Tag Archives: Deficit

Against Brexit

David Smith writes the ‘Economic Outlook’ column in The Sunday Times Business section. I don’t much like a lot of what he writes because he’s one of those columnists who has believed (and possibly still does) that the UK’s deficit must be eliminated and our debt must be cut now-now-now. Which is what George Osborne has been trying to do since 2010 – and singularly failed. But, in the meantime, Osborne has managed to cut capital expenditure significantly, while off-loading a load of costs that used to be borne by central government onto local authorities. Not to mention the damage he and his ilk of ‘small-staters’ have done to the NHS and social services. All for want of taxing a bit more and borrowing a bit more, when ‘the markets’ are actually paying governments to borrow. Nearly all mainstream academic economists believe this has been counterproductive, as do even some working for banks and newspapers, not to mention the IMF.

But I digress.

In today’s column (29-05-2016) David Smith tackles some of the Brexiters’ economic and ‘resources’ arguments. And he does it very well indeed.

Firstly, he quotes data from HMRC showing that ‘recently arrived’ immigrants paid £2.5b more in taxes in 2013-1014 than they received in tax credits and benefits. Presumably this surplus in tax revenue over expenditure from immigrants has been going on for some time – and is likely to continue. David Smith says ‘Part of this money has been used to cut the budget deficit. But it is also as available as anybody else’s taxes to pay for public services‘.

Well, wash your mouth out. He’s not seriously suggesting that, if we have a load of new immigrants increasing pressure on our housing and public services (NHS and education especially), we should be spending tax-payers’ money to boost spending on housing and public services, is he? I do believe he might be… Though it is almost as a throwaway, as if he doesn’t want people to notice he was kind-of suggesting it.

Which brings me to his second excellent point.  He looks at the alleged ‘job transfer machine’ – the allegation that all these immigrants are taking the jobs of stout British workers. David Smith points out that the number of UK-born workers in employment (I think he’s quoting ONS, but I can’t be sure) has increased by 1.1m to 26.25m since the low of Jan-March 2010. A record apparently. And, not only that, but in the 6 years to the end of first-quarter 2016 there was an increase from 70.7% to 74.6% in the UK-born employment rate. Just wow, eh? Still believe they are taking our jobs? Unemployment has been going down (fact) since all these immigrants have been ‘swamping’ in from the EU.

So, clearly, these new immigrants are taking jobs and starting businesses which truly needed to be filled and needed to be started. They are contributing in spades to the growth of the UK economy (our growth, while lacklustre, due to – ahem – austerity, has been better than that of most developed economies) and recent immigrants, as well as boosting growth, are, as we saw, substantial net contributors to our tax revenue.

So – that all being the case, we really should stop moaning about the immigrant pressure on resources and bloody, bloody (bloody) well spend the money, even if he have to borrow some, on training more doctors, other education-resources, housing, health-resources and social services that our increased population now requires. Surely that’s not difficult to see – unless of course one is determined to cut public expenditure, no matter what, as a matter of religious belief…

I’m not sure if David Smith would agree, but he does seem to sort-of agree. Doesn’t he?

And, while we are on the subject of Brexit – here is some really great stuff from ‘Rick’ at flipchartfairytales. He has done his homework…





Austerity: The UK Government’s Current Motives Are Not The Original Ones

It looks as if the UK government’s austerity drive to reduce the deficit in haste no longer has the objective of improving the economy. It has other objectives.

It looks this way because the excuses for austerity not apparently actually improving the economy are transparently weak. They boil down to ‘our main export markets are in a terrible state, the global economy is in a pretty poor state, other countries are in the same boat, so we are doing the best we can under highly adverse circumstances; but don’t worry – we are getting there, slowly – just look at our improving employment situation‘.

This is transparently weak because, for a start, it ignores the fact that our major companies are simply not investing. These companies do not need to borrow (or borrow much) to invest as they are generally sitting on large cash-piles. So while it is true that our SMEs may be experiencing difficulty raising funds – because the banks are still in a ‘delicate’ position – if our major companies were to be investing we would be seeing some real growth. But they are not, despite the once-alleged confidence building effects of the austerity policy. This is because they are fearful there won’t be enough demand to justify their investment in new products, new plant, new machinery. They see a lack of demand stretching into the future. This demand shortfall arises because consumers do not have the wherewithal or confidence to go out and spend. For some years now, their wages and salaries have not kept pace with consumer prices and they are nervous about their jobs. One major reason why their wages remain ‘stickily’ low.

But what about our ‘improving’ employment situation? Well, it’s true that private employment has grown and even outpaced the engineered decline in public sector employment. But at pretty low wage levels. And anyway, there is a marked decline in productivity associated with these employment improvements. More private jobs is not translating into more production and growth. Cheap labour is being hoarded by firms and hired, too, as a cheaper or less risky alternative to capital investment. And in the service sector much labour is being expended fruitlessly chasing more business which refuses to materialise because this is a negative-demand-led recession.

David Cameron, George Osborne and Nick Clegg are none of them stupid. Neither (now, at least) are they ignorant. They know all this stuff. So what is their stated excuse for not abandoning their policy of short term fiscal consolidation – though, of course, it is now not quite so short term because the end-of-this-parliament targets are definitely going to be missed, and the government has admitted it? When, instead, they could be borrowing – at what are actually negative real interest rates – in order to boost demand through increased capital investment in productivity-enhancing infrastructure, building works, school repairs, more housing, etc? All things which are really needed, and which would, much of it from the get-go, have significant economy-boosting effects. The stated excuse is that to be seen to be changing the austerity policy and embarking on a borrowing ‘binge’ when the national debt is ‘so large’ in relation to GDP would cause the bond markets to freak out. The markets would suddenly cease purchasing UK government bonds. And this would result in a rapid rise in market interest rates on the bonds significantly increasing the price of government borrowing in the future. Also, they claim, the UK would lose its AAA status because the government would have lost credibility in its perceived ability to reduce the deficit and ultimately the national debt. Um… well the credit rating agencies are going to do that anyway, and soon. Because, clearly, the government is failing in its endeavours to fix the economy, while the deficit remains stubbornly high, with debt still increasing in relation to GDP. GDP is still bumping along the bottom, if not actually decreasing, further exacerbating the debt-to-GDP ratio. Obviously the best way of actually reducing this ratio would be to increase GDP, the denominator in the equation. We really, really need growth.

There is also, of course, a major unstated reason for not changing policy: that no senior politician can be seen to admit they were wrong, as this would have a seriously deleterious effect on their personal credibility and future career path. Tough one that… Moral dilemma, eh?

So therefore the purpose of continued austerity is now no longer to fix the economy, but (i) to try to hold off a sudden rise in UK government bond interest rates (a sudden drop in demand for bonds) and (ii) to shore up policymakers’ personal credibility until ‘something turns up‘. This is just finger-in-the-dyke stuff. It can’t help but fail. Even more disturbing is that, actually, there is also a third reason (iii) that some Very Serious People, possibly including Mr Osborne – but if not, certainly people he rubs along with at dinner parties, perceive government debt as immoral. They do, too. They may give reasons for this, relating to future generations – reasons which don’t generally hold water. This is really ideological, emotional, not susceptible to argument. Oh, and a related fourth reason (iv) The belief that the state must be shrunk so that the well-off can keep as much of their income as possible and not be burdened by more than the minimal amount of taxation: purely ideological, this one, to put it politely.

So – there we have it: four motivations for continued sharp fiscal retrenchment – none of which actually relate to the reason we were given for front-loaded fiscal retrenchment at the outset: that this austerity would cause the private sector to invest and grow. This was the myth of ‘expansionary austerity’. A myth, by the way, cleanly, neatly and tightly debunked in an essay/paper from the USA’s Center for Economic Policy Research (CEPR) published some 7 months ago. Here (PDF).

Way back in 2010 Olivier Blanchard of the IMF clearly said ‘Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it’. That was in June 2010.

All this is not to say that the national debt is too low, or just right. The national debt is, by general agreement, even among KrudeKrugmaniteKeynesians, too high in relation to GDP. A credible plan for its reduction – and therefore reduction of the deficits which feed it – is definitely needed. But we do not have such a plan at the moment. Plan A has, indeed, been discredited. To be at all credible, a rational plan needs to be stated now, to be implemented when GDP does significantly turn up in what looks like being a sustained manner. Austerity in a time of growth may be a virtue. In a time of depression/recession it is definitely a self-defeating ‘sin’. As the IMF pointed out way back then.


1. How does our debt to GDP ratio actually look? Is it as bad as it is claimed? Well, it is not brilliantly good. But putting it into a historical perspective shows that it is not actually all that terrible, either. Here are some charts. So we need to do something to bring it down. But all that now-now-now panic was totally unnecessary. (EDIT: And long after this was originally written, a paper by Reinhart and Rogoff widely used to justify debt panic, has been thoroughly debunked for (i) sloppy use of Excel, (ii) deliberate exclusion of data that didn’t fit the thesis and, (iii) perhaps the greatest sin, assuming causality and ignoring the possibility of reverse-causality: high government debt results in slow growth, when it could equally be that slow growth causes high government debt).
2. Did the last government cause the sharp increase in national debt? Well, it did happen on their watch. But that was because of the extreme financial crisis caused by the meltdown of the banks, requiring an expensive bank rescue operation, and causing a sharp drop in tax receipts.
3. Could we have been in a stronger position when all this actually started? Probably. But Spain and Ireland were paragons of fiscal rectitude, and still got sunk by their banks (and the euro and the ECB – but that is another story). The UK was not particularly fiscally profligate before this all happened. The fiscal deficit of the UK was actually less than 3% of GDP at the time. Not so bad, as it happens. Similar to the USA and France. But, of course, if the banks had been better regulated… Well, that’s another story. And the blame for that can certainly be laid at the door of Gordon Brown. However, the Conservative party at the time was all for very light-touch regulation too.

There is one potential flaw in the argument that the government should switch course, and borrow for investment in beneficial infrastructure, etc, etc… But nah… That’s for others to elucidate… If they have some evidence, that is…

…Oh well, all right then. The potential flaw is that – although I do not believe it would happen, it is, theoretically possible that some muddled thinking on the part of some people in ‘the markets’, combined with herding, might result in either refusal to buy new UK government debt, or, if not immediate, a sudden rise in their yields (free market interest rates) as those who had bought the new debt (mainly banks) found that they could not sell it on at prices above or equal to what they had bought it for. In other words, if the UK government were to abandon current austerity policies and borrow for worthwhile capital-type investment to boost GDP (fiscal stimulus, yay!) interest rates on UK debt might possibly go stratospheric.

As I said, I don’t believe this would happen. But, if it did… what would happen then? The answer, from history, seems to be here. Nice charts and explanation from that KrudeKeynesianKrugman (KKK). So, not Greece, nor Spain, nor Ireland today. But but France in the 1920s. When an awful ‘bond vigilante’ strike actually happened. So France, which had started with an enormous post WW1 debt problem, recovered strongly. what a surprise! The effect of the sharp rise in French bond yields caused a sharp decline in the value of the franc (surprise? No). Resulting in increased exports (surprise? No). Some inflation eroding the value of the debt (but definitely no Weimar, note). And on to a full economic recovery. France boomed in the 1920s – until the Great Depression. But that is a whole other story.

Meanwhile here is a blogpost and chart chart snitched from Not The Treasury View (aka Jonathan Portes and NIESR) which says it all about the current recession, compared with previous ones.

Getting My head Round Deficits and Debt and What Happens Next

I’ve sort of got my head around this stuff. But I need to write it down to be sure.

Firstly – ‘Debt’  is money a country borrows on ‘the markets’ by issuing bonds, of a particular value/price, paying a particular rate of interest (eg 3%) and which may be redeemed for the purchase price after, say, 10 years.

People buy these bonds at the issuing (nominal) price and may then either hold them or trade them. This is where it gets interesting – because when they are traded on the open market, the price, here, may go up or down according to supply and demand. Thus, depending on the risk perceived by the markets, the price increases or decreases on this open market. But since the interest paid is static (eg 3%) in respect of the original issue price, if their market price goes down (too little demand, because too much perceived risk) then the interest they actually pay on the actual price they are traded at will be higher than their nominal interest. The real interest paid is inversely related to the price at which they are traded. It is this real interest which gets quoted and is seen in the press. The more risk there is perceived to be that the Sovereign (the issuing country) will not be able to redeem the bonds from whomever now owns them, at their original face value at the end of those bonds’ fixed period, the higher is this quoted interest rate (ie the lower the price at which they can be traded on the open market). Phew!

Now, obviously, if there is a perceived significant risk that a country will ‘default’ on its obligations to redeem the bonds at their face value (or maybe even keep up the interest payments!) the harder it will be for the country to issue more bonds – because ‘the market’ will be demanding that new market interest rate has to be paid by the issuing country on its new bonds – to a point that it will no longer be able to afford to service its Debt and pay its internal and external bills. If the price of its bonds collapses on the open market (interest rates quoted skyrocket) this is a sure sign that the market (that is – the traders – mainly banks) believes the country is on the brink of national bankruptcy. Even if there is no foundation to such a belief, the belief itself would make it very difficult or impossible for the country to issue any more bonds – thus it would become a self-fulfilling prophesy.

So the ‘confidence of the markets’ is very important for a country.

However, it is important to note that low yields on government bonds (as currently for US and UK Treasuries) do not necessarily mean that the market is confident in the way the country is being run economically – only that there may be nowhere else for the market to put its money – eg shares being considered a dead loss, as at present! (Evidence: August 5, 2011 S&P Downgrade the U.S, but the 10-Yr US Treasury Yields 2.5%…)

‘The Deficit’ is not the national debt. The deficit is the difference between national income and national expenditure – approximately. Sometimes a country is in surplus with this respect, and sometimes it is in deficit. Often a rich country will run a deficit for years and years – adding to the size of the national debt as it issues more bonds. But as long as the markets believe the country will not default, they’ll keep buying the bonds and the quoted interest on them remains relatively low. How can this happen? Never mind. It just usually does for advanced economies. Perhaps the subject of another blog piece – talking about say, the USA, Japan and the UK and maybe the role of Sovereign Wealth Funds…

So – what is going on at the moment in the UK and the USA?  Here is my take:

  1. The whole developed world is going into austerity mode at the same time, particularly all the European countries – so no European country which is in trouble is going to be able export their way to GDP growth and hence out of trouble (eg the way Sweden did in the mid-90s via domestic austerity);
  2. In the meantime austerity is contractionary – and the private sector is not going to pick up the slack because it is also in austerity mode: profitable businesses are actually sitting on their cashpiles rather than investing because they do not have any confidence that their markets will buy their goods/services in sufficient quantities to make it worthwhile to invest; consumers are trying hard not to spend too much, and to reduce their own debts;
  3. It’s not a good idea for economies to run large deficits over a long period of time and thus increase their debt: so in the long run (even the medium run) deficits need to be reduced or eliminated;
  4. If a country with large deficits wants to be able to keep borrowing money on the markets at advantageous rates, it needs to keep the markets confident: thus it needs a credible plan to reduce its deficits in the medium term.  Nobody out there apart from the ‘Pain Caucus’ – (we have overborrowed and binged and sinned, therefore we must suffer pain, painItellyou, nownownow) – really needs a short-term plan to reduce the deficit. But is may fit in neatly with an ideological-cum-religious desire to ‘shrink the state’ and ‘let me keep more of my own money’ – eg, as with UK conservative party and US Republican party type people and Libertarians;
  5. Economies can have any level of national debt they like – as long as they can afford – via their tax receipts – to pay the interest on their debt – just as you or I can take out any mortgage we like – as long as the bank will lend it to us and we know that through our income we can afford to pay the interest, and ideally some of the principal;
  6. Currently, for the USA for Japan and for the UK  – the market is willing to buy our debt for very low interest rates – in other words, pay a  high price for our bonds (especially now that the stock market has tanked!)
  7. The ratio of debt or of deficit over GDP depends on the absolute size of the deficit or debt and also the absolute size of the GDP
  8. If you want to reduce this ratio you can do it in two ways – (a) cut the deficit or (b) raise the GDP
  9. There are various ways to cut the deficit – however, it should never be done ‘nownownow’, but over the medium term, if you do not want to harm your economy/reduce your GDP; (contractionary policies are, well… contractionary… doh!)
  10. Reducing taxes for the rich (typically, unfortunately, these are the so-called ‘Very Serious People’ that government ministers mix with) produces hardly any dividends for the economy – because they hoard their excess money or spend it (often abroad) on yachts, planes, property and jewellery. It’s a myth that it encourages them to invest productively or work harder (that’s checkable by the way: lots of research);
  11. Reducing taxes for the not-so-rich – most especially the relatively poor – does stimulate the economy because they spend the extra money on goods and services;
  12. So one way of stimulating the economy is to reduce taxes on the relatively poor – and this may possible produce more income for the govt than it loses. But reducing taxation across the board for rich and poor is only deficit-increasing – because it is the rich who benefit the most (which is why the GOP in the USA is so hypocritical about its desire to reduce the deficit);
  13. Because of the low price of borrowing for, say, the UK and even the USA (despite the most recent shenanigans in the USA) – now is a good time for those countries to borrow more – provided only that they can put their borrowing to GDP-enhancing use;
  14. The most important thing is to kick-start the economy and get growth; ideally via capital projects, etc, that will pay dividends longer term;
  15. This implies that  fiscal stimulus via government spending and *judicious* tax reduction would be A Very Good Thing;
  16. There is an economic theory that government spending squeezes out private investment – but this is incorrect when interest rates set by central banks are near zero;
  17. Monetary policy (interest rate-setting by the central bank) cannot help because we are up against this ‘zero bound’ – unless possibly via quantitative easing (about which the jury is out – it may just be pushing on a string);
  18. We have high unemployment, set to grow further: this reduces Government income and also increases Government spending to keep the unemployed unproductively alive and living a sort-of life;
  19. So wage-increase demands will certainly remain weak – unless and until the unemployment becomes ‘structural’ (square pegs and round holes) which all the research shows it is not, currently – here or in the USA; (but long-term unemployment does tend to become structural eventually as skills are lost);
  20. Worldwide, most inflation, currently, is imported, via commodity price (etc)  increases, not domestic – and is anyway going down (‘core’ inflation definitely is going down);
  21. So – as thing stand – the governments of the UK and the USA can ‘print’ as much money as they like and it will not be inflationary; those who believe it will be inflationary do not understand the difference between domestic inflation and imported inflation;
  22. A household cannot print its own money – but a sovereign country can do so; although eorozone members are not sovereign in this sense: they have no control of their own money supply, which is controlled by the European Central Bank;
  23. Obama’s fiscal stimulus was too little, and has now run out.  Some economists were predicting it was too little right at the beginning; others are saying this shows that fiscal stimulus cannot work – but that is bullshit;
  24. Apart from bailing out the banks – the UK, since the Conservatives came to power, has not even tried fiscal stimulus;
  25. The last great depression was ended by the fiscal stimulus of a big war and its aftermath; I don’t see that happening this time, thank goodness – so this ‘lesser depression’ could last a very long time, because current policies are likely not to reduce the deficits;
  26. And now – because of the latest shenanigans in the USA Congress and the governance of the eurozone – things can only get worse… We may be heading straight into another Great Depression.

Er… that’s all I can think of for now.
But when things get better in an economy, that can also send bond yields up!!
This is because their traded price goes down because investors are confident enough not to need to park their money in bonds (at low yields) but prefer to use it for investment and/or buying shares, for higher expected yields. So they sell the bonds.
Thus rising bond yields do not automatically mean loss of confidence in a country’s ability to service its debt: you need to know what else is going on in its economy.