I gave a talk to Ipswich Quakers and friends last night and whilst doing so said that there was no chance the UK deficit would be cleared during the life of the next parliament whatever any politician says.
The reason is obvious. If the deficit is to be cleared then someone else has to go into deficit instead: that's the way the economy works. Consumers, business, government and overseas finance have always to balance between them. But we have what FT commentators call a 'global savings glut' where consumers with any wealth are stashing cash, and not spending it. Business is not investing as a result as they do not have customers who want to buy, and government austerity is not helping that situation by closing down that part of the market. In the meantime we are running a big trade deficit which has the net effect that people from outside the UK are effectively saving here. In that case a government deficit is inevitable and unavoidable: it is the only way the books can balance.
I see none of these trends changing so dramatically, especially based on Labour or Conservative austerity plans, to change these sectoral balances.
In that case I am certain I am right, and so too is the IMF, which adds some comfort to the prediction. As the BBC reports:
The International Monetary Fund has today highlighted the challenge to be faced by the next government in returning the public finances to balance.
Its new official forecast is for the gap between spending and taxes still to be a deficit of £7bn in 2019-20, compared with the Office for Budget Responsibility's forecast made at the last budget for a surplus of £7bn.
The Guardian has a more interesting explanation though. As it notes:
Britain's reliance on households using loans and credit cards to spur economic growth has put the gradual recovery of the past five years in jeopardy, the International Monetary Fund has warned.
A rise in household debt to one of the highest in the developed world puts the UK on a warning list of countries vulnerable to a credit crunch similar to the one that triggered the 2008 banking crash.
The disturbing message from the IMF comes amid concerns that the world economy has become more vulnerable to financial shocks in the past year.
This, I think, is key. The drive to balance the books (which is a wholly arbitrary and unnecessary goal given the massive demand for UK government bonds in financial markets) will involve the creation of substantial risks by artificially over stimulating parts of the economy, like consumer spending based on credit (which, as my analysis above shows is a pre-requisite of a government surplus occurring) that are actually much more dangerous to UK financial stability than any deficit could ever be.
Austerity is, then, unnecessary. It cannot work. And it creates massive economic risk to achieve a goal that cannot be delivered.
Why, oh why, then is it the cornerstone of this election?
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Hi Richard,
Great talk last night. Thanks.
You refer to ‘stashing cash and not saving it’ above. Do you mean ‘stashing cash and not spending it’?
Also one question I didn’t get to ask last night (I asked the pension questions, and didn’t want to hog your time).
Is it true that much of the land held in ‘land banks’ by developers is not subject to Business Rates? I know that Land Value Tax was mentioned, but surely we must levy a charge on dormant land – I’m sure a lot of it would find itself back on the market and available for homebuilding pretty sharpish if that were the case?
Thanks again for your talk.
Martin.
Martin
You are right. Corrected!
I think you are right on land banks – most are taxable anyway at very low rates as effectively unused land
And we need to tax dormant land and empty houses
Good to see you
Richard
Its still concerns me that every time I go to work I am paying the rich interest. Its not going on schools, hospitals or roads.
The rich buy the bonds, or the rich countries. We saw this morning Japan owning the most US debt in the World. THe banks buy, the big companies buy, the rich buy the bonds.
Yet the interest is paid for by the workers of the country.
I don’t see that being fair.
“Why, oh why, then is it the cornerstone of this election?”
Probably due to what Simon Wren-Lewis calls “media-macro” and its massively incorrect assumptions about how the economy works.
Indeed
And it is interesting that terrorism, religious extremism and how we should respond to it has, despite being clearly a major issue, fallen entirely off the agenda. The media appear to be determined to make politics a question of management competence rather than ideology.
Because they have backed themselves into the same corner.
For to long they have run the economy along the [public] lines of the household economy.
Now, they have nowhere else to go. To suddenly stop, and change tack onto another course, would reveal to everyone that none of them have much idea of anything.
The country runs on soundbite politics, with the sound provided by political lightweights.
Great and factual analysis as always. The phrase that comes to mind for the electorate is… “the truth you can’t handle the truth”
That’s true. Mr Blair told us in the past couple of weeks the electorate cant handle making the right decisions. That why Labour isn’t really pushing the difficult stuff against the Conservatives.
‘Why, oh why, then is (deficit) the cornerstone of this election?’
Come on Richard – you know very well why this is so. Don’t lose heart – keep plugging away. If there is a tipping point for anything, then it even exists for the issues discussed in this blog.
There is no way the deficit will be cleared by 2120.
I recently watched Steve Keen explaining this in a lecture recorded on youtube.
I would recommend it even if you feel you already understand it completely, and watch it all carefully.
After watching it you will see (as George Monbiot said in the Guardian yesterday) that the deficit is a con, something which fools people without the right knowledge into thinking that government is a household, and that balancing the books, paying off deficits and even maintaining surpluses is prudent, when the opposite is true.
Deficit spending is a government overdraft, and therefore it has an equivalence with government created debt free money. Government could choose to write it off, or tax it back later if inflation takes off.
Steve Keen recommends creating money and giving it to people to pay their debts.
The video is excellent because it describes in mclear diagramatic form exactly how a surplus extracts wealth and forces people to borrow, and leads to another crisis.
This is the link: https://www.youtube.com/watch?v=dA_p0VqV2ck
Sandra – THANK YOU!
Please also check out Steven Hail’s You Tube lecture – it’s well worth it. Unless you’ve seen it already.
https://www.youtube.com/watch?v=qBpm5sVmGYc
We need to triangulate this stuff!!
Yes Steve Hail is very good. He explains government money as a real asset and bank money as a debt, and shows that taxation is there for three purposes, to legalise money, to redistribute wealth, and to stop inflation. They ae not needed for government to spend and do not create debt for future generations, as the deficit hawks pretend. I like the way he explains that deficits are really injections of real money, this implies that deficits are always needed to prevent the use of too much bank debt, and can be ignored if inflation is under control.
If only the Labour Party would listen.
I was told at the Birmingham Labour spring event in March that running a deficit was not progressive, and that we needed to balance the books. This was Angela Eagle. They read from a script which they cannot believe. I saw Angela Eagle sitting in the money creation debate on November 20th, wherein Michael Meacher spoke so well, explaining that government could create money in the national interest.
Angela was wrong
I think that we should call this topic ‘deficit seduction’ because there is no doubt that far too many people have been taken in by this idea that the most important topic is ‘the deficit’ rather than the economy in general which has been denuded of transactions since 2010 because of cuts in the public sector as well scaremongering in the private sector.
As others have pointed out on this blog, equating macro fiscal policy with home economics is pure bunkum. A number of economists critical of this neo-lib nonsense go to great pains to point this out (such as Steve Keen’s hypothesis that macro economics is being deliberately confused with micro economics).
Also, if we are honest, it is private debt that is climbing as people either pay for expensive home ownership or make up for the shortfall in wages due to recently suppressed pay and higher prices with credit. So this idea that we should be using the household as some sort of example to follow for budgeting by the State is hypocritical nonsense since it is debt that rules in many households anyway.
Looking at Steven Hail’s You Tube film, he points put that even if there is a deficit, Governments who are able to print their own sovereign currency can’t run out of money. The UK deficit is affordable and this country has always paid back its debts – debts that are created to fund long term investment in the country – not to pay benefits. Or to bail out bankers to keep the money supply moving.
According to Hail, if the Government has a ‘deficit’ (could we think of something else to call it for goodness sake?) then the private sector has surpluses.
And guess what – is that not exactly the situation we are in now?
If the Government has surpluses, the private sector is likely to have the debt.
This points to the fact that both private and public money is part of the SAME financial system and are in balance with each other. There is no such thing as a truly segregated private money system or stand alone public sector one – there is only so much money in the system at any one time and it actually works in union or interacts as ‘the one money supply’. It moves around between public and private.
The problem is that in neo-lib land, the production of money (or anything else for that matter) by the state is seen as artificial and invalid. So theirs is a world where all the money or the power to create it is in the private domain. Now that is scary. Very scary.
The fact is that loads of money is lying idle in the private sector so now is the time for the Government to invest and put new money to work where the private sector is too shy to invest. That is called leadership. Or even ‘courage’.
But too many voters still do not get it. This is going to be long haul. But lets keep at it – eh?
I think you are relying on the accounting identities of Mmt to make your point, but these are flawed. It is perfectly possible for the government to balance the budget. It can simply spend less and not issue bonds. The money which would have been paid out to buy the bonds will simply be invested somewhere else, such as corporate bonds, or could just simply sit in the bank account. No problem there at all.
I am relying on standard macro theory
Used by the OBR etc
Not MMT
You are wrong, as ever
And you are assuming Says Law works
Tediously
Standard macro theory says the budget can’t balance?
It says all four sectors balance
But balancing the government budget is beyond its control because it cannot predict the behaviour of the other three
Balance with what?
With each other….
“The thing to remember about sectoral balances is they must sum to zero. It is not possible to have a negative external balance, as the UK does, with concurrent surpluses in the public, household and corporate sectors. If the UK is a net borrower from the rest of the world because of its current account deficit, then somewhere in the domestic economy must be a balancing deficit”
http://coppolacomment.blogspot.co.uk/2015/03/repeat-after-me-sectoral-balances-must.html
The question was aimed at ‘jamesg’ but your answer was what I was looking – thank you.