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.

In the words of a Greek economist

I found this article in the weekly online magazine for chartered accountants.

Put simply lending money to help a country out of debt is like hosing someone down to dry them off.  In the end you will have to switch the hose off and get out a towel

The damage of deferring Greek debt restructuring

29 July 2015 

The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible

Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day.

….

For full article go to http://economia.icaew.com/opinion/july-2015/the-damage-of-deferring-greek-debt-restructuring?utm_source=economianews&utm_medium=articles&utm_content=headlines&utm_campaign=july31

A new way of looking at economics?

I have been thinking recently.  It is a difficult and sometimes painful process I would prefer to avoid.

I have been thinking about how we measure economies and whether GDP is helpful or not.  One issue with GDP is that everything is measured in terms of finance and that does not always give reliable results.  For example I know I am well off because my house is warmer than the house I grew up in – because of improvements in insulation and heating, not because I have more finance than my parents.

And then I heard something on the news this morning.  As a result of the Ebola crisis, they (I cannot remember who was talking) think that Sierra Leone’s economy will shrink this year, whereas its GDP had been projected to rise by 11%.

Would 11% growth in GDP have been a real measure of the countries economic strength?  We know from frequent news reports that the country does not haGraph of somethingve anything like the health care that we (in an ailing economy which cannot manage 3% GDP growth) take for granted.

So do we really want to compare GDPs or are there better measures available?  Should we care about these financial measures at all, or would it be better to measure happiness (as they do in Bhutan) or what should we measure.

Perhaps we could look at some social measures – education, employment, quality of housing stock, health care – but these might be difficult to quantify.

But if we are going to look at financial measures, we need to get away from GDP.  Economic analysis says that another way of looking at GDP is that most of it comes from  bank lending and government deficits (government borrowing).  See my previous post Steve Keen visits solvent land (2) for more detail on this.

Some may say that this is fine, but recent experience of debt shows us that some, if not a lot of, debt is an illusion – it cannot be repaid and is therefore of no value.  As a result we have written off debts of countries (under the HIPC initiatives);  we have bailed out banks who lent too much to people who could not pay.  So if neither bank borrowing nor government borrowing are secure, GDP, the main economic measure we use, is overstated.

So let’s look for something which better reflects what is important – and the size of our mortgages – personally or as a country – is not the right place to start.

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?

 

Debt is a bad thing – HIRC

I may have coined a FLA (four letter acronym) in my white paper.  “HIRC” is short for “Highly indebted Rich Country.”

Greece  –     is the answer to the obvious question (what country is a HIRC?).

How did it get that way?

If I have understood the situation properly – the government spent money it did not have in the expectation that this would generate an economic upturn which would increase government revenues to pay for the spending.  This is the recommended response advocated by economists such as Keynes and followed by Gordon Brown and others following the global financial crisis of 2008.

Another way of describing this policy is “spend now and pay later” and is the opposite of the austerity measures being used by the current UK government in dealing with UK debt.

A particular problem that Greece faces is that it is within the Eurozone which means that it cannot realign its national currency to reflect its poor status – it does not have a national currency but is tied to stronger economies such as Germany and France.  As a result, the only way it is allowed to deal with the problem is the sort of austerity budgetting we are seeing in the UK.  And austerity bugdetting is not popular because it means fewer state-funded jobs, which means higher unemployment and therefore lower living standards.

Could this situation have been avoided?

Under my proposal that commercial debt is outlawed, governments would not be able to issue debt so, yes, this particular problem could not have arisen.

The big question is can governments operate without the flexibility that borrowing gives them.  Should Keynesian solutions be allowed to governments?

And if governments cannot borrow, how are cash flows managed?  The UK cycle involves payments going out throughout the year but a large proportion of tax revenues (income and corporation tax) coming in in January.  Would we need to change tax payment dates?  Or change the fiscal year so that the largest inflow of money came in at the start of the and set an automatic limit on what could be spent?