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This is striking. From a quick look at the Fiscal Monitor, it seems the trend for program spending (excluding debt charges) would be even more striking - since spending on debt service seems to have actually been dropping recently. If the operating surplus is shrinking faster than the overall surplus, does that have an accelerating effect (since less debt could be repaid, lessening the offset from retiring debt)? It might also be interesting to show program spendng as a share of GDP - constant spending growth divided by slowing GDP growth...

I'm afraid we're going to have to wait a couple of weeks to get the movements in GDP shares. I'll be updating as soon as the numbers are published.

Tax cuts (like the recent GST cuts) should cause a one-time drop in the level of tax revenues, but should not affect the future growth rate of tax revenues (I am ignoring supply-side effects, of course). So the recent flattening of the tax revenue curve may just be the result of those tax cuts (plus the effects of the current near-recession), and if so, tax revenue should start growing again at the same rate as it was growing before (unless there are new tax cuts).

Even if the surplus goes to zero (as it may), inflation plus real GDP growth mean nominal GDP grows at around 4%-5%, so the debt/GDP ratio will nevertheless decline at 4%-5% (not 4-5 percentage points) per year, even with zero surplus.

A more controversial point: interest rates on government debt seem to have settled at around 4%. Suppose they stay at around 4%. With the (long-term) growth rate of nominal GDP higher than the nominal rate of interest, we are now in the world where Ponzi schemes are sustainable (Samuelson's Exact Consumption Loan model, rather than a Barro-Ricardo world). Maybe, just maybe, the debt/GDP ratio is below the efficient level. If so, this may be time to recommend deficits big enough to at least stop the debt/GDP ratio falling any further.

I imagine there are three factors squeezing the surplus: lower taxes; slower GDP growth; and increased spending. Can we calculate the relative contribution of each to the current squeeze? I'm thinking about Krugman's pushback on Bush's claims that the US deficit came from war and economy, rather than tax cuts.

Governments should run balanced budgets, no more. Your graph pleases me because I see the Conservatives cutting taxes so that revenues match expenses. Your prediction that they will keep cutting until a deficit is... a prediction.

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