Budget deficits sound bad. After all, it amounts to a nation taking in less tax revenue than it spends, borrowing to cover the balance – and driving up national debt. A good deal of commentary Fisher Investments UK reviews says deficits risk financial stability. Those who recall the Greek experience in the early 2010s may agree. But our research shows budget deficits aren’t inherently negative (or surpluses a positive). Understanding why may help investors avoid falling for what we think is a myth.
According to Fisher Investments UK’s reviews of financial headlines, many commentators view budget deficits as undesirable. Some think a deficit means the government’s revenue is insufficient to fund public investment, services, the social safety net or, potentially, stimulate industries or the economy in need of a boost.
Conversely, a budget surplus supposedly implies the economy is providing for a nation’s needs without the government having to go into the red. Moreover, countries issue debt (e.g., government bonds) to finance spending, and conventional wisdom holds rising debt increases interest costs in the here and now, potentially requiring tax hikes and/or spending cuts. Without those austere measures, a nation risks being unable to make interest payments – and therefore default on its obligations. Failure to repay debt on time has historically caused major financial and economic downturns, according to our research.
Yet Fisher Investments UK’s reviews of past deficits show this conventional wisdom has some major holes. For example, since fiscal year 1970 – 1971, the UK has had a budget surplus in only five years – and the last one occurred in 2000 – 2001.[i] Having a budget deficit for virtually the entire 21st century hasn’t left the UK economy worse off relative to other major developed economies. Since 1999, the UK’s average annual gross domestic product (GDP, a government-produced measure of annual economic output) growth was 1.7% – behind America’s 2.2% but ahead of France (1.4%), Germany (1.2%) and Japan (0.7%).[ii]
Speaking of the United States, America has also run a budget deficit for most of the postwar era, but this hasn’t been a negative for its markets.[iii] One way to see this: since 1950, America’s budget deficit as a percentage of GDP has averaged 3.2%.[iv] To cite some extreme examples, this ratio was much higher in 2009 (9.8%) and 2020 (14.7%) – two years in which bull markets began.[v] Conversely, equities didn’t fare well when America reported its largest surplus relative to GDP (2.3% in 2000).[vi]
Perhaps this seems counterintuitive. But based on Fisher Investments UK’s reviews of history, government spending tends to pick up after economic troubles arise. In our experience, forward-looking equities have usually pre-priced probable economic conditions and moved on by the time the government gets around to passing and implementing fiscal support programmes.
Understanding that deficits aren’t inherently negative for markets can help investors refrain from reacting when this popular misperception arises in headlines, in our opinion. Fisher Investments UK’s reviews of financial publications shows deficit chatter tends to arise alongside political events (e.g., election campaigning). Likewise, understanding surpluses aren’t inherently positive for the economy or markets is a useful counter to politicians who argue otherwise. Based on our research, government spending isn’t superior or even more influential than private-sector spending – keeping this perspective can help investors tune out that noise.
Disclaimer: This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.