For reasons I am not sure of, I missed the publication by the Resolution Foundation of its report entitled 'Built to last: Towards a sustainable macroeconomic policy framework for the UK' on 19 October this year.
The recommendations in that report are now repeated in its new book, 'Ending stagnation: A New Economic Strategy for Britain'.
Summary
This is a longish post, so let me summarise what I will say in advance.
The Resolution Foundation says in this report is that the UK government must run its affairs as if it is a household expecting to endure hard times and, as a result, it must save up in most years (three in four, they suggest) by putting money aside by running fiscal surpluses so that when that proverbial rainy day arrives the funds to deal with it might be available.
In response, I suggest that the assumptions inherent in this would have been familiar in the gold standard era of the 1930s, and the outcome would be similar: this is a recipe for economic disaster for the UK that is built on the basis of almost total macroeconomic illiteracy. Far from ending stagnation, this report prescribes recession.
- Since the financial crisis, public sector net debt has nearly trebled, rising from just 36 per cent of GDP to around 100 per cent, an unprecedented peace-time rise. A key driver has been the role played by fiscal policy in supporting the economy a series of major economic shocks.
- If fiscal policy continues to support the economy each time the UK goes through a downturn, governments will need to run a budget surplus in good times to ensure a stable level of debt in the long run. Based on the average size of fiscal support in post-war recessions, this would require a primary surplus of 3 per cent in three out of every four years, something that has only been done in three out of the past 50 years.
- If we return to a world of low average interest rates, the Bank of England's headline policy rate is estimated to hit the zero lower bound once a decade. Raising the inflation target from 2 per cent to 3 per cent, and paving the way for negative rates of up to -1 per cent, could reduce our chances of hitting the lower bound to once a century.
- Better-targeted fiscal support would have saved £35 billion through the pandemic and cost of living crisis, saving the Government around £1 in every £5 spent on support during that period.
- Our analysis suggests that avoiding the lower bound, slightly reducing the average size and frequency of fiscal interventions through better-targeted fiscal policies and improved risk management, would mean that a 1 per cent surplus, rather than 3 per cent, would be sufficient to put debt on a gently downward path in the long-run. This would still be challenging, but would be much more in line with the experience towards the end of the 20th century, when we ran a surplus of 1 per cent or more in three out of every five years.
Commentary
Let's be clear what this means. The Resolution Foundation authors clearly think:
- That the government cannot create money, or must not do so. The net effect is the same.
- That the government must be managed as if it is a household that has been denied credit.
- The government must save in advance of spending so that deficits are avoided.
- Deficits must be avoided.
- Fiscal surpluses are themselves without economic consequence.
I could expand that list , but I do not think I need to do so to show just how dangerous this proposal is. They might not be explicit about those assumptions in the way I am, but they are all implicit in their work. Those claims must be rebutted .
As a matter of fact, a government with its own currency and central bank (as is the situation in the UK) can create money whenever it is required and take it out of use if it so wishes.
As a matter of fact, new money creation in the UK happens whenever a government spends more into the economy than it collects through tax revenues raised.
A very important caveat is required, however. That is that if the excess funds injected into the economy as a result of a government running a deficit are then placed on deposit with that government in structured savings accounts, whether represented by bond issues or deposit accounts, then the excess funds created are taken out of circulation within the economy, resulting in no significant inflation risk arising. This is most especially the case if the deposits made are of a long-term nature. Private wealth might have increased as a result of the deficit spending but the actual quantity of money in active circulation might not have done so, depending on multiplier effects.
There can, then, only be an inflation risk arising from deficit spending not matched by deposits made. This happened during the quantitive easing programmes from 2009 until 2016, and again from 202o to 2021. This point being made, there is no evidence that those quantitive easing programmes did result in inflationary pressure arising within the economy of the UK.
The Resolution Foundation is wrong in that case to think that government created money is ever in short supply. The whole logic that underpins its work, that is premised on this being the case, is simply untrue.
b. Household analogy
The idea that a government must run its economy as if it were a household is absurd. Households, by definition, have to settle the liabilities that they owe to third parties as they fall due making use of money that they can themselves secure from third parties either by earning income or by borrowing. The same is true of all business entities and other organisations, except for a central government with its own currency and central bank. A government in that position is entirely unlike any other organisation within an economy for three reasons.
Firstly, such a government can always create any sum of money that it requires to settle any liability that it owes whenever it wishes by issuing an instruction to its central bank to create the funds in question. That is a legal action on its part that is only available to it within any jurisdiction that sets it apart from all other organisations in that place. To pretend that this exceptional capacity does not exist is to propose that economics be based on false assumptions.
Secondly, such a government not only can create money at will to settle liabilities it owes, but it must also do so as a matter of fact. The only way in which government-created currency enters circulation within an economy is when the government in question makes expenditure in excess of its income and leaves some of that resulting currency in circulation for use within the economy for which is responsible as a means of exchange. If government does not provide this essential liquidity to the banking sector sector within that economy, private sector transactions will necessarily be constrained either as to their extent or value in ways that are likely to prejudice the growth of the economy in question.
Thirdly, and given that most governments seek to promote both real and nominal growth within their economy, i.e. they wish to grow the actual volume of trade undertaken in their jurisdiction in real terms, as well as promoting modest increases in the prices at which that trade is undertaken over time, a government has to inject additional funds into the economy for which it is responsible by deficit funding unless it wishes that the whole of the additional funding required will be provided by private sector borrowing from commercial banks, which is an ultimately unsustainable trajectory for fiscal stability.
For these reasons to promote the idea that governments must as a matter of policy withdraw money from the economy in most years is not just unnecessary, but recklessly irresponsible.
c. A government must save before it can spend.
This suggestion, which is deeply implicit within the recommendations of the Resolution Foundation, is profoundly mistaken. There are three consequences.
The first is that the Resolution Foundation thinks that a government must extract a surplus out of the private sector economy of the jurisdiction for which is responsible before it might spend that surplus for private benefit. This is straightforwardly wrong. Not only can a government with its own currency and own central bank by definition fund its expenditure without extracting any value from a private sector economy if it wishes (which it would rationally seek to do if that economy had reached a position of less than full employment) but it also implies that at no time should a government borrowed to invest when this is a completely normal course of action in the rest of a modern economy. Why a government should be denied access to the option of borrowing when the rest of the modern economy functions on the basis of the availability of credit is hard to work out.
Secondly, this idea imposes the constraint upon the government that it should not seek to fiscally intervene within its economy to stimulate economic activity even though this stimulus has been the normal basis on which growth has occurred in the entire post 1945 era. The suggestion does, therefore, necessarily take the economy back to the pre-war era by effectively imposing ideas derived from gold standard thinking. That standard assumed that money supply was necessarily constrained by the artificial requirement that a currency be capable of translation into the gold reserves of the jurisdiction. That limited the quantity of spending a government could undertake out of the available currency available for that purpose. The result of that policy being pursued at that time was the Great Recession of the 1930s. The policies that the Resolution Foundation are now proposing would likely have exactly the same effect, with the government acting as a continual drain on the private sector by seeking to withdraw value from it in most years, rather than enhancing its role within the active economy.
Thirdly, and rather bizarrely, this policy would both reduce the amount of government-created money circulating within the economy and simultaneously reduce the availability of secure, government-backed savings opportunities available within the economy, upon which the banking, insurance and pension markets are entirely dependent for their stability. It would also reduce the opportunity for overseas governments to save in sterling in the UK. The resulting risk of financial instability is high. Why any government would choose to create this risk is hard to work out.
Deficits must be avoided
For all the reasons already noted, this policy makes no sense at all. The suggestion that a government runs a surplus the majority of the time has implicit within it the idea that a government should continually extract value from the private sector economy rather than add to it. Why anyone would wish a government to impose a burden of this sort on a society, meaning that the society in question will necessarily be significantly constrained by that chosen action by the government, is very hard to work out, most especially when it is wholly unnecessary.
Fiscal surpluses are without economic consequences.
There is a very good reason why very few governments run fiscal surpluses, and all of them are good. The government running a fiscal surplus:
- Deflates its economy.
- Reduces private wealth within the economy.
- Creates the risk of financial stability in that economy by reducing the availability of credit within it.
- Refuses to supply the services that it might make available for the people of the jurisdiction for which it is responsible even though it is possible to supply them.
- Creates the risk of unemployment.
- Denies pension funds and other critical financial institutions the opportunity to save their funds in the way that they need to do so denying them the chance to fulfil their obligations within society.
There is no reason for any government to take the risks that fiscal surpluses create. They have the freedom to run a deficit whenever they wish. What is more, the compelling evidence of UK government deficit funding is that the resulting outcome is financial stability, growth, long-term periods of controlled inflation, high employment, and the provision of essential government services as well as a vital social safety net.
Conclusion
The proposal that the Resolution Foundation has made is based upon a classical view of the economy that is well to the right of most neoliberal economic thinking. It reveals almost no understanding of the nature of money, the role of government with regard to money, the nature and function of a central bank, the positive contribution of government to an economy, or the need for deficit creation to inject essential liquidity to minimise risk in any growing modern fiat currency based economy. In fact, the policy does in itself imply that the Resolution Foundation is not even sure that we should have a fiat-based currency and does instead prefer the idea that the money supply should be constrained by some form of artificial constraint on credit creation.
Whatever the reason for this extraordinary lack of economic understanding, the Resolution Foundation‘s credibility is fundamentally undermined by the recommendations that it makes because they are deeply dangerous. If adopted by any government, this policy suggestion would cause profound harm to the well-being of the people of this country.
It is rare to see anything so ill through being proposed by a supposed centre/left-of-centre tank, although after making this proposal it is hard to see how any such label might be attached to the Resolution Foundation ever again. I sincerely hope that Resolution Foundation will have the sense to withdraw this report as soon as possible. If they do not do so, their credibility will be in tatters.
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What a weary load of old tosh! How can such utter nonsense ever get any credibility whatsoever? Everyone knows from their mortgage to their car loan that this is the ‘economics’ of Victorian grannies. AND while we are about it, can there be a united assault on all the ridiculous pretensions of such ‘think tanks’ – Was there ever a bigger misnomer? – wrapping up their spurious nostrums under the bogus heading of “findings”, thereby insinuating that they are the results of investigations of fact and the product of rational thought, which they very clearly are NOT.
The Nuffield Foundation funded this….
Appalling – Nuff’ said or Nuff’ is naff’ as I’d put it.
Yes.
On the same topic. Outright lies from the torygraph.
https://www.telegraph.co.uk/politics/2023/12/09/britain-debt-spending-economy-politics-deficit-tax/
Title.
The debt timebomb: how MPs have ignored 300 years of economic precedent to splash the cash.
Deficit must be debt… Not yet!
It is where you allocate the #newmoney that does the damage. QE, or supporting private profit, NO. Which is where we are now. Commercial bank extending loans for new oil fields with ‘The People’s’ #newmoney. Nice little earner on both sides. The invisible hand made visible. Also very inflationary
#Newmoney allocated to Pensions, People, NHS is a better economic stimulus. The ‘Theory of Multipliers’.
One day there will be a sea-change amongst the economists and pundits, and this sort of thing will be seen for the nonsense it is. Who knows then that tipping point will be arrived at. In the meantime, the likes of Keir and Rachel will be loving this.
How about formally asking Resolution Foundation to respond to the points raised in your critique? Letter to be published here and on Twitter?
Given that they are supposedly a centre/centre-left think tank, with a significant focus on inequality, this does suggest that they are as deeply wedded to neoclassical thinking as the rest.
As an aside, the Cowboy Economist, aka Professor John T Harvey, a video from whom was posted a few weeks back, has an excellent book explaining the different schools of economics. It is written in terms that people with only modest knowledge of economics will find readable. Unlike most economic tomes. His series of videos are also a great introduction as well as being entertaining.
I will ask them
One day there will be a sea-change amongst the economists and pundits, and this sort of thing will be seen for the nonsense it is. Who knows when that tipping point will be arrived at? In the meantime, the likes of Keir and Rachel will be loving this.
Maybe it’s not a coincidence that it gives support to the Starmer/Reeves position.
Whilst I accept the overall view of what you say, I think there are some glimmers of hope…. even if unintentionally.
They realise the limitations of monetary policy and suggest
a) raising the inflation target to 3% to allow greater scope for low rates to boost the economy. (Reasonable idea but not really that important)
b) fiscal intervention in a large way will always be needed from time to time in the future. (A very important observation and counter to the current neoliberal view).
Their conclusions about running budget surpluses (ie. we need to “save for a rainy day”) are wrong – but Rome was not built in a day.
As a society, we DO need to save but this should not be confused with budget deficits or even money at all. We need to “save” by building the infrastructure (physical and social) we will need in the future. Indeed, “true” saving will mean budget deficits rather than surpluses!
Indeed. It’s a small step from Funding the Future to Building the Future.
Chief Executive Torsten Bell who was an advisor to Milliband and , I gather, still involved with Labour.
Depressing. Saw your tweet re Wife’s comment.
Will the Resolution Foundation and Nuffield Foundation ever get to read and inwardly digest your post?
I will send it to the RF
To suggest that the economy should be run like a household demands some evidence of effectiveness. We’ve already seen how this analogy may have begun in the book “Housewives And Downing Street” (1935) https://tinyurl.com/4t6h6ka7 and the idea was propagated by Margaret Thatcher in her speech at the Tory Party conference in 1983 when she stated, (without any evidence) “There is no such thing as public money; there is only taxpayers’ money.” https://www.margaretthatcher.org/document/105454
It is not just my opinion that the household budget analogy does not hold up. See for example:
☑️ Crisis and Myth: Why Politicians Must Stop Comparing the UK Economy to ‘Running a Household’, by Jack Mosse, in Byline Times, 1 September 2022
https://bylinetimes.com/2022/09/01/politics-has-been-captured-by-economic-fallacies/
☑️ What Are the Pros and Cons of a Federal Balanced Budget? By Sean Ross, September 06, 2023 @ investopedia
https://www.investopedia.com/ask/answers/042415/what-are-pros-and-cons-operating-balancedbudget.asp
☑️ “Why the federal budget can’t be managed like a household budget”, Helaine Olen, Tue 26 Mar 2013, The Guardian, https://www.theguardian.com/money/us-money-blog/2013/mar/26/federal-budget-household-finances-fed
☑️ “Why the federal budget is not like a household budget”, December 16, 2014, The Conversation Trust (UK) , https://theconversation.com/why-the-federal-budget-is-not-like-a-household-budget-35498
☑️ “Chapter 1: Don’t think of a household”, in The Deficit Myth (2020) Stephanie Kelton, https://amzn.eu/d/eYbP60O
☑️ “A government is not a household”, Frank van Lerven, Andrew Jackson, 26 October 2018, The New Economics Foundation, https://neweconomics.org/2018/10/a-government-is-not-a-household
☑️ “The economy is not like a household budget”, October 12th, 2010, Bevan Foundation, https://www.bevanfoundation.org/views/the-economy-is-not-like-a-household-budget/
☑️ Are Policy Analogies Persuasive? The Household Budget Analogy and Public Support for Austerity, Lucy Barnes and Timothy Hicks, British Journal of Political Science, Cambridge University Press: 08 June 2021, https://doi.org/10.1017/S0007123421000119
☑️ “Deficits and Institutional Theorizing about Households and the State”, Zdravka Todorova, Journal of Economic Issues (2007) https://www.jstor.org/stable/25511211
☑️ MMT: Government Budgets Are NOT Like A Household, Professor L. Randall Wray, https://youtu.be/yofpo88ipmo?feature=shared
☑️ STEVE KEEN on Household Budget vs National Budget, https://youtu.be/RI44Vw-V8oE?feature=shared
Thanks
It always frustrates me that advocates of ‘household budgeting’ for governments carefully ignore the fact that many households take on massive debt in the form of mortgages and/or car loans, and they do it for very good and profitable reasons.
Perhaps we do want the Government to behave more like a household — provided it behaves like a *real* household!
Here’s one dictionary definition of “foundation”:-
“the basis or groundwork of anything: the moral foundation of both society and religion. the natural or prepared ground or base on which some structure rests”
As any structural engineer or architect knows unless you get the building foundation right you erect the rest of the building at your peril and that of the users and passer-by and neighbours.
Clearly the British need to learn what makes for a successful monetary system foundation and for once in their lives have the humility to recognise they are sadly lacking in economic and monetary knowledge to make a firm foundation. Both the Resolution Foundation and your highly reasoned response should be sent to all influencers. Readers of “Funding The Future” can assist in this.
“The Resolution Foundation says in this report is that the UK government must run its affairs as if it is a household expecting to endure hard times ”
I just checked the date – nope not April 1st.
Resolution Foundation, another cheerleader to keep things just as they are. The question is: to whom is this guff aimed? Presumably the ignorant and/or gullible, so that would be a large number of politicos then? Other question: who paid them to write this papable nonsense? Bankers? Financiers? who?
You would have thought they would ask themselves why only three out of the last fifty years has there been a fiscal surplus, and whether that may give them pause before being so fiscally conservative.
Its a funny report – or two reports. The summary of ‘key finding’s in the ‘Built to Last’ report almost seem to cut across other summaries – in the ‘Ending Stagnation’ report – the 10 ‘key facts’ and 10 ‘key steps ‘ emphasise negative effects of inequality, and suggest taxing higher unearnd incomes , boosting public investment etc
The flow between the two reports is not obvious – so I checked that all the conclusions from the first are in the second – and they are.
Even the fiscal headbangers who designed the Maastricht criteria for Monetary Union thought a 3% deficit was reasonable. Indeed they reckoned that (with 60% debt/GDP) the debt GDP ratio would be stable.
Let’s be clear – a consistently balanced budget would be a dreadful idea.
Agreed
Dear oh dear, what drivel.
At least fiscal conservatives of the right realise they’re serving the plutocrats.
Alastair Campbell and Rory Stewart were singing the praises of the Resolution Foundation report in their latest podcast.
They would
Stewart, especially, is very neoliberal, and Campbell was with Blair – another one. Blair actually ran goverbment surpluses – the last we had.
The Week in Westminster R4 this morning had Mandleson and Ken Clarke agreeing that there was no alternative to austerity , neither in 2010 or now.
I tweeted presenter Waugh asking why none of the many economists who disagree utterly with their economic narrative – such as Prikka. Straight propaganda from BBC – not analysis or discussion.
Being of a Machiavellian bent, I agree with Inga MW above. I see it as no coincidence but part of the hegemonic project of Starmer and his puppet masters. You even get a three word slogan out of it: Save Before Spend.
While trying to explain very simply on a forum what was wrong with the RF proposals,notably the need to run a surplus I came across this blog post on the Economics Help website. So I suggested that people read it.
It might not be perfect, but it sets out the problems with running a surplus very clearly, with examples from the 20th C.
https://www.economicshelp.org/blog/152634/economics/should-government-run-a-budget-surplus/
I confess that I still find it difficult to translate ‘economics speak’, such as what exactly is ‘fiscal policy?’ (even at the simple level you try to use in your explanations, Richard) into something that really ordinary people will understand.
I’m way behind many of your commenters in understanding and talking the talk 🙁 (this is an old style ‘sad’ emoji..)
Thanks
And noted
I think the term fiscal policy is one of the really hard ones
It simply means the difference between spending and tax, when it comes down to it
Richard, how are discussions going with the Green Party on economic policy?
We have had useful discussions
Oh dear, oh dear!
And I thought Resolution Foundation were mostly “the good guys”.
As already suggested, please do press them for a response to your critique; and ideally a retraction – or at least a presentation of the monetary sovereignty basis for spending.
The ‘household’ thing (or the Schwabian housewife as I think it’s called by German ordoliberals) is pure channelling Thatcher.
And wasn’t it Gordon Brown, under Blair, talked the ‘seven fat years, save; seven lean years, spend’ analogy (perhaps his prudent biblical upbringing?)
It reminds me that the very first Labour Chancellor of the Exchequer was Phillip Snowden, who was brought up in a small corner shop in Lancashire. And he stated that the economy should be run just like his fathers corner shop.
Needless to say, things did not go well and Labour failed to impress the voters until 1945.
The next leading politician to have a similar childhood was Margaret Thatcher, and she, also, banged on about ” living within your means” and paying off debts as a way of avoiding……. what exactly?
As with many politicians who make comparisons with household economics, it is never clear whether they really believe it. Or if they think the voters will still believe it and will then vote for self-sacrifice in the hope that there will be pie in the sky when they die.
I was surprised at first but then scrolled down the RF’s ‘Our Team’ page and spotted David Willetts at the bottom.
>The Rt Hon. Lord Willetts FRS is the President of the Resolution Foundation. He served as the Member of Parliament for Havant (1992-2015), as Minister for Universities and Science (2010-2014) and previously worked at HM Treasury and the No. 10 Policy Unit. <
Thanks for this analysis of the RF.
Torsten Bell addressed our local Labour Party branches last Wednesday, 6th December.
He presented a summary of the Ending Stagnation report. His presentation led me to think that RF would favour a bigger state involvement.
We had almost no time to ask questions. But I managed to ask him if Rachel Reeves’ fiscal rules would have disastrous implications for what RF were proposing. His answer was very guarded and left me quite unclear what he thought. So this analysis is very useful.
Thanks for that