It is budget day. Rishi Sunak has the task of delivering what might be the most irrelevant budget I will have ever witnessed, unless he appreciates the economic situation as it really is, and runs with it, accepting that this is his fate,
What do I mean? My suggestion is that unless the government accepts that we are heading for a recession, which is partly of its own creation, and that its sole duty is to now guide the economy out of the mayhem that is coming our way, then all Sunak has to say is inconsequential.
Take an example, but a quite critical one. Sunak will, without doubt, have something to say today about fiscal rules and the level of borrowing that he plans over the coming years. He will seek to frame this with caution, suggesting that this is a matter over which he has some power to decide. And that is simply not true.
As a matter of fact, if (as is likely) the private sector decides to save over the next few years the government has no choice but to borrow. This is a simple equation. As the money creator, and as the borrower of last resort (which as a matter-of-fact a money creating government always is) then if the private sector part of the economy insists on saving then the government has no choice but to borrow whatever that sector wishes to save.
Technically this is described as the sectoral balances. I do not have time to explain this in great detail this morning: try this link for an explanation I did a while ago.
The sectoral balances are not some theory: they are simply an accounting identity. They say that in the case of a single currency (and for all practical purposes that is what the UK has, in the form of sterling) if one part of the economy, which we will call the private sector wants to save, then another part of the economy, which we will call the government sector, has no choice but borrow, most especially when that government is the creator of the currency in question. This is simply an accounting identity: double-entry will happen. The ramifications are, however, significant.
If, as is likely, people stop spending at present because there is going to be a recession (and that is the unavoidable message from the stock market, the Bank of England, and others), then they will unless their incomes completely crash (which is unlikely in the longer term) save. This is what always happens in a recession. And the result is that the government will run a deficit. How big that deficit might be is not within the government's control: it will be determined by the private sector and its decisions about what it wants to save.
In this circumstance all that the government can do is turn the private sector's decision to save into something that is positive for the economy as a whole. I have already suggested the answer to this: simple changes to the rules on ISAs and pensions could redirect up to £100 billion of savings a year into the Green New Deal at no net tax cost to the UK economy at all. In fact, far from having a cost, the economic activity that this would give rise to would boost the Exchequer, as well as delivering the essential infrastructure that we now need, whilst creating jobs in every constituency, and help repair the intergenerational imbalance within the economy, whilst providing people with secure means of saving, whilst turning disadvantage into advantage for many.
This is the type of lateral thinking that our economy now needs, and which we should be looking for from Sunak today. He needs to show that he can deliver what is required to beat the coronavirus crisis in the short-term. That is things like rent and loan repayment holidays; increased social security payments; emergency funding to small businesses that require help and massive injections into both local authorities and the NHS to make sure that beds are freed to manage this crisis. Those things are necessary. But more important will be the recovery: can we get out of the recession as soon as possible by delivering the type of new economy that we need to face the challenges of the 21st-century? This is what I will be really looking for today. I am expecting to be disappointed on all fronts.
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“This is the type of lateral thinking that our economy now needs, and which we should be looking for from Sunak today.”
& a squadron of flying pigs went past my window just now, winking at me & singing “abide with me”.
On Sectoral Balances can I recommend this on PP by Charles Adams? http://www.progressivepulse.org/economics/the-single-most-important-piece-of-economics-that-everyone-should-know
It was my second choice this morning – so more than happy to add
“In this circumstance all that the government can do is turn the private sector’s decision to save into something that is positive for the economy as a whole. I have already suggested the answer to this: simple changes to the rules on ISAs and pensions could redirect up to £100 billion of savings a year into the Green New Deal at no net tax cost to the UK economy at all. In fact, far from having a cost, the economic activity that this would give rise to would boost the Exchequer, as well as delivering the essential infrastructure that we now need, whilst creating jobs in every constituency, and help repair the intergenerational imbalance within the economy, whilst providing people with secure means of saving, whilst turning disadvantage into advantage for many”
Richard, this is what I would bring to Jeremy Vine today.
I dictated that in one take – it felt like a trial run for the radio!
It is akin to taking away lots of people’s ISA allowance..i.e those who don’t want to invest in govt bonds. This is how it will be presented in some quarters.
Tough
“Tough”
this attitude probably explains why you spend your time blogging and not remotely influencing policy making..
In your dreams…
Can anyone help me out on here? I have a gapping black hole in my understanding.
I thought (probably wrongly) that the “government” is not the money creator in the economy. With the exception of seigniorage on the creation of cash all the rest of the money in the economy is created by private banks when they create loans. (Excluding Central Bank Reserves)
The “government/Treasury” then sells bonds or collects taxes to get it’s hands on this bank created money.
Banks need to use central bank reserves to purchase government bonds. Do they buy the CBRs with deposited “money” (sorry, I can’t remember the correct term for the money we all use in our bank accounts) and pay this into an account at the BoE? Thus the BoE being in credit but the Treasury being in debt?
In the case of QE. Does the BoE create central bank reserves that it gives to private banks on the condition that they then go and spend the CBRs on government bonds?
In haste, start here
https://www.taxresearch.org.uk/Blog/2019/05/10/pretty-much-all-that-most-people-need-to-know-about-modern-monetary-theory/
ALmost all your logic is wrong – sorry. But you’re not alone
Thanks. I’ll get reading.
Hi Richard. Thanks for the link.
I always thought that MMT was a way that government finance could/should be structured. From the article, I now realise that it suggests that it is actually how the existing system works. (I watched the Stephanie Kelton video posted here a while back and was confused. She seemed to be speaking in the present not the future tense!)
So MMT differs from say, the “sovereign money” proposals put forward by the people at Positive Money, because MMT suggests that it already happens?
I’m then confused on how the government, if it is the money creator in the economy, creates the money? What is the mechanism by which the government creates and then distributes the money into the economy?
Does it create the money by selling bonds to banks, which then create the money (under licence) to buy the bonds?
Does the BoE create the CBRs that the banks then purchase the bonds with.
Or is there a totally different mechanism at play.
The government has announced big spending in the budget. Where is the money coming from? Debt/bonds, raising taxes or some other way?
There is absolutely no relationship between positive money and MMT: they are in fact the complete opposites of each other, the positive money crowd being close to the gold standard for all practical purposes, which is particularly scary.
Try this re how money is created
https://www.taxresearch.org.uk/Blog/2013/04/19/all-money-is-a-confidence-trick-4/
Or this re QE
https://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
Not just one magic money tree but 50 million one for each pot hole!
And more roads for more pot holes for even more magic money trees.
And less tax and NI!
Yup We Are Getting DONE!
Done over again, and will have a further doubling of the national debt as is usual under the tories – the NHS will not get the extra people so will remain understaffed and underpaid and further privatised.
[…] it very clearly implies is that Sunak believes that he still has control of the public finances, when as I suggested yesterday, this is something that he cannot control if the whole of the private sector (made up of […]