I was asked this question on the blog yesterday by Anja Cradden:
I have a slightly related, slightly tangential question… is there a relationship between the size of government debt and the trade deficit?
If we want to pay down government debt and stop transferring interest payments to wealthy ‘depositors' with the UK government in the form of gilts, would becoming a net exporter help us do that?
Am I wrong in having a hunch that low post-WWII asset prices were a contributing factor to high post-war productivity growth?
Is there something wrong in my feeling that a pretty high, properly anti inflationary wealth tax designed to drastically lower asset prices could contribute to productivity growth in the UK economy, allowing us to export more and allowing us to pay down our government debt without employing austerity against our population?
The way this relates to my thoughts on Trump in Venezuela is that I wonder if the rich in the USA do not want to address their asset price bubble with asset price drops and are looking to resolve their trade deficit issues and prop up asset values by incorporating exports of Venezuelan oil wealth into the U.S.A. ‘export ledger' instead of addressing their internal economic problems, my feeling here being that if the trade deficit and government debt are linked in this way, is a long term government debt a sign that a country is living ‘beyond its means'? That is, importing more value than it exports? And that in the end that will have to be accounted for by a period of rebalancing by exporting more value than we import if we want to avoid a trajectory towards wars of imperialism to shore up our excess consumption?
That was a bit of a mega question, requiring a substantial response. This is it:
There is a persistent belief that long-term government debt signals that a country is “living beyond its means”. That intuition usually rests on an analogy with household borrowing. It is also wrong. But it does touch on something real, which needs to be explained.
The accounting reality
In any economy, three financial balances must sum to zero:
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The government balance
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The private sector balance
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The external (trade) balance
This is not a theory. It is accounting. There is an explanation in this blog's glossary under the technical description of sectoral balances, which explains what these balances, together, create.
What this means is that if a country runs a trade deficit, importing more than it exports, then someone domestically must run a deficit to pay for that. In turn, that means that if households and firms want to save overall, as they usually do and as governments encourage, at least with regard to the household sector, then the government will have to run a deficit instead, if income is not assumed to decline. That is not profligacy. It is the mechanism that the sectoral balances require. It also stops the economy from contracting.
So, a persistent trade deficit will often coincide with persistent government deficits and a rising stock of government debt. The debt is not the cause. It is the accommodation for what is happening elsewhere in the economy. This is the government acting as the borrower of last resort.
Would becoming a net exporter change this?
A country becoming a net exporter might change this, but not in the way many imagine.
A trade surplus allows the private sector to save without requiring the government to run deficits of the same scale. That can make it easier to stabilise or reduce the stock of government debt over time. But exporting more does not automatically “pay down” debt, and it does not eliminate the need for fiscal policy. It simply changes the space in which fiscal policy operates.
More importantly, the fastest way to reduce the burden of government debt is usually not to repay it, but to control the interest paid on it. Debt interest is a policy choice to be preferred to the alternative of running government surpluses, which usually impose a real cost on society by voluntarily reducing economic activity, often through the imposition of austerity. Being a net exporter is not, then, a panacea.
Asset prices, productivity, and rent extraction
Turning to the next part of the question, there is a strong case to be made that high asset prices are a drag on productivity, especially in economies like the UK.
High land and property prices raise business costs, divert capital into speculation, and reward rent extraction over innovation. Meanwhile, financial capital is saved to match asset inflation because that is seen as safer and more profitable than funding productive risk. The result is weak investment, poor productivity growth, and rising inequality.
The post-war period is instructive. Asset prices were low, capital was controlled, finance was constrained, and investment in productive capacity was high. Productivity growth followed. This was not an accident. It was by design.
Increased taxes on wealth and the income and gains derived from it could help reverse this, but only if they were part of a broader strategy that included labour reforms, public investment, industrial policy, competition policy, credit regulation, and a proper approach to climate change. Asset price deflation alone is not enough.
Is long-term government debt a sign of excess consumption?
This is not the case in a monetary sense. A currency-issuing government does not “run out of money”. It is impossible for it to do so, meaning that the question does, in itself, not make complete sense.
However, a trade deficit is a real resource issue. It reflects import dependence. That creates vulnerability to inflation, to supply shocks, and to geopolitical pressure. If elites refuse to rebalance internally, whether by taxing wealth, curbing rent extraction, and investing productively, the temptation is to rebalance externally instead. History shows that this can lead to economic problems, which were traditionally addressed through overseas exploitation, a route that should no longer be available to any country.
The real choice
What all this means is that the real choice is not between debt and virtue. It is between:
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building domestic productive capacity and reducing import dependence, or
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sustaining living standards through asset inflation, financialisation, and external leverage
The former requires confronting wealth and power at home. The latter risks drift into coercive geopolitics abroad, as is now being seen in the case of the USA.
Government debt is not the warning light. Trade dependence combined with asset-led inequality is.
I hope that helps answer the questions.
See also this morning's post on sectoral balances, also written in response to this question.
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Thank you once again for an instructive explanation. Asset price deflation through wealth taxes and redistribution of assets through rent law reform strike me as available options domestically in the immediate term, given the political will. When you say that in the post war era capital was controlled do you mean capital flows in and out if the country? And the restraint of finance, was that domestic regulation? I think mortgages were rationed but I might be misremembering that… I’d be interested to know what our current options are increasing real productivity and if we might need to repudiate certain WTO agreements or if we can make appropriate choices without having to challenge our current treaty obligations?
a) Tes caputial flows in and out of the country were controlled until 1979.
b) So too was credit availability controlled.
There is a glossary entry on captial controls.
Why do we need to increase real productivity? Isn’t that the real question? Might you answer that?
Shouldn’t we try to balance our imports and exports over the long term? Is there a way to do this without increasing real productivity?
Why?
Some economists (not including Richard) maintain that, in real terms, imports are a benefit and exports are a cost, because they involve the use of real resources (labour etc.) which could have been better employed to meet our domestic needs here in the UK.
From this point of view, the people of China and other exporting countries could be described as our employees, working round the clock to satisfy our wants and needs.
On the other hand, imports represent a drain on domestic demand in the UK, reducing sales, profits, investment and employment at home, while exports do the opposite, and, as Richard explains, a trade deficit has clear financial implications for the government and private sector balances, as a matter of accounting.
The claim those (few) economists make is not logical.
They ignore the claim on assets that the value of imports and exports represent.
IT’s maybe worth noting that though productivity growth was high in the UK in nominal terms after WW2, the UK’s productivity growth was materially lower than in the major west European economies. From the end of WW2 to the end of the 70s, the UK’s living standards (e.g. GDP per capita) went from being a third higher than European peers’ to on a par with or lower.
Since the early 80s, the UK’s living standards have risen broadly in line with those in other European countries, albeit with variations over time and across county-by-country comparisons and at a lower nominal level that in the post-WW2 era.
So returning to a more “1940s-1970s” type approach to running things may not be as helpful as might be hoped, as the “high” UK growth in this era may simply have been a function of the world as it was at the time (cheap energy, no environmental concerns, relatively few pensioners to support, relatively low NHS costs etc.) rather than due to anything particularly positive implemented by the UK government.
Noted
Most likely true
And I would not want the 50’s to 70’s back.
We still had the legacy of empire. British imperialism enabled the UK to have “captive” countries to export to. The growth in means of communication including the reduction in goods transportation costs through “containerisation” enabled production to be moved out of the UK as well as other industrialised countries to lower cost and less industrialised countries.
As a further qualification to – rather than a refutation of – your qualification:
GDP/capita is only a useful proxy for living standards when social & financial inequalities are low. The nominal “rise in living standards” since the 80s has been primarily seen in the GDP/capita figures but as inequality over that time has markedly (if not drastically) increased the value of the proxy has decreased.
If we instead rely on the “economics by walking about” to assess living standards, perhaps with reference to inequality & relative poverty figures, we see that living standards for the many have not improved anywhere near as markedly as the GDP/capita figures would suggest.
Much of what has been said fails to address the fact that capital today is highly mobile and large company capitalists aren’t really nationalists they’ll invest where they can reliably maximise profits. This means that human beings around the world are now going to have to work together to regulate market capitalism, a very tall order at the moment but we have no choice especially with climate change threatening the future of life on the planet.
Capital controls could be reintroduced by the UK post-Brexit, but if no other countries do the same thing, the UK economy could become much less attractive as a place to invest for non-UK entities. (Having £-denominated assets trapped in the UK wouldn’t be ideal for anyone wanting to realise their investment.)
What is the problem with that?
Why do we need external investment?
What is wrong with home grown business?
Why do we need to sell our businesses to US interests, above all else?
Re “What is the problem with that [UK becomes a less attractive place for overseas investment]?” I think this hinges on the fact there are two ways to avoid UK companies being sold to overseas investors:
1 – UK start-ups are sold only to UK investors, in a new dynamic world, post-capital controls.
2 – What would have been UK start-ups pre-capital controls become start-ups in other countries without ever troubling the UK capital markets.
It would be nice to think that (1) would be the outcome, but (2) feels more likely. Why would an entrepreneurial type limit themselves to UK capital markets when they can have access to the Rest of the World capital markets?
You do know that start ups really do not think like that don’t you? And that international financial markets really do not have any interest in them at that stage? And that start ups don’t even think about sale, they only think abiut survival? And, in fact, that genuine entrepreneurs are only very vaguely driven by money?
Re “And that international financial markets really do not have any interest in them at that stage?” Most start-ups fail. The 1 in 50 (or some other large number; unlikely to be exactly 50) that do succeed, particularly in the fintech / biotech etc. sectors then do get interested. Hence the regular tales of woe in the financial media (Robert Peston’s podcast is a great source of depressing thoughts on this subject if you want to get depressed) of successful UK companies being sold to US investors or listed in the US etc. All startups hope they will become the 1 in 50 (the initial “venture capital” funding or personal/family equity only lasts so long) so locating in a capital controlled UK to be cut off from US capital feels somewhat optimistic.
Re “And that start ups don’t even think about sale, they only think about survival?” My experience of such enterprises is limited to London, where dreams of getting rich via an IPO etc. seem quite common. I accept that things may be different in your “window” on the world.
But on a wider point, do you think the folk of the UK are ready for the very significant disruption that would follow from the imposition of capital controls? Whether capital controls are a good or bad idea long term, their implementation can’t really be anything other than highly disruptive for a few years.
I shave run start ups.
`
I have been VC funded.
And no, not all startups do think of selling out. They think about being commercially successful. The funders force the sale on them. You are wrong.
If a change in regulation changed the focus of so-called entrepreneurs out would be very much for the better.
Can you explain how “The funders force the sale on them” please? It feels a little hyperbolic to me!
But anyway, I guess we’ll have to agree to disagree about the merits of capital controls. A did a quick Copilot search on countries that employ such controls in a major way, and I’m happy to be on my side of the argument.
The funders are only in the company to get an exit opprtunity.
In my experience, VCs and the founders of companies are always at loggerheads. The founders rarely want a sale as soon as the funders do.
A very useful post – thanks.
Anja – this productivity you speak of – who by and how is this productivity you refer to it defined? This is not an unfriendly challenge, just a way to get you to reflect on the subject matter.
Good question, Why does it seem to me like we should balance imports and exports….. okay, at the risk of looking foolish with my amateurish perspective:
1. As I thought you agreed in your initial reply, to lessen dependence on imports in order to get freedom to make political choices … europes dependence on Russian gas has looked problematic since the invasion of Ukraine…. and to avoid the temptation to try and rebalance by acquiring other peoples wealth through wars…..eg… Venezuela, opium wars withChina….. etc did you mean that ‘elites can rebalance’ this domestically somehow without worrying about the trade deficit? I’m feeling confused on this point….it seems I have misunderstood something….
2. Ecologically international trade where we send identical
Commodities back and forth…. Meat butter etc…. Seems crazy and we should be producing locally and consuming locally to reduce our total resource use and restore nature.
3. I’m probably making some kind of ‘household economics’ error here….. but doesn’t a trade deficit mean that we are consuming the fruits of our own labour plus some of the fruits of other people’s labour … by virtue of some kind of leverage we have via currency or ownership of overseas assets…. Or something else? And isn’t that unfair?
Yours confusedly… 🙂
Those are good answers
The popint is – you could answer the question because the answer is not in the finances – it is in the dependence, both political and on climate.
Ignore the “trade deficit” look behind it, is the point.
And trade dedicits are, remember, balanced by financial flows; your household analogy is not working for that reason. The sectoral balances show that, too.
I find an article written in response to a reader question can be very enlightening, as this was. Thanks all.
That’s why I am doing them more often.
I am happy to do more.
What this whole exchange brings out is that the instinct to “balance imports and exports” is really a proxy for something deeper: the desire for autonomy, resilience and the ability to make political choices without being held hostage by external dependencies. Once you see that, the trade deficit itself becomes less important than the underlying structures that create it.
A country can run a trade deficit indefinitely without financial strain, as long as the flows are stable and the domestic economy is healthy. The real vulnerability isn’t the deficit — it’s the dependence. If we rely on imports for essentials, we lose room for manoeuvre. If we rely on asset inflation to sustain living standards, we hollow out our productive base. And if we rely on foreign capital to buy our businesses, we lose control over the direction of our own economy.
That’s why the household analogy doesn’t work. A trade deficit isn’t “overspending”; it’s a reflection of how we’ve structured our economy. The real question is whether that structure leaves us exposed. Europe’s dependence on Russian gas is a perfect example: the problem wasn’t the deficit, it was the vulnerability.
So the issue isn’t whether imports and exports “balance” in a numerical sense. It’s whether the pattern of trade leaves us politically dependent, ecologically reckless, or economically fragile. A politics of care would start by reducing those vulnerabilities — through domestic capability, local production where sensible, and a shift away from rent‑extraction toward real investment — rather than chasing an abstract notion of balance for its own sake.
Agreed.
Finance is not usually the issue.
As I noted, dependence is.
Thanks again for clear ideas. The political freedom and ecological restraint the we might hope for from more domestic production of essentials like food and energy feels easy to understand. However, I am still struggling with the idea that importing more value than we export is not a problem ‘as long as the economy is healthy’. I suppose I can’t picture to myself what this means. Why did Britain fight the Opium wars if all the silver flowing to China in exchange for high value manufactures and tea was of no real consequence? I know that modern money is no longer backed by rare metals…. But does the fundamental problem not still apply? Why would the rest of the world continue to give us more of their stuff than we give them of our stuff if there is not some cost to this hidden elsewhere? I will spend some time in your glossary Richard and see if I can clear up some of my confusion on what seem like quite fundamental matters.
The glossary does not address all those issues
But as Mike Parr has made clear theirs morning – trade is in many things, not just goods. Do remember that.
@ Anja Cradden
“Shouldn’t we try to balance our imports and exports over the long term? Is there a way to do this without increasing real productivity?”
Here’s one answer which poses the question why ideologically split out the private sector from the public sector:-
https://www.nakedcapitalism.com/2026/01/two-decades-of-chinese-industrial-subsidies.html
Personally I’d like to see all countries subscribe to a policy of equalising investment so that all countries can rise with the tide. In order to do this there would need to be a huge concentration on building trust. Currently the world is going backwards on this and we need as a species to concentrate on asking why.