Are we running a deficit in politicians

Not a lot has been made of the quick turnabout in policy. Philip Hammond presented a budget with lots of facts and figures and within a week, the key economic policy – being sensible – is out of the window and the budget has a £2bn hole in it.

This is not the first time this has happened with a “fiscally responsible” conservative government. George Osborne – the man who can hold down any number of full-time jobs – has had to reverse key policies within days – he was the man who decided a £4.4bn cut in benefits was not acceptable (in 2016). And he presided over the “omnishambles” budget of 2012 when various VAT changes (including the pasty tax) were later scrapped.

The problem is not limited to conservative politicians, with Gordon Brown announcing in 2007 he was “cutting” the 10p tax rate – which meant a hike in taxes, which he had to balance by national insurance changes of his own.

But the real problem seems to be the deficit in reality. When chancellors talk about “reducing the debt” what they seem to mean is “not borrowing quite as much as last year.” When ordinary people and businesses talk about “reducing debt” they mean paying some of it back.

When recent conservative chancellors talk about being fiscally responsible, they seem to ignore the numbers and try to claim that labour chancellors borrowed irresponsibly when borrowing under 40% of GDP (2005 to 2009 on average) when in recent years borrowing is only now coming back down to that level of GDP.

The idea of actually paying some of the debt back is still a dream. The “red book” which has all the forecasts in it still shows the government borrowing more money every year to 2021-22.

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13 Terrible Tory Counterarguments

And for those who think what I reblogged earlier is lacking in credibility (the guy is an American…) he has tried to answer the main criticisms here.

Benjamin Studebaker

A few days ago, I wrote a post called Britain: For the Love of God, Please Stop David Cameron. I didn’t expect much out of it, because my usual audience is predominately American, and many Americans take little interest in the British elections. So I was pleasantly surprised when it went semi-viral in the UK, quickly becoming the most popular post I have written. Naturally, with a larger audience comes more critical (and sometimes just aggressively hostile) comments, and my usual policy of responding to every critical or interesting comment I receive is increasingly no longer practical. So instead, I’ve decided to write this all-purpose response to the most common bad critiques I’ve seen levied at my post. If you’re one of the wonderful people who read my post and deemed it worth sharing, I hope that this post will help you deal with any Tory supporters you may run across…

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Britain: For the Love of God, Please Stop David Cameron

Another take on the UK recovery. Says much the same as Paul Krugman but with lots of graphs and no snazzy graphics. But you can’t have everything.

If only economics was a science the politicians would have to listen to them, but perhaps they would get the same treatment as climate scientists…..

Benjamin Studebaker

On May 7 (this Thursday), Britain has a general election. I care deeply about British politics–I did my BA over there and will return to do my PhD there this fall. But more importantly, David Cameron’s government has managed the country’s economy with stunning fecklessness, and I couldn’t live with myself if I didn’t do my part to point this out.

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Vote for a policitian – you know you have to even though it does not make any sense

I have just been reading Paul Krugman’s long read in the Guardian entitled “The austerity delusion.”   I would like to say I disagree with him, because he is saying we should run government deficits – in other words allow governments to borrow – to get out of economic recessions and my whole blog is about stopping people and governments from borrowing.  But I cannot disagree with what he says – the main politicians are saying something to get our votes that just does not make sense.

I will say I disagree with the idea of running government deficits and refer you back to the white paper.  And give one main reason here. During his article Paul Krugman says

It’s true that you can’t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it’s foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.

At some point you do want to reverse stimulus. But you don’t want to do it too soon – specifically, you don’t want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.”

In my view this actually creates a “boom and bust” effect.  You borrow and stimulate the economy and help produce a boom and then you have to reduce borrowings – which stifles the economy and produces a recession.

But back to where we agree. George Osborne has been claiming that his austerity measures have been the thing that saved our economy when our George actually borrowed as much as the previous Labour government.  Yes, he introduced fiscal tightening but he has not kept it up.

10 year interest rates at 14 April 2015

10 year interest rates at 14 April 2015

But for some reason which Paul Krugman tries to explain we Brits seem to think that austerity is a good thing.  So the Labour line and the LibDem line is that we need to be cautious about spending (to differing degrees) and it is only the SNP who want to spend a lot more.

So all our main politicians seem to be ignoring general economic wisdom despite the wealth of economic evidence from the rest of the western world (except Greece).  And they are ignoring the successful growth policies adopted in these other countries in favour of a theory that seemed good in 2010 but has since been shown to be wrong.

But we don’t have much choice – if we want our votes to count we will almost certainly have to vote for a party that will give us austerity even though it makes no economic sense.

It’s all about the deficit

This was going to be a quick post after the budget except that I then spent ages trying to find some statistics and had to give up!

The big thing George Osborne had to say (apart from a few gimmicky changes to pull in the voters in a few weeks time) was that he was “reducing the deficit.”

But what does this mean?

I remember taking out a mortgage and seeing it shrink. But not because I was paying any of it back – it was an interest only mortgage so I owed as much money at the end as when I took it out. But it did not feel like I owed as much. Why? Because I had just started work and my salary was increasing each year and the value of the house was on the way up. So every way I looked at it, my mortgage was smaller – it was a smaller proportion of the value of the house than when I took it out and it was a smaller proportion of my salary.

And this is what George means when he says he has got debt falling. His statistics are

George's budget debt percent“debt as a share of GDP falls from 80.4% in 2014-15; to 80.2% in the year 2015-16. And it keeps falling to 79.8% in 2016-17; then down to 77.8% the following year, to 74.8% in 2018-19 before it reaches 71.6% in 2019-20.”

But he is actually going to borrow more money.

The forecast amounts we will BORROW over the next few years are:

George's budget real debt

(source Red Book Table 1.3 or 1.4)

But he has not actually paid off any of the debt. (Yes he did talk about paying back some old debts

“I can tell the House that we will increase the number of long-dated gilts that we sell. We’ll also redeem the last remaining undated British Government bonds in circulation. We’ll have paid off the debts incurred in the South Sea Bubble, the First World War, the debt issued by Henry Pelham, George Goschen and William Gladstone”

But he has done this by remortgaging {see Red Book Table B.1 which shows borrowing through gilt sales around twice the level of repayments through gilt redemptions}. It is like paying off Barclays by going to HSBC.)

I would like to compare the amount this government has borrowed with its predecessor, but could not access the data to show that he has borrowed as much as the previous government if one excludes banking crisis debt (which is what all the quoted government statistics appear to do).

Good news from the chancellor

You have to agree that George Osborne seemed to be happy with his autumn statement yesterday.

But I am not sure if everyone understands what he means when he says that the deficit is reducing.

If you were to tell me your borrowing was reducing, most people would assume that you have paid it back and you don’t owe as much as you used to. The Chancellor at the dispatch box

When Chancellors tell us the deficit is reducing what they mean is that they are borrowing less this year than either they had budgetted or less than last year or more often less than the last government.

Of course borrowing less than you expected means you are still borrowing and that you owe more this year than you did last year.

He is forecasting actually paying some borrowing back in a few years time – 2018-19.

But surely he said he was repaying some borrowing:

And this morning I announced we will repay the entire outstanding national debt incurred to fight the First World War.

How can he say this?  Table A of the official statement does show gilt repayments of £64.5billion – but new gilts issued will be £125.9billion.

So all he really means is that he is refinancing his existing debt.

Continue reading

Steve Keen visits Solvent Land

Following on from Hyman Minsky’s visit to solvent land, I would like Steve KeenDebunking Economics book cover to visit as well.

He is known for Debunking Economics and predicting that there would be a financial crisis when so many of the world’s economists were basking in a prolonged period of growth and (as Gordon Brown put it) the “end of boom and bust.”

But what would he see in solvent land?

In his most recent posts about world economies, Steve Keen seems to have been concentrating on two things:

  1. The correct response to a downturn is for a government to run a deficit to provide a boost to the economy.  This is in stark contrast to the way in which the EU has required Greece to respond to its Euro crisis by severe austerity measures.  See his blog post on 23 June 2014.
  2. Governments should always run deficits (and not surpluses) or they will stifle economic growth (a lecture in Vienna which last a little over an hour)

These two requirements seem to say that solvent land which has no commercial debt, will not work.  A government cannot run a deficit in solvent land because it, like everyone else, cannot borrow money commercially and therefore is not able to run a deficit.

But let’s stop to think for a moment:

  1. “The correct response to a downturn is to run a deficit.”  This means you only need deficits if you have hit a downturn.  But a main reason for removing commercial debt is to avoid the cycle of debt expansion which leads to a downturn in the economy.  Minsky put forward his “theory of financial instability” which says something like (my synopsis of part of the process) –

    during the good years everyone gets used to growth and profits and expects it to go on.  So the financial institutions come up with more ways of lending money to fuel the growth we are all experiencing.

     

    Then something (possibly minor) goes wrong and we realise that assets are overpriced (because it was too easy to borrow to buy them) and we realise we are in debt and we are in a financial crisis because even if we sold the assets we bought when they were overpriced we would still be in debt.

    So if we do not have debt, we do not have something built-into the economy which will lead to boom and bust.  And if we do not have a downturn, we do not need governments to run deficits to be able to get us through them.

  2.  And so we come to the second problem, that “governments should always run deficits”, or stifle growth.  Whilst Steve Keen’s graphs are convincing, is this a price worth paying for an economic system which:
    • does not automatically lead us into recession;
    • safeguards the poorest in society from the most expensive lending;
    • avoids governments borrowing so much that they lose the ability to pay for basic services such as education and health

    Even when we have said all that, Steve Keen’s own analysis back in May 2014 (in a talk which lasts around 15 minutes) suggests that governments should avoid running permanent surpluses as this is what will stifle growth.  His “balanced government spending” scenario does not look so bad to me.

    And if we are really living in solvent land, governments will need to have doubloons in the vault (because they can only spend what they have already received in taxes).  This also means that they could build up a surplus over time which could be spent when the economy is not as strong.  In other words we would be asking governments to “save for a rainy day” rather than “borrow in the hope we will be able to afford it in the future.”

Minsky visits Solvent Land

I have now started to work my way through Book coverMinsky’s papers in “Can “It” Happen Again?: Essays on Instability and Finance” and I began to wonder what Minsky would make of “Solvent Land” – a world without debt.

If he could visit this wonderful place, would he see different economic rules at work? Continue reading

What are we trying to measure?

There was a lovely article on the news recently which said that the Italians were now including sex and drugs in their GDP figures.  I am afraid the only reference I can find at present is to an article in Bloomberg of 21 May.  But the point seems to be confirmed.  And indeed the UK GDP figures may also need to include whatever we can measure of prostitution and illegal drug sales.

This has made me wonder why this is something we are so keen to measure and get so excited about (when it goes up) or depressed with (when it goes down).  And why do we compare GDP and borrowing so much as a way of seeing if the borrowings are affordable. Continue reading

Debt 101

Aside

I am worried.

One of the blogs I watch is published by Steve Keen and he has recently (at the beginning of the month) published a three blogs looking at whether governments should run surpluses or not.  This was in response to a proposition from the Australian National Commission of Audit that the government should “live within its means.”

His three blogs are:

Should governments run budget surpluses?

Should Governments run Deficits? a Minsky Model?

Should governments run permanent surpluses? (2)

His conclusion (based on some numbers using his modelling software) is that running budget surpluses takes money out of an economy and effectively reduces growth.

On the other hand running a balanced economy (no surplus or deficit) will see public debt reducing.  But running a deficit has higher growth.

So is a deficit economy a good idea?

It matters because if we remove the possibility of debt (commercial lending) from an economy, then it must follow that a government cannot run a deficit – because it cannot borrow.

Or is lower growth a price worth paying for the advantages of taking debt out of the system?