The IFS has opined on the options available to the Chancellor in the Spending Review that was to be announced this week, but which will not be because he is isolating as a result of a Covid contact with Sajid Javid.
There are two headlines. First, they think Sunak is planning spending cuts of £17 billion.
Second, the IFS thinks there is little room for the Chancellor to spend any more if (and this is the key bit) he wishes to achieve a balanced budget.
Why do we need a balanced budget more than we need education, healthcare, social care, justice services, environmental protection, new social housing, transport infrastructure reform and so much else? I doubt that anyone who proposes a balanced budget can explain that. But because it is assumed that a balanced budget must be the goal all those things that we need - as well as the vital support that so many in the UK are dependent upon to just let them have the most basic of standards of living - are to be denied to us.
The debt paranoia is killing us. There is a whole chapter in my book ‘Money for nothing and my tweets for free' on this issue. But let me reiterate how absurd this claim is.
The logic of the balanced budget fetishists is that government debt is akin to any other debt, and must be repaid. The problem for them is severalfold.
First, government debt has not been repaid since the 1690s, when the national debt began, and quite extraordinarily, given all that the debt fetishists say on the issue, the country has not gone bust since then.
Second, government debt is unlike any other debt, because the government actually makes the money that the debt is comprised of. An example is seen in the case of quantitative easing (QE). This creates what is called government debt that is said to be owing on the central bank reserve accounts that the UK's clearing banks hold with the Bank of England. The clearing banks, entirely appropriately, call these balances cash deposits, because that is what they are. They are not debt. What what is more, those banks did not deposit this money with the Bank of England as that description might imply. The Bank of England instead created money and forced it into the banking system, and these accounts are the residue of that process. The accounts in question can only be unwound by cancelling the money created, which proves that this is not debt like any other balance. And what is more, it also shows that this debt actually exists because the government chose to create it, and the Banks did not. So how is that debt, when what it very obviously actually is is money itself? And why is interest due on it in any case, when the clearing banks did not earn it? None of the normal logic of debt applies to what is called government debt. It's just that the debt fetishist do not realise that.
Third, people, from pension funds, to banks, to insurance companies, to foreign governments, to normal savers, want to own and hold government debt. Right now, they are buying it like fury and the price is rising. There is no reason for the government to think there is any shortage of buyers for its debt, as there never has been.
And, fourth, without this debt the economy would simply cease to go round. This debt creates the money we use: if, as the IFS and government want, the government was to cease to create the new money the economy needs as it grows, at least in financial terms, how is it to function? It's a question that debt fetishists can't answer.
And fifth, how is this debt to be repaid, which is the only obvious direction of travel for those who obsess on this issue? That is only possible by taking money out of circulation, and again denying the economy the money it needs to function. Why do that?
And last, why repay what people so obviously want to own? This money (because it is not debt) is not a burden on society. The fact is that the fortunate (they're called the children of the wealthy) inherit this debt, but for them it is an asset. And it is a burden to literally no one. Not a single grandchild, despite all the stories you have been told, will ever need to repay this debt. If you are in doubt, just read Jane Austen novels, where the wealthy prospective sons-in-law all had their wealth defined around the value of government bonds that they owned. The wealthy do not want this debt repaid: they want to own it.
So, the balanced budget narrative is false, within itself, and inconsistent with Tory policy: they do not go out of their way to deny the wealthy what they want.
So what is this all about? It is simply about shrinking the state. This is the aim. The plan is to deny to people the services that they need, claiming that because tax cannot fund it and debt must be constrained it cannot be afforded even though it is very apparent that the resources to provide all that we really desire do exist within the UK economy, but we are simply being denied the chance to organise that economy in the way that ensures that real need is met.
The IFS plays along with this ‘we can't afford it, and anyway we must shrink the state' narrative. It is, therefore, part of the problem. But so too is Labour, who buy this nonsense just as much.
The economic illiteracy of our politicians is crippling this country. And I have no idea when that might change.
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With the household fallacy alive and kicking nothing will change until we get a Chancellor (and Government) who understands how national finances really work. Sunak isn’t one of these, as he’s on YouTube record saying that he can only spend from f tax receipts.
But it also needs an education for journalists as most seem to roll over and fall in line with the fallacy when interviewing politicians and people from the IFS, as per this morning’s interview on R4.
I need to give up having my blood pressure rise when journalist ask “Just how are you going to pay this debt back?” instead of “To whom to we owe this debt and why does it need to be paid back and what would be the consequences of doing so or not doing so?”. It’s so basic but so maddening.
A great post.
We are ill served by just about all our politicians at the moment.
There will come a time when the pitchfork will replace the ballot box if they are not careful.
With respect to the National Debt not being a burden, I am not clear how the payment of interest on bonds to individuals and pension funds etc, which is an item of expenditure, is not a burden.
Because the interest paid is in sterling and the govt could, if it so wished or needed to, just create whatever money was required to pay that interest.
True
Got it. Thanks.
Richard – Absolutely!
I have been charged with setting up a formal discussion and paper around this for a local, and then maybe not so local, Labour Party.
Am trying to summarise in a way which might get some traction – and specifically to explore what would be the most convincing repost to ‘but where is the money coming from’ etc. dismissal of any propsal for better services etc etc.
Would be grateful if you might be prepared to glance over a (short ) draft.
Sorry to bother.
Mail me….
The most important word there is “if” – “*if* he wishes to achieve a balanced budget”. At present, that would be ludicrous.
IFS? We need a think tank with a different angle called BUTS. Hmm. Bringing Understanding To Society, perhaps.
Very good
There would probably be traction for some of us here if you could include us in Andrew & your draft & comments in a blog
we’re all in this together. after all
Up to Andrew….
The BBC has a lovely article about the deficit, debt and borrowing… looks like it doesn’t come from an MMT perspective https://www.bbc.co.uk/news/business-50504151
Decidedly simplistic and not made clear that all bonds now being issued are matched near enough pound for pound by BoE repurchases, meaning it is quite misleading
The option of the government simply running an overdraft at the BoE, which it could, is not mentioned
Was government debt more real in the days of Bretton-Woods?
When we had a gold backed currency, yes. Then everything changed. The trouble is that the narrative has not
I think it would be useful to emphasise the change in circumstances brought about by the ending of Bretton Woods. This could do a lot to convince the older voters who remember post-war austerity.
Good point
Noted for attention
Could I add to Barry’s point about explaining the change since the end of Bretton Woods? The followup question (or statement in some left and green forums) is the “so we can spend as much as we like on anything we want, without limit?” I have seen you point out that this is not the case, but there is an added bit of explanation re: where the real limits lie, and why, which would be really useful for the younger generation (in response to the statement) as well as the older generation (in response to the question).
The real limit is full employment
I will revisit this
Richard, If the real limit is full employment, but we were still part of the EU say and could draw upon reserve labour, would this remove the limit?
Yes
[…] Cross-posted from Tax Research UK […]
This is probably me and that I am not an economist. I do like to understand the double entry because that is where I live. Does the bank of England create money which the government then uses directly to fund its SEIS and Furlough schemes or is the connection more convoluted than this? I have read before that the government spends what it needs via the bank of England and then effectively, has a debt to the Bank of England. The quantitative easing described above appears to channel through financial institutions and is not directly connected with this government spending. Is there a book that clears up this that is reliable as a source?
I explain all this in my ebook Money for Nothing and My Tweets for Free
Available here https://www.taxresearch.org.uk/Blog/2021/05/03/money-for-nothing-and-my-tweets-for-free/
Or read The Deficit Myth by Stephanie Kelton, but that does not have a UK focus
Thank you. I am glad to have these questions raised in my mind. Society has been conditioned to accept a lot of things without question.
Richard,
The emphasis of the debt campaign has switched today to interest, which is quoted to have surged. Undoubtedly this is bogus, but are you able to explain the detail, please? It’s important we are all armed with the arguments .
I will try to do this….soon
It is because, as Adam Smith says, “the delight they (the rich that is) take in screwing
all they can from the hands of the poor”
Interesting. When did Adam Smith say this?
John tells me:
“Lectures on Jurisprudence report of 1762-3
para 36 on page 24 of the Glasgow edition
but you need to refer to the page before as well”
As I said, interesting, thanks. It comes from a discussion on the origin of private property and land rates, and specifically the king and his nobles in feudal times appropriating the right to hunt game animals which had hitherto been considered free to anyone who could catch them. After mentioning laws of Henry VII and James I and George I and III, that punish those who are denied that right:
“The reason they give is that this prohibition is made to prevent the lower sort of people from spending their time on such an unprofitable employment; but the real reason is what we before mentioned, the delight the great take in hunting and the great inclination they have to screw all they can out of their hands.”
The quotation is in harmony with Adam Smith’s observations on the relationship between capital and labour in his other works; nevertheless it is perhaps worth remembering (albeit it may seem a trifle pedantic here), that the ‘Lectures on Jurisprudence’ are not taken directly from Smith’s own text, but are rather, a compilation of transcriptions from survivng handwritten student notes of Smith’s lectures at Glasgow University.
Rachel Reeves is the shadow chancellor and wrote this in 2010: https://renewal.org.uk/wp-content/uploads/2020/09/renewal_autumn_2010_reeves_deficit-1.pdf
She supports deficit reduction and balanced budgets. Her only argument is the means not the ends.
Jeremy Corbyn was equally a believer in “sound” economics.
The revolutionaries in my lifetime were Ronald Reagan and George Bush who had no such inhibitions.
Funny old world.
I suspect the appeal of Boris Johnstone is that he appears to be in the latter camp on economic matters , being prepared to spend money to get the economy rolling.
Personally the case for huge investment in insulation of houses, fast broadband everywhere, domestic food production, public transport, health and social care, and training and jobs for young people seems compelling.
Could you comment on the ‘but the 70s’ remark in this interview Richard?
https://twitter.com/jrc1921/status/1418112690648764418
See https://twitter.com/RichardJMurphy/status/1418166911737679877?s=20
What I would really love to see and what I think would effectively begin the shift in the public’s perception of government funding and MMT would be a prime time documentary fronted by Martin Lewis (once polled as the most trusted man in the U.K.) and supported by you, Richard Murphy, Stephanie Kelton along with a representative from the Bank of England.
Numerous clips of politicians and pundits repeating the usual debt myths and ‘no more more left’ etc analysed and dismantled. Better still, if someone like Sunak, Bernard Jenkins, Daniel Hannan or Jacob Rees Mogg could be invited on and their statements fact-checked and picked apart in real time.
The whole thing could be very persuasive towards MMT and could be used as a learning resource there after.
What do you think Richard?
I would be on for it and both Stephanie and I can do television…..