Deficits Good, Surpluses Bad? Not Quite

I’ve seen a lot of posts lately waving around January’s £30bn surplus as proof that the government is “draining money from the economy”, based on the familiar trope that deficits inject money into the private sector while surpluses remove it.

There is some truth in that. Governments are not households, and deficits can absolutely support demand during weak periods.

But I thought I’d actually investigate the claim rather than simply applaud the infographic because it had arrows and the phrase “fiat currency” on it.

Turns out the £30bn was not even a quarterly figure. It was a single January monthly figure, which matters because January is always unusual in Britain due to self-assessment deadlines, CGT payments, VAT receipts and the usual January tax bunching.

In fact, the UK was still running a very large annual deficit overall. The January surplus sat inside a wider yearly borrowing figure well above £100bn.

In other words, a lot of the “surplus” may simply reflect more economic activity, timing effects and seasonal receipts, not the state sucking life out of the economy like a Treasury vampire.

And here’s another awkward point. Because this was a single January monthly spike, not a permanent state of affairs, presenting it as proof the government has somehow permanently “removed £30bn from the economy” is economically simplistic at best. The next months could easily swing back into deficit again, which is exactly what usually happens.

Equally, the other side should be careful too. You cannot hail one strong January surplus as proof the economy has suddenly been transformed either. One unusual tax-heavy month does not mean Britain has escaped its deeper problems of weak productivity, low investment and anaemic growth.

There’s also a reason governments often tighten finances during stronger periods of growth. If an economy is already running hot, continually flooding it with borrowed money can simply fuel inflation instead. Borrowing is not automatically wise any more than fiscal tightening is automatically reckless. Timing matters.

All of which rather suggests a lot of the Facebook outrage is less economic analysis and more partisan point-scoring. People are starting with “Reeves bad” and then working backwards from there using whatever infographic floated past that morning.

That doesn’t mean Reeves is automatically right. Britain still has weak productivity and anaemic growth, and excessive caution can become self-defeating. Rebuilding public services also requires real resources and credible funding, not just slogans about deficits being good.

Governments also need enough fiscal room to respond when the next crisis arrives, rather than already sitting permanently at the limit of what markets will tolerate. Lower borrowing and lower debt interest costs do matter eventually, even if Facebook economics prefers to skip straight from “fiat currency” to “infinite free money”.

But economics is not as simple as “deficits good, surpluses bad”. If it were that simple, Chancellors would just sit in the Treasury pressing the “prosperity” button all day.