Magazine article Management Today

Saving Up for a Rainy Day

Magazine article Management Today

Saving Up for a Rainy Day

Article excerpt

SAVING UP FOR A RAINY DAY Those of us who are foolhardy enough to travel round the country to explain what is happening (or, even more boldly, to predict what will happen next) learn to dread certain questions. We dread them because the answers cannot be stated simply and a complex answer takes too long to provide. One current example runs as follows: Why doesn't the Government spend its large surpluses on something useful (e.g. roads or hospitals)?

This question is sometimes supplemented by the comment that the surpluses are not helping to control inflation, since the money supply is increased by the purchases of gilt edged securities. Both require a response.

The short answer to the question is: 'Because then it would not have the surpluses.' The reply to the supplementary comment is: 'That's all wrong.' Unfortunately, however, that brevity is neither polite nor helpful, and it may well be worth taking the opportunity to explain it all in greater length and detail.

The Government's large surplus is usually measured by its public sector borrowing requirement (PSBR). Since it currently has a surplus, it has renamed that requirement the public sector debt repayment (PSDR). Last financial year the PSDR was about 14.4 [pound sterling] billion. The budget surplus (the excess of revenue over expenditure) was about 7.5 [pound sterling] billion and there were favourable financial transactions (mainly associated with privatisation) of about 6.9 [pound sterling] billion.

Why does the Government have such a large surplus? One immediate point is that it did not plan to have a surplus of this size. In the 1988 budget, the Chancellor forecast that the PSDR for 1988-89 would be 3 [pound sterling] billion. In the event, revenue was about 6 [pound sterling] billion higher than expected, expenditure was about 6 [pound sterling] billion lower than expected and financial transactions were about 3 [pound sterling] billion more favourable. (Privatisation proceeds were about 2 [pound sterling] higher than forecasr.) Although one can say that a surplus as large as 14 [pound sterling] billion was not anticipated, the Goverment has announced that it forecasts a margin of pretty much the same size for 1989-90. It also intends, on current plans, to maintain large surpluses for the coming four years.

The Government plans these large surpluses because it believes it is wise to do so as part of its counter-inflationary policy. Its main weapon in this respect remains monetary policy. As Nigel Lawson said in his Budget speech: 'Inflation is a disease of money; and monetary policy is its cure.' He added: 'The role of fiscal policy is to bring the public accounts into balance and keep them there, and thus underpin the process of re-establishing sound money.'

If sound money needs only that the public accounts should be brought into balance, it would seem that the stance of fiscal policy is rather tighter than monetary policy on its own requires. An that is indeed the case. It is using fiscal policy in a traditional 'Keynesian' way to help control the growth of expenditure. Even though Lawson reaffirmed his view that the PSBR should be zero in the medium term, he remarked that 'the path of prudence and caution must be to return, to balance not overnight, but gradually over a period of years. …

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