• Mr Micawber ifs Not A Good Guide When It Comes to Public Finances

    It was Charles Dickens’ Mr Micawber who famously defined the principles of successful economic management, when he said “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

    Most people, with experience of running their own household accounts, will nod in agreement.  But while Mr Micawber no doubt got it right for individuals and households, he may not have been so percipient when it comes to public finances.  A government’s role in managing the country’s economy is very different from running your own affairs.

    We have had until recently a government whose most important goal was, it seems, to run a “surplus”, and most people would no doubt again agree that a surplus has to be preferable to a deficit.  But, as we are beginning to find out, a surplus is not all unalloyed benefit.

    The surplus we are talking about, first of all, is not the country’s surplus (that is quite a different matter – the country has been in deficit from one year to the next over a long period) but the government’s, and whether there is a surplus or a deficit in the government’s finances will impact rather differently from what one may expect on the lives of most citizens.

    If the government is in surplus, it is really just another way of saying that it takes more from us in taxation than it spends on public services – it takes spending power away from us, in other words, but doesn’t make good the loss to the economy as a whole by increasing its own spending to compensate.  The result – from the viewpoint of the economy rather than the government is not necessarily benign – we are likely to have a smaller economy and a lower level of economic activity than would otherwise be the case.

    There is also, of course, a potential downside if the government runs a deficit.  It will then in all likelihood have to borrow in order to finance the shortfall, and that will come at a cost, assuming that someone can be found who is willing to lend – though this will not normally be a problem since lenders like lending to governments (often at low rates) because their credit is good.  Borrowing – so often frowned upon – is a perfectly sensible policy option if the outcome is a more vibrant economy and it is even more sensible if the borrowing is for capital rather than current expenditure – something many of us are familiar with when we borrow on mortgage to buy a house.

    So, we might conclude that elevating the achievement of a government surplus so that it is the government’s primary goal may not have quite so much going for it as we might have thought – and we haven’t even begun to look at the other side of the equation, which is the price we pay when the government does not spend the money it takes in.

    The government’s accounts, in other words, are laid out like any other accounts.  There are two columns – Mr Micawber’s income and expenditure.   It follows that a surplus can be achieved either by taxing more than is needed or by spending less than is needed.

    The problem for a government that seeks to achieve a surplus by cutting pubic spending is that there is a cost to such cuts, as we are beginning to find out.  Right across the board – from health care (rotting hospital buildings and all) through to underfunded schools and underpaid public servants such as nurses – the country is worse off and less able to function efficiently.  A properly run economy will need both the public and private sectors working together in unison – each accepting the responsibility that is properly theirs.

    A surplus might please the ideologues and be seen as the badge of good government, but even Mr Micawber might see that we will all be better off if we use all our resources – whether in public or private hands – to the best effect.  A surplus is of little use as figures in a balance sheet if the price we pay is that essential services are run down.

    Bryan Gould

    4 April 2018



  1. Patricia says: April 3, 2018 at 11:46 pmReply

    All very nice Bryan but I suggest you listen to Bill Mitchell on MMT on YouTube and his explanation of our fiat monetary system. A sovereign Government is not financially constrained like a household. It can purchase, and do, anything it wants in its own currency. The right has propagated the idea that the Government is limited in what it can do by the amount of taxation it receives. Just like a household. All a load of nonsense. But the propaganda has been very successful and we bought it hook line and sinker.

  2. Bryan Gould says: April 4, 2018 at 3:59 amReply

    I agree – I am a supporter of MMP myself and can see no reason for a sovereign government ever to be short of money. But one does not have to take on the whole of a complex argument on every occasion one wants to make a subsidiary point. Bryan

  3. Patricia says: April 4, 2018 at 6:15 amReply

    Point taken Bryan but surely unless we emphasise that all the things like health, roads can be easily done then the complexities like jobs guarantee can be ignored until a later date. It’s a bit like after WW11 when the politicians of the day asked themselves if we can do all this for a War why not during peacetime?

  4. Wilfrid Whattam says: April 7, 2018 at 9:21 pmReply

    The Government certainly would not have to borrow to finance any short fall. Please follow Patricia’s advice and read Bill Mitchel. You could also read Richard Murphy (well respected tax expert and economist) on MMT. Indeed there are many sources , including Mervyn King (the ex governor Bank of England), who could correct your misunderstanding.

    Neverthless your overall message is well stated and much needed in New Zealand, where our new Prime Minister seems to be a Tony Blair in drag – all glamour photo ops, but thoroughly tied into the neoliberal story.

  5. No, I haven't seen it but I hear that it is very good. I imagine that it would be hard to find story lines that outdo the reality of the US at present.Bryan Gould says: April 7, 2018 at 9:53 pmReply

    I am well aware of MMT and Bill Mitchell, whose “Reclaiming the State” I have recently read. In your concluding comment, you provide the justification for the piece I wrote – I chose not take on the whole of the argument about governments funding their expenditure but chose to make the simpler point that cuts in public spending hurt and that taking that path is political rather than economic.

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