The history of the last 20 years suggests so. During this time, there's been a close correlation (0.67 in annual data) between the unemployment rate and public sector net borrowing as a share of GDP. On average a one percentage point rise in unemployment has added 1.4 percentage points of GDP to borrowing.
That said, borrowing this year looks likely to be higher than the unemployment rate would predict. Post-1993 relationships suggest that an unemployment rate of 7.8 per cent should be associated with borrowing of 5.4 per cent of GDP. But forecasters expect a deficit of around eight per cent, if we exclude the boost to the public finances given by the transfer of the Royal Mail pension plan. This might be a sign that there is a small “structural” budget deficit. However, as the idea of a structural deficit is at best imprecise and at worst unscientific nonsense, we should be sceptical of this. It might instead be that widespread labour hoarding and under-employment mean that the economy is weaker than measured unemployment suggests, and so you’d expect tax revenues to be weak and public spending high.
So, a triumph for Keynes, right?
No. The tight relationship between unemployment and the public finances is not a permanent one. In the 1980s, government borrowing fell as unemployment rose. The Thatcher government did not look after unemployment, but nevertheless the budget returned to balance. Keynes was wrong then, so why should he be right now?
It's because the circumstances of the 1980s are not those of the 2010s. Back then, tighter fiscal policy was accompanied by falling interest rates which – along with the ending of credit controls in 1981 – led to a huge rise in household borrowing. That allowed government borrowing to fall. Across the whole economy, remember, net borrowing must be zero, so as household borrowing rose, someone else's borrowing fell and that someone was the government. In effect, the government privatized borrowing.
This is not the world we live in now. At near-zero interest rates, monetary policy can do little to encourage the private sector to borrow. This is especially true to the extent that – in complete contrast to the 1980s – households might be over-indebted rather than under-indebted. This means the government cannot now reduce its borrowing by transferring it to the private sector, as it did in the 80s. The attempt to do so will instead lead to weak aggregate demand. Austerity can work sometimes - Keynes's "general" theory wasn't general – but those times are not here and now.
Instead, the best – only – chance of a sustained and large reduction in government borrowing is that we get a strong economic recovery which sees unemployment fall.
Most economists do not expect this. The consensus is for unemployment to fall only slowly over the next few years and – not uncoincidentally – for public borrowing to fall only a little.
Whilst this is the most likely scenario, it's not the only one. It is possible that the next few years will see uncertainty decline – say, if the US "fiscal cliff" and euro area debt crises are resolved satisfactorily. This could unleash a wave of corporate spending that creates jobs and tax revenues and so reduces public borrowing.
You might think this unlikely. It is. But the point is that the only circumstances in which government borrowing can fall a lot are circumstances in which unemployment also falls.
