Philip Hammond will not tell the truth about the UK's debt today.
It is likely that he will say that the UK will notionally borrow substantially more than the £55.5 billion that was budgeted by George Osborne for this year.
What he will not say is that £60 billion of government debt has also been cancelled this year. This is because of the Bank of England's QE programme, which will purchase £60 billion of gilts during the year. And what that means is that the government will have bought £60 billion of its own debts. And as its own accounts show, that cancels the debt in question.
This means that whilst the deficit may be of the scale he will talk about the increase in debt will not be. That will be much, much, smaller. And in the overall consideration it is the debt that matters.
It is debt that requires interest payment, and the £60 billion of gilts repurchased will not be subject to interest payment anymore.
And nor will they ever be repaid: even if they expire they will simply be replaced by new debt and almost no net cost.
So the cost of running a deficit will be vastly smaller than Philip Hammond will imply. Even the inflation risk for this reason is minimal, as the last few years have shown. There is an inflation risk from Brexit, but not from money printing.
So what does this mean? Three things, I suggest.
First, the money is available to invest. All of this sum could have been made available for that purpose, but was not. He need not tinker (as he will) with housing in that case: the government could be out there building.
Second, austerity is unnecessary, but Hammond will say otherwise and will keep a firm commitment to it in his rhetoric.
Third, the state of government funding is vastly better than he will imply.
So the question has to be asked as to why he will not tell the truth, and that answer is crystal clear. He will lie (I use the word advisedly; he knows that he will not be telling the truth) because he does not want to invest, he does want to impose austerity and he does want to diminish the role of government.
Don't doubt that everything said about debt today will be political, because it is.
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“He will lie (I use the word advisedly; he knows that he will not be telling the truth”
– which leaves unanswered the question: why is Hammond doing this – he knows the problems the country faces & knows he could do something about them. Why doesn’t he? My own three ha’pannies is that like much of the Tory tribe he is locked into the “markets” ideology/small gov that is the political lodestone of the Tories. This will only have one outcome – a country that becomes progressively poorer – & thus we arrive at Einsteins definition of madness (doing the same thing repeatedly and expecting a different result).
Cognitive lock in is the term, I believe
“My own three ha’pannies is that like much of the Tory tribe he is locked into the “markets” ideology/small gov that is the political lodestone of the Tories.”
Wow at this rate the Tories will lose the 2020 election 😉
You do have to wonder why everyone is depressed.
It is shame Labour did not embrace MMT and completely smash he myth that they harmed the economy by spending too much (rather than not enough.) That way it would be hard to backslide. But here we are.
My view is that by repeatedly telling the population that we are running out of money Hammond is still manufacturing consent in the classic Chomsky sense for more cuts and less progressive policies and services.
Hammond is not here to help; he is here to dismantle things just like the rest of his party.
As I type, Hammond his just started his statement, and the first thing he refers to is Labour’s recession”.
Right. This has to be addressed.
When I first understood what QE means I found it mind-blowing (I can’t believe I’m alone in this). Why have they stopped at £60 billion? I have also seen it suggested that QE could be used for
– paying off all the PFI contracts
– paying off all student debt
– funding the building of all the homes needed.
Why not all of the above?
I suppose what I’m asking is if there is any limit on QE and if so why? And how would that limit be determined? I am talking from the PoV of a socialist. I fully understand why the Tories wouldn’t want to eliminate all that lucrative debt!
The limit is the capacity of the economy and the impact on inflation
So cancel debt and spending will rise
Will that cause inflation? Will it create a demand for labour the economy can’t fulfil?
Are there enough bricks?
These are the real constraints
Thank you Richard.
This is all so much harder (for we non-economists) to understand than the Tories’ Mr Micawber prescription!
Okay, Richard, we keep hearing that QE asset purchases will never be repaid. Never is a long time. What if the plunging pound causes inflation of household goods such that it triggers an old-fashioned wage claim round? What if a resurgent trades union runs with this in the fight against the ‘gig’ economy? If inflation returns to old-style levels the BoE will have to use its classical weapon, increasing interest rates. But to avoid that it could sell assets bought under QE. So I would not want to bet the farm on the BoE ‘never’ selling its assets. Printing money is never a long-term solution to anything.
It’s also true that QE debt may need to be repaid in the event of an alien vision.
I think that more likely than your scenario
So shall we deal in the realm of the plausible and not that of your fantasies?