Respected Financial Times journalist Martin Wolf argues that the last thing we need in a world of excess saving is for creditworthy governments to cut their borrowing. He presents evidence that shows that fiscal deficits are helpful not because they return the economy to swiftly to health but because they promote the painfully slow healing of deleveraging.
It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.
Wolf refers to an objection that growth slows sharply once public debt exceeds 90% of GDP. Our public debt at around 30% of GDP is nowhere near that of some of the eurozone countries.
In an article in today’s DomPost, not online, Conor English of Federated Farmers says: “If debt is the problem, why borrow more”. But the problem the world faces is not too much debt but too little demand, and the main danger is stagnation as in Japan or worse deflation.
If the diagnosis is wrong then the so-called cure of asset sales to pay off debt, and fiscal retrenchment instead of investment for growth is also wrong. We should be investing now, not selling off control of our future.