The announcement that the Government may rethink its budget surplus objective in the light of the UK’s Brexit vote has been met with some approval by a number of economists. There was a particularly unusual article from “The Economist” on the 3rd September suggesting all manner of spending. I think that their judgement has been clouded by being distraught over Brexit and perhaps too much time in the sun!
A sense of perspective is required. The economy has been recovering for nearly eight years, inflation is low, business confidence has recovered and employment levels are at record highs. These are not the classic symptoms of an economy in distress. At this point, it was not just doctrinaire monetarists but even Keynes who thought that Government’s should be running surpluses in order to repay the debts that they had incurred whilst pump-priming the economy during the recession.
One has to ask if one is not repaying debt when the economy is operating at near full capacity, when would one repay it? What position does this leave us in when inevitably the next slowdown or recession occurs. A country where debt as a proportion of GDP has rocketed from under 40% to over 80% really does need to think about reducing this to allow headroom for when the next economic crisis occurs.
From a tax point of view it would also be desirable to have a surplus. The last time that there was serious tax reform coincided with Nigel Lawson’s tenure as Chancellor where he was able to rationalise taxes in an environment where the Government was not looking constantly to extract more funds from the taxpayer.
A surplus would ease the pressure on tax collection and allow for a more considered and less short-term view of the tax system. It is high time that our massively overcomplicated tax system was simplified, but experience shows that to achieve this one needs a position of stable public finances.
