Bryan Gould: A budget surplus takes spending out of the economy

The surplus we are talking about is not the country's surplus. Photo / Mark Mitchell

It was Charles Dickens' Mr Micawber who famously defined the essence of successful economic management, when he said, "Annual income twenty pounds, annual expenditure nineteen, nineteen, and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Most people, with experience of running their own household accounts, will nod in agreement. But while Mr Micawber no doubt got it right for individuals and households, he may not have been so percipient when it comes to public finances.

A government's role in managing the country's economy is very different from running your own affairs.

We have had until recently a government whose most important goal was, it seems, to run a "surplus", and most people would be inclined to agree that a surplus has to be preferable to a deficit. But, as we are beginning to find out, a surplus is not all unalloyed benefit.

The surplus we are talking about, first, is not the country's surplus (that is quite a different matter – the country has been in deficit from one year to the next over a long period) but the government's, and whether the Government is in surplus or deficit will impact rather differently on how the economy performs from what one may expect.

To say that the Government is in surplus means only that it takes more from us in taxation than it spends on public services – it takes spending power away from us, in other words, but doesn't make good the loss to the economy as a whole by increasing its own spending to compensate.

The result, from the viewpoint of the overall economy, is not necessarily benign – we are likely to have a smaller economy and a lower level of economic activity than would otherwise be the case.

There is, of course, potentially also a downside if the Government runs a deficit. It will then in all likelihood have to borrow in order to finance the shortfall, and that will come at a cost, assuming that someone can be found who is willing to lend – though this will not normally be a problem since lenders like lending to governments (often at low rates) because their credit is good.

Borrowing – so often frowned upon – is a perfectly sensible policy option if the outcome is a more vibrant economy and it is even more sensible if the borrowing is for capital rather than current expenditure, something many of us are familiar with when we borrow on mortgage to buy a house.

So, we might conclude that treating a surplus as the Government's top priority may not have quite so much going for it as we might have thought, and we haven't even begun to look at the other side of the equation, which is the price we pay when the Government does not spend the money it takes in.

And that is to say nothing of the capacity of any government of a sovereign country that can, with the required political will, create money for necessary expenditure (as is commonly done in wartime) quite independently of whether it is in surplus or deficit.

A government that insists on trying to achieve a surplus by cutting pubic spending is doing so, in other words, for political rather than economic reasons. For the rest of us, however, there is a cost to such cuts, as we are beginning, now that the books are open, to find out.

Right across the board – from health care (rotting hospital buildings and all) through to underfunded schools, underpaid public servants such as nurses, and earthquake-damaged Christchurch houses still needing repair – the country is worse off and less able to function efficiently.

A surplus might please the ideologues and be applauded by some as the badge of good government, but even Mr Micawber might see that we will all be better off if we use all our resources, whether in public or private hands, to the best effect.

A surplus or otherwise is in any case completely beside the point, but we all pay a price for it if essential services are run down in its name.