A recent article from the BBC reports that the government budget deficit, or government borrowing in their words, has recently decreased in May to £24.3 billion compared to the same month last year.
This figure is £ 19.4 billion less than last May’s figure, a massive win for the government as a decreased budget deficit moves us closer to the objective of balancing the budget.
Balancing the budget is important as it then allows the government to see a budget surplus during economic boom periods as a booming economy brings higher employment, consumer spending, and business growth and activity, which all contribute to the government budget through income tax, VAT tax and corporation tax respectively.
Consequently, when all of these factors increase during boom periods, the government can see a budget surplus if the aforementioned objectives of balancing the budget are achieved.
This then allows the government to save some of this revenue for when times get rough, in other words, for recessionary periods where factors such as employment, consumer spending and business growth and activity fall.
A fall in these factors leads to a reduction in aggregate demand as it is made up of consumer, business and government spending as well as net trade, hence, when consumer and business expenditure falls, it is the Keynesian view that the government begins to spend more to fill in this vacuum.
The reason why this spending increase is partly due to the existence of automatic stabilisers, for example, when a recession occurs, workers lose their jobs thus forcing them onto schemes like job seekers allowance or benefits which are automatic stabilisers.
When there are more individuals on these schemes, it costs more to run them, hence, government spending in this area automatically increases.
Although the existence of these stabilisers is important, as they ensure individuals are somewhat protected by ensuring they are entitled to a small amount of disposable income, it does create a problem for the government due to overspending which strays us away from the target of a balanced budget.
This effect has been amplified by the COVID-19 pandemic as the UK government introduced new schemes such as the Furlough scheme which has cost the UK government £100 billion to ensure that jobs within the UK remain protected.
Additionally, a discretionary fiscal policy such as the construction of HS2 and the implementation of public health systems such as track and trace has also increased the UK government's budget deficit during the COVID-19 pandemic.
And this makes the saving strategy rather effective as it enables the government to eat away at its saved revenue for when it is overspending rather than being forced to borrow loans that have the opportunity cost of interest and debt associated with them.
However, due to past performance, the UK government has been unable to completely balance the budget deficit before the pandemic began as austerity measures were not enough in the given timeframe, but they were incredibly close.
This means that it is essential for the UK government to begin to minimise the budget deficit as soon as possible to ensure that the COVID-19 debt does not keep piling up as it is already at a staggering £2.4 trillion.
Luckily for the government, it seems that decreasing this deficit is not as far fetched as the promising economic outlook of the UK economy is the likely reason why public sector debt is decreasing each month.
With a successful vaccine rollout combined with the relaxation of COVID-19 restrictions, economic agents have seen newfound confidence recently which has led to an increase in consumer spending as well as business activity as this wave of demand signals producers to produce more.
This has led to increased expenditure within the economy as consumers spend more and as businesses spend more to organically expand, a decision which has led to a record amount of vacancies being available within the UK since the start of the pandemic.
This increased activity of economic agents raises VAT revenue, income tax revenue and corporation tax revenue for the government as previously stated thus leading to a decrease in the budget deficit.
At the same time, the increase in employment to 4.7% minimises the number of workers on schemes such as Furlough which decreases the pressure and the spending the government allocates on automatic stabilisers.
Consequently, as revenue rises and as spending decreases, the UK government is beginning to see a similar pattern to that of austerity which in the end, will help the UK government achieve its objectives of a balanced government budget.
Written by Hubert Kucharski