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Derivation Of The Structural Deficit?

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Can anyone explain this and can you point to any sources of information or standard practices in accounting for it? It gets bandied about a lot, and ascribed different figures, but I realise now I've never seen the working... For example, it would be important to know whether Darling's 7bn undershoot applies to it or not. Cheers.

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Can anyone explain this and can you point to any sources of information or standard practices in accounting for it? It gets bandied about a lot, and ascribed different figures, but I realise now I've never seen the working... For example, it would be important to know whether Darling's 7bn undershoot applies to it or not. Cheers.

Standard accounting practice? It's called common sense - Don't run a deficit. The sooner the deficit is cut the greater the standard of living our future generation(s) can have.

Politicians make a simple concept difficult. Debt is bad. Increasing debt per annum through a deficit is even worse.

We need to cut the deficit within 2 years. Short term painful medicine for long term health.

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Standard accounting practice? It's called common sense - Don't run a deficit. The sooner the deficit is cut the greater the standard of living our future generation(s) can have.

Politicians make a simple concept difficult. Debt is bad. Increasing debt per annum through a deficit is even worse.

We need to cut the deficit within 2 years. Short term painful medicine for long term health.

Yes but that doesn't describe a structural deficit. Hammering your credit card to buy clothes and holidays is overspending, having to pay for your car insurance and rent (etc) is structural.

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Yes but that doesn't describe a structural deficit. Hammering your credit card to buy clothes and holidays is overspending, having to pay for your car insurance and rent (etc) is structural.

Isn't the structural deficit simply the bit that would be there when the economy was working normally?

I always assumed they simply averaged total borrowing across the economic cycle, subtracted average revenues and defined the resultant figure as the structural deficit / surplus. But then I am a bit thick.

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Isn't the structural deficit simply the bit that would be there when the economy was working normally?

There's a can of worms in itself :)

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Yes but that doesn't describe a structural deficit. Hammering your credit card to buy clothes and holidays is overspending, having to pay for your car insurance and rent (etc) is structural.

A structural deficit is one that remains when the good times return. Or one you run when the good times are rolling.

A structural deficit is a sign of total missmanagement of a nation's finances.

In your analogy above both cases are of missmanagment. In neither instance should the credit card (or printing fake money a la Labour) represent an honest way of paying one's way in life.

Had savings been acumulated by the individual he wouldn't need to use the card for either purchase. Likewise the government should have saved through the good times by creating a surplus of cash by creating a 'production' based economy. China did this and can now enact Keynsianism policies through the use of savings.

A deficit of any kind is a joke. A structural deficit that is created at the height of the boom is criminal.

Blame Brown for diverting human, capital and land reources from the productive private industry to the non-productive public sector.

The sooner the deficit is cut the better for our future generation(s).

Lets stop arguing about the number and reduce it to zero pretty quickly.

Edited by ringledman

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. . . A deficit of any kind is a joke . . .

That's all very well if you are hoarding tangible assets in the good times that you can spend in the bad.

But if you want to achieve that in a credit based economy, then you need the electorate to be in debt to the state in the good times.

Come the bad times; they default.

EDIT: I suppose you could nationalise, then privatise...

Edited by Timm

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That's all very well if you are hoarding tangible assets in the good times that you can spend in the bad.

But if you want to achieve that in a credit based economy, then you need the electorate to be in debt to the state in the good times.

Come the bad times; they default.

I want an economy based on savings and production. It's not hard to achieve just needs a proper and strong government to make it happen.

A government who says no to the public sector. A government that lets the private sector grow through low taxation and low regulation.

Simple concept. Amazing how only 5% or so of the population get it.

Edited by ringledman

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I want an economy based on savings and production. It's not hard to achieve just needs a proper and strong government to make it happen.

A government who says no to the public sector. A government that lets the private sector grow through low taxation and low regulation.

Simple concept. Amazing how only 5% or so of the population get it.

How does your strong government save in the good times?

.

Edited by Timm

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POTENTIAL OUTPUT, OUTPUT GAPS AND STRUCTURAL BUDGET BALANCES (1995)

http://www.oecd.org/...43/33928808.pdf

good luck- HM Treasury have been trying to figure this one out for the past decade. Still on page 101.

Here are some UK figures from the IFS:

The UK public finances: ready for recession? (2008)

http://www.ifs.org.uk/bns/bn79.pdf

Edited by chris c-t

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structural deficit depends on the size of government.

more government more structural deficit.

our problem is the size of government.

and im not just talking numbers...Im talking of functions, supervising of those functions, thinktanks on what functions to add and so on.

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'A deficit of any kind is a joke. A structural deficit that is created at the height of the boom is criminal'

But its not as straitforward as that is it? It never is in economics!

It all depends on what the money was spent on - some of it was spent on assets and therefore should be regarded as investment. If the UK was a company these assets would appear on the balance sheet as tangible assets. But if the deficit was as a result of increased costs ie wages then that would be really bad and unsustainable.

So to answer the question you would need to know exactly what the money was spent on. During a boom it makes sense for the Govn. to spend money on roads, schools, hospitals, rail links, olympic games etc. Previous govn. did make alot of expenditure of this nature but not all - I grant you. But can't evaluate this unless we can see UK balance sheet. But with 4000 school refurbished or rebuilt and many new hospitals the boost to assets is likely to be huge.

Edited by flapjack

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'A deficit of any kind is a joke. A structural deficit that is created at the height of the boom is criminal'

But its not as straitforward as that is it? It never is in economics!

It all depends on what the money was spent on - some of it was spent on assets and therefore should be regarded as investment. If the UK was a company these assets would appear on the balance sheet as tangible assets. But if the deficit was as a result of increased costs ie wages then that would be really bad and unsustainable.

So to answer the question you would need to know exactly what the money was spent on. During a boom it makes sense for the Govn. to spend money on roads, schools, hospitals, rail links, olympic games etc. Previous govn. did make alot of expenditure of this nature but not all - I grant you. But can't evaluate this unless we can see UK balance sheet. But with 4000 school refurbished or rebuilt and many new hospitals the boost to assets is likely to be huge.

Bu lab used PFI to buy assets....off balance sheet....and the borrowing is ADDED to the GDP.

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That's all very well if you are hoarding tangible assets in the good times that you can spend in the bad.

But if you want to achieve that in a credit based economy, then you need the electorate to be in debt to the state in the good times.

Come the bad times; they default.

EDIT: I suppose you could nationalise, then privatise...

In short we have spent a couple of generations pumping up property prices and spending the proceeds on imports instaed of manufacturing and exporting. The result is that govt does not receive enough tax revenue to pay its bills for wages and the obvious such as health and education etc. Brown borrowed more and more through the better times, whilst the unbalanced property obsessed economy grew and gew feeding this greedy frenzy, ready to burst again. It's paper wealth, so it has gone wrong. We had borrowings of about £60Billion pa more than tax revenues by 2007, even before the crisis (which was an unnoticed crisis already).

I can't believ how some politicians even don't see how futile this mismanagement of the economy is! Did you see Question time last Thursday? On there was a woman (name escapes me) from Birmingham who said that the structural deficit argumanet was being overplayed because after WW11 we had a deficit which was 238% of GDP - alot more than now! She need some serious economic history lessons. The USA had to lend us most of it and gave us a gift of £5billion (worth £155billion) called MARSHAL AID just to keep going. We had rationing for 10 years and a tough old time. Debts to the USA over the war were only completed repayment in 2005 or 6.

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Apparently our structural deficit is £ 70 Billion. I wonder how they get that figure as we only had a maximum deficit of just over 40 billion in the years up to 2007. (i.e. so I assume that the amount we borrow, is the amount of structural deficit as those years are normal).

Is the figure high because,

A ) The government sold stuff and spent it as well as borrowing.

B ) Or because if you borrow and spend 40 billion you get quite a bit of it back so that has to be taken into consideration or what?

C ) Or are the years leading up to the peak in 2007 defined as boom instead of normal economic activity?

Or a combination?

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Cogs - excellent question.

I think the structural deficit is quite debatable - the incoming govt for political reasons prefers bigger numbers in order to support theirt agenda for shrinking the state. I agree with this and accept the machiavellian nature of politics. But you are right to question the underlying justification.

From the FT:

Britain’s “structural deficits” disease

March 4, 2010 2:01pm by Chris Giles | Share

British economic commentary - even at the most respected levels - has got a nasty bout of “spurious precision disease”. One that shows people are not thinking very carefully about the budgetary problems facing the country.

The disease is the obsession with talking about the “structural” or “underlying” budget deficit as if we have the faintest idea what it is. The two “official” structural budget deficit numbers - 9 per cent of national income for the overall deficit and 5.5 per cent of national income for the current deficit excluding net investment - are made up in the Treasury, based on its assumption of the permanent lost economic output. But the Treasury itself says this number, “remains subject to significant uncertainty”.

As I will explain, the disease is serious and potentially dangerous. It is setting up incentives for just the sort of uncertainty and rule-bending that undermined the credibility of Gordon Brown and the 1998 fiscal framework. We should all resist this. Avoiding using spurious structural deficit numbers would be a good place to start.

Who has caught the disease?

In the spirit of refusing to hide behind the coward’s “some commentators” gambit, I would argue that the a large part of the economic establishment has come down with the disease, including:

The distinguished letter writers to the Sunday Times who argue, “the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report”.

The governor of the Bank of England, who has repeatedly argued, “there must be elimination in large part of the structural deficit over, say, the lifetime of a parliament which is the period for which a government is elected”. This statement is rather undermined by his insistence that, “if anything we’re more uncertain about how much spare capacity there is”, since an idea of the degree of spare capacity is a pre-requisite for an idea of the size of the structural deficit. If you don’t know the size of the structural deficit, it quite a stretch to prescribe the optimal correction of your unknown number.

The Conservative Party, for whom the “eliminat[ion] the bulk of the structural current budget deficit over a Parliament” is George Osborne main aim as a prospective chancellor.

Almost everyone in the City. In the past two days, sensible notes from Goldman Sachs, Fathom Consulting and Geoff Dicks at Novus Capital Markets have all taken the structural deficit numbers at face value.

What is wrong with the use of structural deficit numbers?

The simple deficiency of structural budget deficit statistics is that we cannot measure it. It is entirely made-up, based on the an estimate of what the budget deficit would be if the economy was operating at a normal level. Because the economic crisis has destroyed our pre-2008 notions of what normal levels of output are, it has also destroyed any notion that we can estimate the structural or underlying position of the public finances. We might at some point in the future have more confidence about the degree of spare capacity and its likely evolution, but pretending to know the figures now is a mug’s game.

Although the Treasury has been commendably honest about the deficiencies of its estimates of the permanent effect of the recession, its convention of publishing a precise number creates some bizarre effects. In the March Budget, officials estimated the structural deficit as 9.8 per cent of national income in 2009-10, a number which fell to 9.0 per cent by December.

Let’s look at why its measure of the structural deficit improved. Was it lower than expected public spending or higher than expected revenues? No, the expected borrowing requirement was raised, not cut. Was it because the Treasury thought the economy would perform better in future, revising its growth forecasts higher, thereby raising more tax revenues? No, the forecast level of nominal GDP was lower in December than in March for the whole forecasting horizon, suggesting worse public finances unless you believe in negative fiscal drag.

Instead, the reason was entirely due to the economy performing worse than expected in 2009, alongside a Treasury assumption that spare capacity was consequently higher in December than in March. This enabled it to pencil-in a bigger adjustment between the measurable budget deficit and the notional structural budget deficit in December than in March.

In this world, bad news on the economy is good for the structural budget deficit and vice versa. If the Office for National Statistics revises its estimates of 2009 output up, that will be bad for the structural deficit, unless the Treasury simultaneously says its estimate of lost output has reduced.

Why does the overuse of “structural deficit” numbers matter?

In short because Britain is in danger of setting policy on the basis of them. If economists persuade the next government to set fiscal targets on the basis of structural deficits, fiscal policy and strategy will be in hock to something that cannot be known. This is likely to lead to bad policy and/or fiddling the figures.

In government, the Conservatives could, for example, easily achieve their target of eliminating the bulk of the structural current budget over a Parliament by increasing the estimate of the economy’s spare capacity as this government has done between March last year and December. I would pity an independent Office for Budgetary Responsibility having to grapple with taking on a government over something which cannot be measured.

So we are in danger of setting fiscal goals that hard-wire just the sort of problems that undermined this government’s fiscal credibility and gave it incentives to cheat rather than address a lingering fiscal problem. And the more economists succumb to the spurious precision of the structural deficit disease, the more dangerous this becomes.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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