Three myths about Government debt

Few aspects of our economy are as gravely misunderstood among politicians, media pundits and the general public as our public finances. Indeed, public discourse on the national debt is luxuriant with myths and fallacies. This piece offers a rebuttal to three widely held beliefs regarding public debt which, I hope, will lead to greater honesty in discussions, and debates, on the state’s finances.

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Debt, deficits and fiscal arithmetic

Fiscal austerity – defined as the reduction in the structural (primary) budget deficit – might be politically popular, but is it necessary from an economic perspective?

I ask this because the current Conservative government expects to eliminate the budget deficit by the middle of the next decade. So, the deficit reduction programme, which has been in place since 2010, will continue into the 2020’s. But should it? Are balanced budgets necessary to achieve sustainability in the public finances?

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Minimum wages and profitability

The debate over the impact of the minimum wage has been one of the most intense and most controversial in the field of economics. This is in large part because the literature on the subject is contested.

On the one hand, critics argue that a price floor in the labour market would result in greater unemployment, since an increase in the wage rate will increase the cost of hiring an additional worker, so firms would employ less (Leamer et al, 2017). Conversely, proponents of the minimum wage assert that the resulting unemployment is inconsequential in comparison to the benefits gained (Cengiz et al, 2017; Allegretto et al, 2018; Rinz and Voorheis, 2018). The supposed benefits include: poverty reduction, improving worker morale (and, thus, raising labour productivity) and offsetting the negative impact of employers with market (monopsony) power.

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