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    It's seems such a basic question but very few people seem to have clear answers and those that seem to understand the issue are split on whether it is or is not.
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    Because a deficit is unsustainable in the long term, a continued deficit adds to the cumulative national debt (I think it's currently around 1.2 trn GDP for the UK) which becomes a problem because a large debt means that a large proportion of government revenue will be spent on servicing (paying interest on) that debt therefore reducing the funds available for pensions and NHS etc. The other issue is that as the national debt grows as a percentage of GDP, investor's confidence in that country's ability to repay all its debt falls so it is harder for that country to borrow money in order to cover it's day-to-day deficit by selling government bonds, therefore the government must offer higher interest rates on its bonds to attract buyers for its bonds, the effect of that higher interest rate will be exactly as I've just explained in the previous point.

    Basically it's important because in the long term there will be less money at the treasury's disposal so the treasury may not be able to spend money on the things that it should i.e. pensions, policing, NHS, welfare.
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    It is unimportant and has always been, as we have sovereign control over our own currency and our debt is mainly owned onshore or by offshore entities with a stake in Britain's solvency.

    We ought to be borrowing. With borrowing costs at lows never yet seen in the 300+ year history of the national debt, Osborne wasted three years of recovery, like the Tories always do. Although if he had borrowed he would only have spent it on cutting taxes and giving rentiers money rather than anything useful like infrastructure.

    In any case the way to reduce a deficit is to spend. One increases the GDP side of the equation because spending cuts, if not completely counter-productive, always have a worse multiplier.

    By focusing on this one niche economic indicator Osborne let the condition of our infrastructure go to rack and ruin, didn't allow it to grow with population, inflated house prices beyond all affordability, inflated the pound thereby further hurting our balance of trade, and increased our national debt from some 60% post crash (a steady 40% before) to some 80%. It is now predicted to rise to 100%.
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    It's basically a bit of political propaganda that lets the right paint centre left parties like labour as loose with money. Any kind of social democratic redistributive public spending is made politically impossible. Which is what the modern neoliberal right want.

    The debt has been increasing under the Tories, but there has been little investment in social spending, cos Tories.
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    (Original post by ChaoticButterfly)
    It's basically a bit of political propaganda that lets the right paint centre left parties like labour as loose with money. Any kind of social democratic redistributive public spending is made politically impossible. Which is what the modern neoliberal right want.
    What do you suggest as their motive, assuming your interpretation is correct?
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    (Original post by Fenice)
    It's seems such a basic question but very few people seem to have clear answers and those that seem to understand the issue are split on whether it is or is not.
    The reason is that maintaining a deficit is potentially dangerous. If we have a trade deficit, it means the government is spending more than it's got coming in; the difference has to be made up by issuing bonds - essentially borrowing money. This is all well and good when globally, all your economies are doing well. Everyone is happy to lend each other money, and because everyone's doing well, if you need to slow down your payments to your creditors as you don't have the money to pay them back at that time, your creditors will be pretty happy to do that. Everyone's got the money they need to spend on infrastructure and economic growth, or whatever else the governments may choose to, and it's all generally swell.

    The issue comes when we have a downturn. Now, investors have doubts. Being owed money is suddenly not okay, they want the money to hand so that their assets aren't at risk of being devalued or worse, defaulted on. They start recalling the money they're owed. And now your governments have a problem. When running a deficit, governments tend to fund them by borrowing ever more money. So long as said government can keep borrowing money, this works. But when investors are suddenly not willing to give loans, or at least not willing to give loans that are as favourable, the government finds itself short on cash. Hence they are then forced into policies of austerity to try and save money to pay off their creditors. Ironically, the way that governments run their deficits is remarkably similar to the way in which a pyramid scheme operates; pyramid schemes are considered illegal in most countries.

    Which isn't to say that a trade deficit is inherently bad. Especially for smaller, growing economies, they're vital. Borrowing money allows them to keep capital flowing through the economies and feeds the growth. Without borrowing money, they could not grow nearly so fast, or potentially at all. But a sustained trade deficit - and worse still, a sustained, growing trade deficit - is very often a danger. Because the moment you do get an economic downturn, you're in trouble.
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    (Original post by Fenice)
    What do you suggest as their motive, assuming your interpretation is correct?
    Dunno.

    Anything from believing it is the right thing, they believe it genuinely helps people, cynical class war, unconsciously protecting their or the class they represents interests. There motives are not really important. There policies are harmful is the problem.

    Something else to consider is that this budget surplus fetish wasn't always the case.

    https://en.wikipedia.org/wiki/Post%E...omic_expansion

    The UK was in a much bigger mess, had much greater debt after the war and Labour under Atlee spent our way to recovery building things like hospitals and council houses out of the public purse.
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    Greece.
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    The UK has one of the largest deficits in the G7 of about 7%.

    To fund the deficit, we have to borrow off people and that creates debt which gets larger every year.

    The debt costs money to maintain (Aka interest). Last year it cost about 68 billion.

    So.....having a enlarging debt and deficit is not a good thing.

    Well...I believe that is the thinking anyway.
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    (Original post by Luke Kostanjsek)
    The reason is that maintaining a deficit is potentially dangerous. If we have a trade deficit, it means the government is spending more than it's got coming in; the difference has to be made up by issuing bonds - essentially borrowing money. This is all well and good when globally, all your economies are doing well. Everyone is happy to lend each other money, and because everyone's doing well, if you need to slow down your payments to your creditors as you don't have the money to pay them back at that time, your creditors will be pretty happy to do that. Everyone's got the money they need to spend on infrastructure and economic growth, or whatever else the governments may choose to, and it's all generally swell.

    The issue comes when we have a downturn. Now, investors have doubts. Being owed money is suddenly not okay, they want the money to hand so that their assets aren't at risk of being devalued or worse, defaulted on. They start recalling the money they're owed. And now your governments have a problem. When running a deficit, governments tend to fund them by borrowing ever more money. So long as said government can keep borrowing money, this works. But when investors are suddenly not willing to give loans, or at least not willing to give loans that are as favourable, the government finds itself short on cash. Hence they are then forced into policies of austerity to try and save money to pay off their creditors. Ironically, the way that governments run their deficits is remarkably similar to the way in which a pyramid scheme operates; pyramid schemes are considered illegal in most countries.

    Which isn't to say that a trade deficit is inherently bad. Especially for smaller, growing economies, they're vital. Borrowing money allows them to keep capital flowing through the economies and feeds the growth. Without borrowing money, they could not grow nearly so fast, or potentially at all. But a sustained trade deficit - and worse still, a sustained, growing trade deficit - is very often a danger. Because the moment you do get an economic downturn, you're in trouble.
    Er, a trade deficit is imports vs exports. We used to worry about it a lot in the 1960s when surprise surprise Labour was in. It's something Tories and their papers have studiously ignored for political reasons as I touched upon above.
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    (Original post by political)
    Greece.
    Which cannot issue currency. Try again, no partisan armchair economics this time.
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    (Original post by ChaoticButterfly)
    Dunno.

    Anything from believing it is the right thing, they believe it genuinely helps people, cynical class war, unconsciously protecting their or the class they represents interests. There motives are not really important. There policies are harmful is the problem.

    Something else to consider is that this budget surplus fetish wasn't always the case.

    https://en.wikipedia.org/wiki/Post%E...omic_expansion

    The UK was in a much bigger mess, had much greater debt after the war and Labour under Atlee spent our way to recovery building things like hospitals and council houses out of the public purse.
    That's an interesting way to look at the immediate postwar economy. By most accounts, Attlee's economic policy largely failed. Nationalisation was a bust; inefficiency was rife, which was made most apparent by severe coal shortages in the winter years of that Labour administration.

    And describing the 60s and 70s as 'Golden Years' is certainly debatable too. Successive governments were trapped trying to keep inflation down without snuffing out the already poor economic growth; the rate of growth was more or less half that of France of West Germany. The pound was plummeting, and the rampant inefficiencies within nationalised sectors were stifling the country. Sure, infrastructure projects kept unemployment low, but this was also in part due to the ridiculous power wielded by the unions.

    The real boom in Britain's economy came in the 1980s. Thatcher brought in sweeping monetarist policies which caused unemployment to rise, but also brought to an end the toxic cycle of inflation. By culling inefficient industries and promoting privatisation, she left Britain with a functioning, self-sufficient economic base that lead to a real boom in the mid-late 80s and very early 90s. It's telling that by the next time Labour would take power, they'd dropped their opposition to pretty much every economic policy Thatcher had advocated.
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    (Original post by Luke Kostanjsek)
    The reason is that maintaining a deficit is potentially dangerous. If we have a trade deficit, it means the government is spending more than it's got coming in; the difference has to be made up by issuing bonds - essentially borrowing money. This is all well and good when globally, all your economies are doing well. Everyone is happy to lend each other money, and because everyone's doing well, if you need to slow down your payments to your creditors as you don't have the money to pay them back at that time, your creditors will be pretty happy to do that. Everyone's got the money they need to spend on infrastructure and economic growth, or whatever else the governments may choose to, and it's all generally swell.

    The issue comes when we have a downturn. Now, investors have doubts. Being owed money is suddenly not okay, they want the money to hand so that their assets aren't at risk of being devalued or worse, defaulted on. They start recalling the money they're owed. And now your governments have a problem. When running a deficit, governments tend to fund them by borrowing ever more money. So long as said government can keep borrowing money, this works. But when investors are suddenly not willing to give loans, or at least not willing to give loans that are as favourable, the government finds itself short on cash. Hence they are then forced into policies of austerity to try and save money to pay off their creditors. Ironically, the way that governments run their deficits is remarkably similar to the way in which a pyramid scheme operates; pyramid schemes are considered illegal in most countries.

    Which isn't to say that a trade deficit is inherently bad. Especially for smaller, growing economies, they're vital. Borrowing money allows them to keep capital flowing through the economies and feeds the growth. Without borrowing money, they could not grow nearly so fast, or potentially at all. But a sustained trade deficit - and worse still, a sustained, growing trade deficit - is very often a danger. Because the moment you do get an economic downturn, you're in trouble.
    What are government bonds? How do they work and why are they issued?

    Posted from TSR Mobile
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    Disadvantages
    1. Leaves a greater level of debt for future generations and can be thus seen as irresponsible.
    2. More reliant on foreign countries to give credit as money is needed to retain excess expenditure and still pay for interest. e.g. Greece and Germany
    3. Due to lack of savings caused by a deficit, the government may need to increase taxes in times of financial crisis decreasing household RDI and the standard of living for citizens or face increasing debt causing a higher national debt.
    4. Due to increasing AD by using the deficit to invest in infrastructure it may also lead to too much inflation leading to a wage-price spiral emphasising this effect.

    Advantages
    1.Increased economic growth, due to increased expenditure on infrastructure there is increased employment leading to a positive multiplier effect increasing AD and thus increasing economic growth.
    2. As the government would run a budget deficit they would think twice before making unnecessary investments due to the risk of running into further debt. Meaning that government expenditure is more controlled and effective.

    To conclude, I personally believe that the risks of a budget deficit outweigh the benefits due to the fact increased economic growth can be achieved in other ways such as contractionary monetary policy (reducing the base rate) from 0.5% to 0.25% or by using supply-side policy (government investment in NVQs or further education) which would also have a greater long term effect and have a lower amount of risk to the economy if a financial crisis were to occur in the near future. And proper management of government of funds would eradicate the risk of government making unnecessary investments.
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    (Original post by Gladiatorsword)
    What are government bonds? How do they work and why are they issued?

    Posted from TSR Mobile
    In simple terms, a government bond is a way for a government to raise money. It's essentially a declaration to repay an amount. Let's say you purchase £1,000,000 in 10 year government bonds. You give that government £1,000,000, and the government promises to pay you back interest over the 10 year period, plus the face value of the bond. So in 10 years' time, you'll have back your £1,000,000 plus the interest accrued, which is called the bond yield. They are typically one of the safest forms of investment - especially gilt edged bonds - as governments are very unlikely to default on their debts. As a consequence, yields are normally lower than in some other, riskier investment options.

    The advantage for you is that your £1,000,000 is working; you're increasing its value by receiving the extra payments. The advantage for the government is that it's got £1,000,000 in its pocket, which it can use to fund any infrastructure developments or other social spending, or as often happens, to pay off other debts it owes.
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    (Original post by ChaoticButterfly)
    It's basically a bit of political propaganda that lets the right paint centre left parties like labour as loose with money. Any kind of social democratic redistributive public spending is made politically impossible. Which is what the modern neoliberal right want.

    The debt has been increasing under the Tories, but there has been little investment in social spending, cos Tories.
    An increase in social spending would only lead to increased unemployment. There has to be an incentive to work which I believe Osborne has done by creating the National Living Wage which is substantially higher than the minimum wage under the Labour Party and reducing JSA or sanctioning those who fail to appear to job interviews.
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    (Original post by scrotgrot)
    Er, a trade deficit is imports vs exports. We used to worry about it a lot in the 1960s when surprise surprise Labour was in. It's something Tories and their papers have studiously ignored for political reasons as I touched upon above.
    Yes, but if you're spending more on goods and services imported, than you're generating on goods and services exported, then there's a net expenditure by the government which needs to be covered.
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    (Original post by Luke Kostanjsek)
    Yes, but if you're spending more on goods and services imported, than you're generating on goods and services exported, then there's a net expenditure by the government which needs to be covered.
    I know, my question is why did you say trade deficit when actually you spent the rest of your post talking about fiscal deficit.
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    (Original post by Luke Kostanjsek)
    That's an interesting way to look at the immediate postwar economy. By most accounts, Attlee's economic policy largely failed. Nationalisation was a bust; inefficiency was rife, which was made most apparent by severe coal shortages in the winter years of that Labour administration.

    And describing the 60s and 70s as 'Golden Years' is certainly debatable too. Successive governments were trapped trying to keep inflation down without snuffing out the already poor economic growth; the rate of growth was more or less half that of France of West Germany. The pound was plummeting, and the rampant inefficiencies within nationalised sectors were stifling the country. Sure, infrastructure projects kept unemployment low, but this was also in part due to the ridiculous power wielded by the unions.

    The real boom in Britain's economy came in the 1980s. Thatcher brought in sweeping monetarist policies which caused unemployment to rise, but also brought to an end the toxic cycle of inflation. By culling inefficient industries and promoting privatisation, she left Britain with a functioning, self-sufficient economic base that lead to a real boom in the mid-late 80s and very early 90s. It's telling that by the next time Labour would take power, they'd dropped their opposition to pretty much every economic policy Thatcher had advocated.
    I think this is an incredibly selective post, ignoring the benefits and advantages of workers being protected by unions, while glossing over the huge inequalities caused by Thatcherism which exist today.

    I'll never understand why unions, representing the interests of ordinary workers so they cannot be exploited and undercut are seen in such a bad light by so many.

    Having an organization fighting for your pay and working rights and standards should be celebrated.
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    (Original post by scrotgrot)
    It is unimportant and has always been, as we have sovereign control over our own currency and our debt is mainly owned onshore or by offshore entities with a stake in Britain's solvency.

    We ought to be borrowing. With borrowing costs at lows never yet seen in the 300+ year history of the national debt, Osborne wasted three years of recovery, like the Tories always do. Although if he had borrowed he would only have spent it on cutting taxes and giving rentiers money rather than anything useful like infrastructure.

    In any case the way to reduce a deficit is to spend. One increases the GDP side of the equation because spending cuts, if not completely counter-productive, always have a worse multiplier.

    By focusing on this one niche economic indicator Osborne let the condition of our infrastructure go to rack and ruin, didn't allow it to grow with population, inflated house prices beyond all affordability, inflated the pound thereby further hurting our balance of trade, and increased our national debt from some 60% post crash (a steady 40% before) to some 80%. It is now predicted to rise to 100%.
    Excellent post.
    The problem is that the Conservative Party and their buddies in the press have succesfully and seemingly irreversibly changed the narrative to:

    borrowing = awful thing done by awful socialists to wreck the economy


    As ever, any sense of nuance and reasoned debate is lacking. It's as simple as 'Labour want to borrow, borrowing wrecks the economy'.
 
 
 
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