The UK's public finances are apparently in trouble again. That is the message being pushed yesterday after data showed that government borrowing in April was £24.3 billion, the second-highest April figure on record and considerably more than economists had forecast. At the same time, retail sales fell by 1.3%, the biggest monthly drop for almost a year. Consumers are cutting back, and the government is supposedly borrowing too much.
The implication for some was obvious: more restraint is required. Except that this interpretation is precisely backwards.
Let me start with the retail sales figures. They matter because they tell us something important about the state of the economy. Households are under pressure, and despite official silence in the crisis to come, they know it. Higher energy prices linked to conflict in the Middle East, continuing high mortgage costs, and widespread economic insecurity are reducing spending power. People are buying less fuel, less clothing, and fewer non-essential goods. In other words, demand in the economy is weakening.
At exactly the same time, government borrowing is rising.
Most commentators treat these two facts as unrelated. They are not.
When households spend less, businesses earn less. When businesses earn less, tax receipts come under pressure. At the same time, more people require support through the social security system, and inflation-linked payments rise. The government's financial deficit, therefore, increases. That is exactly what we should expect to happen.
The deficit is not the problem. The weakening economy is the problem. The deficit is merely evidence of it.
This distinction matters enormously because UK economic policy remains trapped by fiscal rules that require the government to focus on accounting targets rather than economic outcomes. Those rules are self-imposed constraints designed to make debt fall and current spending balance within arbitrary forecast periods.
As a consequence, every time the economy weakens, politicians become obsessed with finding spending cuts or tax rises to keep within those rules.
The result is perverse. The economy weakens, so the government cuts back. The government cuts back, so the economy weakens further. Tax revenues then disappoint. The deficit rises again. And so, the cycle repeats.
It is difficult to imagine a less sensible way to run an economy.
The reality is that when private spending falls, public spending should rise. That is not radical economics. It is the lesson that should have been learned from Keynes almost a century ago. Government exists in part to stabilise the economy. When households cannot spend, the state can. When businesses will not invest, the state can. When uncertainty paralyses decision-making, government action can provide confidence and direction.
Instead, Britain does the opposite.
What is especially absurd is that the same commentators who worry about the deficit are simultaneously worried about stagnant growth, collapsing consumer confidence, poor productivity, weak investment, crumbling infrastructure and deteriorating public services. These are not separate issues. They are symptoms of the same disease.
For fifteen years, Britain has systematically underinvested in itself. We have treated public spending as a problem instead of recognising that it is often the solution. We have allowed fiscal rules to become a substitute for economic strategy.
The consequence is visible everywhere.
Growth is weak.
Public services are stretched.
Infrastructure is inadequate.
Households are struggling.
People are disillusioned and angry.
Politics is becoming increasingly unstable.
Yet the focus of these stories is still on borrowing, and it should not be. The real story is that consumer spending is falling. That is what should worry us. The deficit is simply the accounting consequence of that fact.
If politicians understood the difference, they might start addressing the causes of Britain's economic malaise instead of endlessly obsessing about the numbers that merely describe it.
But nowhere do I see any sign of the intellectual curiosity that might get the majority in the political-economic community or the commentators that write about it close to that point. And that lack of curiosity, coupled with the assumed victimhood of all involved, together with their assumed and implied incapacity, is the real problem we face. Households can see what is happening. Those with the supposed training and skills to change our direction of travel are so blinded by dogma that taking action is beyond them, and their doing is unimaginable, most of all to them.
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I couldn’t agree more. The money lifecycle is surely:
1. Create it (print it, move it into accounts, profits, wages, benefits).
2. Use it (spend it! Invest.)
3. Destroy it. (Tax it – don’t let it build up and cause inflation, put some into savings, build up security).
4. Repeat! Continuously.
Simple isn’t it? Except to the people we vote for and their masters. Instead, it seems that we worship making great piles of money to stare at, and elevate certain people above us rather than putting money to good use for all.
Might it be that conventional political parties and/or their financial and publicity backers make sure that anyone with unconventional/unorthodox/non-compliant ideas is filtered out of any route to significant power and/or influence?
Might our consistently erroneously and particular-groups-selfishisly run national community also be afflicted by a “tyranny of theory”?
A tyranny of the capture of theory
I can only stand in awe of the effort Richard has put in, over many years, trying to correct the near universal misunderstanding of the economy (at least amongst politicians and economists). Thank you. Perhaps, I hope, it is having some impact.
And yet, the misunderstandings persist, pushed by those who think their selfish interests are served by misunderstanding. The principle misunderstanding being the “household analogy”, that the government is like a household (when it is, in fact, the inverse, the complement).
I feel one simple message is needed. People need bite sized chunks. It is so difficult to absorb a complex argument especially against the flood of misinformation from apparently reputable sources.
“Yet the focus of these stories is still on borrowing”. And the supposed problem is that “borrowing” cannot increase indefinitely because the government has to pay more and more interest. So there has to be austerity. That is the nub of the neoliberal argument.
To me the response is “why does the government insist on paying interest on its “borrowing”, via bonds (a.k.a. gilts), when it doesn’t have to”? Anyone can see that is madness. Instead it can borrow, interest free, from its own bank, the Bank of England, as it has done in the recent past. To me there can be no rational response to that question (through doubtless neoliberals will try). That’s the question that should repeatedly be asked of journalists etc who catastrophise about borrowing.
Of course there are complexities. But asking that one question, repeatedly, may force any discussion to address economic truths.
We need the savings facility. Bonds are necessary. The problem is using the interest rate to control inflation when it increases it.
Interesting to see that petrol sales dropped by 10per cent
Obviously partly due to panic buying the previous month but if people are not driving they are not going out and spending
It ties up with my observation that the roads seem very quiet
Interesting to see what next month brings
Agreed
Early morning commuting seems to have gone down too – more working from home I feel. At least there is more room for me and my bike!
🙂
‘nowhere do I see sign of intellectual curiosity'<p>
Indeed. On the Today program from Hay Festival this morning Zanny Minton Beddoes – of whom I had never heard – editor in chief of the Economist , was mildly amused that Andy Burnham had immediately sought to reassure the bond markets. She was so quickly dismissive – so quick that it was easy to miss , as if ‘of course he had to bend the knee before the bond markets’. <p>
Self evident! But isn’t the editor of the economist paid to be curious? Obviously not.
Of course not.
Supplication is a condition of the post
One need look no further than the front page of today’s FT for more evidence of the ‘blinded by dogma’ when Andy Burnham promises to stick to the UK’s fiscal rules , a horrendous situation is about to get a whole lot worse and the weak in our society and throughout the world will suffer what they must . The cold hearts and/or ineptitude of those in power is mind numbing and your analysis, along with Steve Keen’s , is the way forward .