Michael H.

The word “deficit”, when referring to government finances, is descriptively correct in accounting terms but rhetorically misleading, because in ordinary English it carries the sense of a shortage, inadequacy or failure. In this context, however, it simply describes a difference between government expenditure and receipts over an accounting period. It does not mean that the government itself is “short” of money. Compare: “The government ran a £100bn deficit.” with: “The government added £100bn of net sterling financial assets to the non-government sector.” They describe the same accounting outcome, yet provoke completely different intuitions. This is not to say that all government deficits produce good economic outcomes. A deficit may contribute to inflation; the composition of spending may be wasteful; or fiscal policy may produce an undesirable distribution of resources. Equally, a deficit may accompany price stability; the composition of spending may promote efficiency and productive capacity; or fiscal policy may produce a desirable distribution of resources. None of these outcomes necessarily follows from the fact that the government’s accounting balance carries a minus sign. It depends on the economic circumstances, the level and composition of spending and taxation, and the productive limits of the economy. A government “deficit”, then, identifies a residual accounting balance, not a deficiency in the government’s finances. The mistake is to import the ordinary-language meaning of deficiency into a national-accounting identity.