Tuesday, 15 December 2015

A Budget Surplus Is A Trivial Achievement

I was just catching up on my Guardian reading, and came across this article about George Osborne relying on rising immigration numbers to reach his fiscal target of a budget surplus by the end of the decade, with Osborne feeling the pressure by assuring us that "the economy will grow robustly every year"

The Guardian writer isn't enjoying himself either though, expressing a worry that "the only feasible way to achieve a budget surplus by 2020 would have been through additional spending cuts or tax rises".

Alas, judging by the language they are both using, both Osborne and the Guardian columnist are paying precious little regard to the concept of value, as they speak as though the nation's value-based economy as a whole is the same as the government's economy. It is not.

A budget surplus is where the government's income is greater than its expenditure. A deficit is the opposite. But just because a government runs a deficit that doesn't mean the nation as a whole is in deficit - a government can run a deficit while the country overall has an income that is greater than its expenditure.

Furthermore, given that government income comes from taxation, even Osborne's goal of a budget surplus by 2010 would not be guaranteed to be anything as like as good for the nation as he supposes. That is to say, although we'll be glad to see the back of a deficit, a surplus does not guarantee value because the government does not earn money in the same way that businesses creating value earn money.

When a business makes a profit it is because its output is worth more than its input, which is based on the extent to which people value the good or service more than money. If you buy a Domino's pizza for £12 you are signalling that you value it more than the £12, otherwise you'd buy something else. Suppose you value a £12 large Domino's pizza at £15, the £3 difference is what is known in economics as your consumer surplus. If Domino's makes £7 on the pizza (their producer surplus) then society has a net value gain of £10. That applies to anything – cinema tickets, washing machines, clothes, DVDs, and so on. Because both buyer and seller benefit from the transaction we know value is being created in society. Firms that cannot create value do not make profits and they are likely to go out of business.

Nothing like what I described above occurs when the government 'earns' its money through taxation, because its earnings are not based on the value it creates. We taxpayers do not choose how the government spends its money - on wars, on public sector salaries, on agricultural subsidies, on hugely uncompetitive contracts, and so on. If by 2010 George Osborne's government spends £800 billion and has a surplus of £3 billion that does not show that the citizens of the UK enjoyed £800 billion of value, because what the government collected in tax was not money voluntarily handed over in transactions where what we got in return for our money created value (this point is compounded when you think of all the government waste that goes on). The best thing any government can do to help create more value in society is by drastically reducing its expenditure and letting us keep more of our money.