We hear TV news, the papers, and politicians bleating on about “the National Debt” and “The Budget Deficit” a lot, don’t we? And, as we all know what it’s like to have debts to pay, we worry about it. We think, “how is the country going to pay for…..?” “Our children will be burdened with debt for ever…” Well, it’s time we looked at the reality.
In my second and third pieces in this blog, we realised that taxes don’t fund government spending, it’s actually the reverse. Governments (if they have their own currency, like the UK) decide how much money the country needs, and then provide it by spending it into existence. ( They also license the commercial banks to make loans, a form of money creation.) They then take some back in the form of taxation, for various reasons. (See my 3rd piece, Let’s talk about taxes). Virtually all other economic activity flows from this government money creation. And this process is often referred to as the “Budget Deficit”.
Even more confusingly, it is often called Government “borrowing”, which is nonsense. It is nothing like “borrowing“, as you or I understand it in our daily lives. If you, or I, were allowed to, and entitled to, put whatever credit figure we liked in our bank accounts, would we really go out and borrow money from anyone?
So, what actually is the “Budget Deficit”? Well, first of all, let’s realise that “deficit” and “debt” of governments, are frequently used confusingly as meaning the same thing. Let’s start with “Deficit”.
The “Deficit” is actually the total amount of money injected into the economy each year by the government of the day, less the total tax collected, plus the “Debt”. It’s not a real thing, like my or your car loan, or mortgage. It’s an accounting device. At the end of the government’s financial year, it disappears, and is replaced by the next year’s budget, not “carried over”. If a government chooses to run a “budget surplus”, this means taking more money out of the economy than it puts in, which will almost always cause a recession or slump. Yet, many politicians talk about it as if it’s a beneficial thing, like us paying off a loan. It’s actually very destructive. (I will talk about this more in the next article, on “austerity policy”.) In the words of economist Ellis Winningham, “budget surplus is the act of the UK government reducing the number of British pounds available for people to save and to spend.”
What about the “Debt”? Governments can, and do, “borrow” money, in the form of Government Bonds, also known as “Gilts”. Organisations, and in some cases people, “lend” money to the government, in return for a guaranteed repayment, and modest interest. For historical reasons, mainly to control interest rates, governments have sold Bonds equal to the amount of new spending which is over and above its receipts. But this is nowadays really a case of the government providing a safe place for spare cash to be placed, because, in the words of an Australian blog, “Monetary sovereign governments do not need to borrow, and when you understand the monetary system fully, you understand that they do not borrow in a meaningful way at all (as long as they never borrow foreign currency).You can’t meaningfully borrow the tokens you yourself create. You certainly don’t need to do so.”
In the current circumstances, (April 2020), the world’s financial markets are in freefall, so it would be impossible to sell Bonds to anyhting like the huge amounts that need to be spent. If necessary, the Bank of England just creates money to, effectively, buy these Bonds from itself. In Japan, most Government Bond rates are negative, which means organisations pay the Government to store their money.
The “National Debt” figure also includes the amounts people have saved in National Savings and Investments, which includes such things as Premium Bonds. To call these savings “debt” for a UK government, is, as Professor Richard Murphy of taxresearch.org says, grossly misleading. The savers wouldn’t want them “repaid” or paid off, unless they have actually asked to cash them in!
So, how much do we need to worry about the National Debt? Not much, actually. In the words of Richard Murphy of taxresearch.org. “a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled.”
President John F. Kennedy understood this, back in the early 1960s: “Is there any economic limit to the size of the debt in relation to national income? There isn’t, is there?….That’s right, isn’t it? The deficit can be any size, the debt can be any size, provided they don’t cause inflation. Everything else is just talk.” JFK to James Tobin. ( James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities-Wikipedia.)
Those who believe that governments need to raise money by issuing bonds, might be surprised to learn that in Japan, bond yields are negative. That means that the Japanese Government pays no interest on its bonds, in fact the reverse. Organisations acually pay the Japanese Government to store their unused money.
I realise this all sounds a bit shocking, because we have all been conditioned to think government finance is like our own finances. But, think about it: if you were allowed to put as much money into your bank account as you liked, would you worry about paying off debts? The UK government is not only entitled to create money, but has to. And does not allow anyone else to.
Why might a government want to let people/voters think that the UK budget is like our own household budget? Because it may well suit their political agenda. We will look at this in more detail next time, when examining “austerity” policies.
Here’s Mike Hall, of the Facebook group MMT for the British People, 13.02.2020 :
“In reality, when they’re in power, and just like US Republican Party, the Tories don’t care about Gov deficits. Despite all the propaganda media guff that they do, their policies never change because of deficits.
When convenient as an excuse, deficit hysteria is invoked, and when it isn’t deficits are ignored, and mass media oblige likewise.”
I will wrap up this bit by giving us two contrasting statements to consider. Firstly, from former Chancellor George Osborne:
“If we don’t get a grip on government spending, there will be no growth”. George Osborne Read more at: https://www.brainyquote.com/quotes/george_osborne_464526
Note: I have, of course, rather simplified a very complex subject, but not so as to mislead. In actual fact, the term “National Debt” is a rather vague term, and nobody- not even professional Economists- can really define it accurately. To explain why, this video, by Chartered Acountant & professor of Political Economy Richard Murphy, tells you how impossible it is to find out exactly what “National Debt” is, even from official sources. https://www.youtube.com/watch?v=oXwmRDM6InI
I am grateful to Catherine York for proof-reading, and her support.