Chancellor George Osborne will probably have to forecast even higher borrowing in next Wednesday's Autumn Statement. Ruth Lea, economic advisor to Arbuthnot, believes public sector net borrowing this year could overshoot its Budget forecast of £91.9bn by £11bn. And the IFS expects borrowing forecasts for the next five years to be revised upwards, causing the Chancellor to have to miss his target of reducing the debt-GDP ratio in 2015-16.
We must distinguish between the politics and the economics here. Politically, this will be awkward for the Chancellor because it will spark clichés about "black holes" and the public finances being "out of control". From an economists' perspective, however, the question is: could it be that the problem with government borrowing is not that it is too high, but rather that it is too low?
From a Keynesian (or Kaleckian!) point of view, the answer is: yes. With long-term real interest rates almost zero, now is the right to for the government to borrow for investment in infrastructure.
But there's also a non-Keynesian perspective which suggests government borrowing is too low. This starts from a fact and a hypothesis. The fact is that government borrowing is, as an accounting identity, the counterpart of net lending (that is, saving minus investment) by the private sector. The hypothesis is that this has been a "balance sheet recession"; the private sector borrowed too much in the good times, and since 2008 has been cutting spending in an effort to reduce debt and repair its balance sheets.
From this point of view, government borrowing might be worryingly low because it is a sign that private sector balance sheets are being repaired too slowly.
This is most plausible for the household sector. Since the start of 2009, households' net lending – roughly the difference between their savings (and/or debt repayments) and spending on buying houses - has been £60.4bn. But in the five years between 2004 and 2008, their net borrowing was £246.7bn. Households, then, have reversed only one quarter of the growth in net debt they incurred during the good times.
In fact, all this turnaround is due to savings and reduced house-buying, rather than to actual debt reductions. Bank of England statistics show that mortgage debt has actually risen by £31.9bn (2.6 per cent) since the end of 2008. Yes, debt-income ratios have fallen – but thanks to a rise in nominal incomes rather than to a fall in debt.
One reason why balance sheet repair has been so slow is that there are "zombie households" who can barely cope with their current interest payments, let alone find the cash to pay down debt. The Bank has estimated that around 10 per cent of households have difficulty keeping up mortgage payments.
Although these are only a minority, there's a larger number in the "squeezed middle" - people who have suffered a fall in real wages in recent years and have reduced their savings to keep up their living standards.
This poses the danger of a Japanese-style lost decade; it's no accident that the idea of a balance sheet recession has been popularized by Richard Koo of Nomura. Any incipient upswing could result in stretched households trying to repay debt rather than increase their spending, with the result that the recovery will soon stall.
In this sense, if government borrowing were higher, it would be a sign of greater net saving by the private sector and thus of faster balance sheet repair - something which would lay the foundations for a proper, sustained, recovery.
Of course, if the private sector were trying harder to repair its balance sheets, private spending would be weaker. But this wouldn’t necessarily be a disaster. It would simply be an argument for stronger counter-cyclical fiscal policy.
Now, there is a big problem with this account. It rests on that hypothesis that households need to reduce debt. But we don't know this for sure. We don't know what the "right" debt-income level is for households, not least because we don't know what their expectations are for future incomes (the higher these are, the more sustainable is a given level of debt).
Herein lies a case for a looser fiscal policy, and in particular tax cuts. They are a way of finding out whether we are in a balance sheet recession. If households respond to tax cuts by saving, this would be a sign that we are indeed in such a recession.
If we are, then tightening fiscal policy would be downright dangerous because the squeeze on households' incomes it would create would slow down the process of balance sheet repair and thus prolong the stagnation. The paradox of thrift tells us that it is impossible for everyone to improve their balance sheets simultaneously. If a balance sheet must deteriorate, it’s better that it be the government's than households', not least because the government can borrow more cheaply.
If however, households increase spending in response to the cut, this would be a sign that households in aggregate are not burdened by excessive debt. In which case, it would be safer to then tighten fiscal policy.
Frankly, I doubt if this is going to happen. For one thing, Mr Osborne would worry that a giveaway on top of increased borrowing forecasts would jeopardize the government's AAA credit rating. (It's quite possible that the costs of retaining this rating exceed the benefits of doing so, but that's another story.) And for another thing, the idea of using policy as an experiment is anathema to a political culture in which politicians are expected to be "in control." And in politics, ritual counts for more than rationality.
One final thing. You might think all of this is contrarian, heterodox stuff. It isn't. Since the spring, we've had pretty consistent news that borrowing will exceed its forecasts. But ten year gilt yields have moved sideways since May, and are lower now than they were in March. This suggests that markets are worrying more about the weakness of the economy than they are about high government borrowing.
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Chris blogs at http://stumblingandmumbling.typepad.com