clearly haven't been. At the end of perhaps the longest boom ever, the public finances are still in deficit. And thus we have no room for manouvre.

No, that's not a good record, not a good record at all.