Here’s a fun fact: since 1974/5, public sector net debt has fallen as a percentage of GDP in 18 years.
Yet of the 18 times it has fallen, only five times was it due to a budget surplus.
Just over two-thirds of the time when the public sector net debt ratio has been reduced, it’s been cut despite there being a budget deficit – thanks to the workings of the combination of economic growth, inflation and interest rates.
At its simplest, if the economy is growing, then you can both be running a deficit and reducing the debt:GDP ratio at the same time. There’s an added complication with how interest rates and inflation also have an impact, but the basic point is still the same: having a budget surplus is one way to reduce the debt:GDP ratio, but it’s the less common way. (I expanded on this point in Eliminating the structural deficit is aiming for the wrong target.)
Why does this matter? Well, I think we’ll find plenty of politicians – especially in the Conservative Party, but also in the Liberal Democrats and even a few in Labour – who for a variety of reasons slip from saying ‘we must get the debt:GDP ratio down to a sustainable level’ to ‘and so of course we must therefore run a budget surplus’.
That’s not so. One only follows from the other if you insert a much more contentious middle step about the speed of reduction you think is necessary. The question back to anyone who demands a surplus is to ask, ‘so why is that speed of reduction in the debt:GDP ratio the one you think we must have?’.
There may be some good answers to that, especially in future years as the longer-term outlook for the economy becomes clearer, but at the moment it’s a question notably neglected.