"My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Charles Dickens, 'David Copperfield'

Well twenty quid doesn't go that far these days, but the Micawber maxim still remains a sound way to manage household finances. George Osborne has taken these sentiments one step further by enshrining his Fiscal Charter into law. This compels the Government to achieve a surplus on their budget by 2019/20, and then keep the budget in surplus each year thereafter. The current budget deficit having ballooned during the credit crisis is still over 4%, perhaps still far too high for an economy running at close to capacity. However, does the path to Governmental happiness rest upon a balanced budget?

The State benefits from a number of important advantages when managing its finances. The salient one in this instance is that its time horizons are essentially infinite. If debt can be serviced and repayment continually rolled, there is no necessity to ever repay loans. Better still, incomes are continually growing (whether through real or inflationary growth), so governments can sustain budget deficits that match nominal growth rates without debt levels spiraling out of control.

In the UK, debt to GDP stands at around 90% (well above the 70% maximum set by the Maastricht Treaty). If the Government achieves a balanced budget by the end of this Parliament and nominal growth rate averages 5%, debt levels fall below the Maastricht maxima within ten years and shrinks to a mere 20% by 2050.

Is this an exercise of political philosophy or wise fiscal discipline?