Budget surplus and deficits

One of the great fallacies of contemporary economics is that fiscal responsibility equates to budgetary surpluses. We see debates about the size of the budget deficit dominating Parliament when it is not the size that counts, but its structure. This is because in times of economic slow down, outlays (or government spending) are higher than income (or taxes collected). When the economy turns around, this trend reverses and we get a surplus.

In this spirit, a budgetary surplus is said to be proof of a government who is responsible. Again, surpluses are not the best guide for judging the competence of a government or central bank. This was highlighted recently when the New York Times criticised Ireland and Spain because of the lack of budgetary and fiscal responsibility. Actually, both these countries where in surplus when the crisis hit…

Thanks to the amazing Dean Baker from the Centre of Economic and Policy Research for pointing this out… and his amazing work in monitoring media errors on economic policy

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One Response to Budget surplus and deficits

  1. njoagwuani kosi says:

    I quite agree with the fact that a surplus budget doesn’t depict a competent government. The government could be ‘over-taxing’ the people and actually providing less for the people… This of course would produce a balanced budget..

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