Budget. What budget?

It is not that long ago when the Chancellor of the Exchequer (the British Finance Minister), Gordon Brown, was preaching the virtues of a balanced budget. In fact this was a commonly accepted wisdom: in a period covering up and down ("boom and bust") of economic cycles governments should balance their budgets. They should have neither surplus nor be in debt. There was a debate how it can be achieved. One approach was that a surplus produced during good times is saved and then used in bad times. The government is never in debt and any surplus is kept as a reserve for bad times. The opposite approach is that during bad times the government gets into debt which is then paid back during good times. The practical solution would be somewhere in between. Precisely where, can be the subject of pragmatic arguments and philosophical debates. What had never been put into question was the entire concept as it clearly makes sense.

After the outbreak of the current financial crisis when governments had spent massive amounts of monies to subsidise the collapsing financial industry, the concept of the balanced budget remains forgotten. Now the real issue is the maximum level of debt governments can sustain in servicing it. In practice it means that governments would remain in maximum permanent debt paying maximum amounts in interest and service payments to the financial industry. And whenever the capacity of repayment appears the debt will be increased, rather than repaid, so the maximum level of permanent interest and service payments to the banks is maintained. Such increase of debt can be achieved through various mechanisms like additional bank's bailout or a downgrade in the credit rating. This is a classic strategy that loan sharks use against their victims: this is how the financial industry - with politicians as conduits - treats the taxpayers now.

This current level of governments debt is a direct result of banks' bailouts. These bailouts broke the traditional economic cycle of "boom and bust". Indeed Gordon Brown's claim that "boom and bust" in the UK was abolished seems correct. But not in a way that Mr Brown would have hoped: the UK ended up in a state of permanent, or at least very long term, "bust" state. When the British government rescued banks to the tune of £65 billion (of direct costs) in 2008 it was not just about £65 billion, a massive amount of cash as it was. These £65 billion ended up in banks coffers filling up the liquidity hole which was created by the banks running a giant pyramid scheme. Banks did not start lending and it was obvious that they could not have started doing so. So £65 billion did not end up in real economy but in the banking system securing interbanking transactions against toxic waste which were generated by the pyramid process. Needless to say these £65 billion generously helped to fund the financiers remuneration.

This £65 billion debt is not just a normal government debt as it would have been if this money had been spent in the economy through tax cuts or public spending. If the banking system was relatively healthy (i.e. did not require rescuing and was not such a pyramid as it is) and the government borrowed additional £65 billion, to fund tax cuts or to spend on public investment programme to stimulate the economy, then through the healthy banking system credit creation cycle this £65 billion would have been multiplied seven to ten fold. Therefore the debt directly generated to rescue the banks in the UK in real economic terms cannot be considered as additional £65 billions on the government balance sheet but as £455 billion to £650 billion lost opportunity costs of the real economy.

Bailouts, such as one in the UK, happened in the US and the entire eurozone. It is economic value is not in hundreds of billions of euros or dollars, but in serious trillions. And it keeps growing. The financial system which was turned into a classic case of a pyramid scheme (in legal and technical terms) and which the governments decided to support, is killing off the real economy. The idea of a balanced budget is unlikely to come back soon.