Some people write to this site or in other publications to tell us that as sector balances in an economy have to sum to zero, attempts to cut the public sector deficit are damaging to output and activity as something else has to give to keep the sector balance. Let me explain why their view is likely to be wrong.
First, we need to grasp that there are conventionally four sectors with balances, not just the balance of payments and the public sector deficit they like to concentrate on. There is the private household sector, the private business sector, the public sector and the foreign sector or balance of payments. Turning their argument around, we have only been able to run a large public sector deficit because the business and household sectors wished or were required to stop net borrowing and generate a savings surplus, and because the overseas sector was prepared to let us buy more than we could afford, with substantial inward movements of money for loans and investments to balance the excess purchases. Whilst reining in the private sector a bit may have been necessary after the large borrowings of the pre crisis period, running a large balance of payments deficit and encouraging a lot of new foreign claims over our assets may not be such a good long term strategy.
Getting the public sector deficit or borrowing down can be balanced by any one of the following, or some combination of them. It could be facilitated by a movement out of balance of payments deficit, by making more of the things we want to buy here at home and or selling more abroad. It could be enabled by the private household sector borrowing more to facilitate more home ownership for example. It could be enabled by businesses borrowing more to invest, or generating less profit and cashflow if conditions become more competitive. More borrowing or less saving by either part of the private sector could be a good thing if it leads to more productive investment, better housing or other stores of value. If it is just a question of which brings more satisfaction, borrowing to spend on what you want or the government borrowing to spend on your behalf to buy what you want, it does not mean public sector borrowing is always the best choice.
The range of changes is considerable. There is no simple identity between the public deficit and the balance of payments. Curbing the public borrowing requirement as the balance of payments deficit on trade is coming down or as the private business sector has some profitable investments to undertake is a good thing, not a bad thing and can take place with growth occurring.