I have received numerous notes, and many comments on the blog about John McDonnell's decision on Friday to back George Osborne's fiscal charter and to say he will cut the deficit.
So, does this matter? First, let's deal with facts. Fact one is that I do not think George Osborne has a hope of clearing the deficit by 2020. Even if we live through relatively uninterrupted 'growth' of the sort we have witnessed for a year or so that is not going to happen. It would require record business borrowing, record personal borrowing and near record improvements in overseas financial flows. I hope the first two don't happen (if they do we will have a crash) and the last is implausible. In that case George Osborne's Fiscal Charter that promises budget surpluses is something he will deeply regret when in 2020 he goes before an electorate having delivered ten years of deficits.
Second, let's talk economically. Deficits do not matter here either: the markets remain keen to buy all the UK gilts they are offered right now. We know that if that changes then QE (or, better, PQE) can be used to pay for the deficit instead. This is what is happened from 2009 to 2012 when there was no net government borrowing at all: every penny of it for most of those years was paid for by the Bank of England in an act that will never be reversed. In that acse, a deficit is no threat.
So, why the obsession with the deficit? This is short term politics: Goerge Osborne has spun a line that denies both the above facts and he has (undeniably) sold it well. The UK public believe, almost alone in the world now, that deficits are in some way a threat to well being. Actually they are not.
As I have already noted today, government deficits are both the foundation of private wealth and money itself. To suggest otherwise is factually incorrect. So in that case what else needs to be said in the context of this weekend's discussion?
First, that I really do not think this issue will have the significance it has now in 2020. That's slightly counter-intuituve given I suggest Osborne will have run ten years of deficits by then but reflects the fact that I believe events will have overtaken the deficit as the issue of concern.
We will have had another recession by 2020. The idea that we will have growth over this period when China is clearly in trouble, as are the emerging markets, and with some parts of the EU remaining deeply vulnerable (including Germany if VW collapses, as is plausible), is almost absurd.
The UK housing crisis will get much worse. The Bank of England is suggesting our banks may be vulnerable to a buy-to-let melt down and if the MPC increase rates they might just trigger that. The same increase in interest rates (if it happens) will also trigger increased home repossessions before an ignominious reversal and a resumption of QE.
The NHS, social care, and many other services, including potentially the police and court services, will be on the brink of collapse by 2020 if current plans are implemted.
Net take home pay will fall despite the so-called living wage. Benefit cuts will ensure that for many.
Loss of benefits exceeding £1,200 a year to swathes of working households will cause unprecedented stress in 2016, and massive resentment.
We cannot know as yet how the migrant crisis will develop.
The EU referendum poll could deliver Brexit as an anti-Cameron referendum and the fall out will be almost unmanageable for the Conservatives (an observation that I suspect will be true whatever the result).
And these are just the predictable issues.
Will the deficit narrative survive all this as the number one public priority? I doubt it. So it could easily be argued that simply sidelining it by refusing to give it the attention the Conservatives crave for it makes sense now.
But only in part. Just as I keep on stressing PQE is a strategy for a downturn sodowngrading the deficit issue only makes sense in three circumstances.
The first circumstance us to say in normal times it can be an issue, and to then say we are nowhere near normal times. Mention unemployment, under-employment, China, the housing crisis, the continuing failure of Goerge Osborne to balance the books, the Bank of England's failure to deliver inflation: mention what you will, but say these are not normal times and so deficit debate is not the priority now and it's time instead to talk other things.
The second obvious comment is to note that austerity has never worked. So it has to be said that if you want to balance the books in good times the only way to do it is take the action needed to deliver those good times and only policies to invest now to put people to work, to reduce under-employment, to increase real wage rates, to increase taxes paid as a result and to reduce beenfit claims not by cuts but because of increased incomes can deliver that good time prosperity. In other words, say the austerity narrative is a complete failure in its own terms and always will be.
And third, it only makes sense to talk about the deficit in the context of it being the wrong issue and that we need to be talking about the bigger ones all noted above which are going to blow it out of the water and make the monetisation of public spending an inevitable discussion in due course.
Now maybe the public agenda is not ready for these three points to be made as yet. John McDonnell's decision to kick it into touch at this moment knowing circumstances will overtake it anyway may make complete sense in that case.
But my point is that unless a discussion on what needs to really be done to manage any one of the likely circumstances that are going to evolve between now and 2020 takes place we are in trouble. So I will be looking at those issues, PQE, the tax gap and other issues on this blog even if right now they aren't likely to be the headline news. As I have argued, that is what I think the job of responsible opposition in the sense of opposing the prevailing hegemonic narrative is. And that is what I am engaged in.
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PS Can I remind readers of this that makes clear where I stand with Labour?
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That all sounds like you have put the matter into perspective. Well and good. I was wondering if you could clarity one matter for us as I am sure that I am not the only one who is uncertain about the full meaning of this excerpt from the relevant Guardian article:
” he (McDonnell)indicates that his support for the charter is qualified because he believes that only the current account should be balanced to give the government space to borrow to fund infrastructure projects.
He says of Osborne’s plans to deliver an overall surplus: “There is an economic illiteracy about this. If you have a surplus in that sense you are actually taking capacity out of the economy.”
What is the meaning of “current account” in this context? I am mainly aware of it as a reference to the external balance of payments.
Government income excluding asset sale proceeds less current spending (or total spending less asset investment spending)
Sorry, I don’t get it. Normally ‘current account’ does refer to the external balance of payments, i.e. foreign sector balance or the (X-M) part of the sectoral balances equation
(G-T) = (S-I)-(X-M).
Where does your definition fit in the above equation, or is it something else entirely?
your normal is not my normal
Stop wasting my time
Based on my reading of the 3spoken article
http://www.3spoken.co.uk/2015/09/corbynomics-and-current-budget-balance.html?spref=tw
it appears you may be referring to the ‘current budget’ defecit, as opposed to the ‘current account’ defecit.
Economics terminology is sometimes deliberately confusing, I think.
“your normal is not my normal
Stop wasting my time”
All my posts on your site over the years have been polite and supportive.
This is the last one that will waste your valuable time.
Your choice
I am happy my comment was fair in the circumstances
Brian,
The Guardian is using confusing terminology. It means the current FISCAL balance. In national accounting, G includes both consumption and investment spending. McDonnell’s proposal, following Keynes, is to separate the two – balance the consumption element over the cycle while allowing debt-funded investment spending to pay for itself over a longer period.
Bill Mitchell has produced a post explaining this in more detail. He also argues that the combination of a cyclically-balanced consumption budget with a commitment to reducing debt/GDP over time – both of which are in the fiscal charter – makes debt-financed investment spending problematic, since investment generates consumption (he gives the example of building new schools – you need more teachers to work in them). The post is here: http://bilbo.economicoutlook.net/blog/?p=31963
A ‘steadying hand’ of a blog if ever I read one. Most Prescient.
Very informative and coherent, thank you Richard.
Am I right in my belief that People’s QE investment in infrastructure and housing would not add a single penny to the deficit?
If so, would someone tell John McDonnell, please?
You’ve got 5 years, John. Please shake off your apparent deficit obsession.
I believe it is a serious mistake to let the media form policy, which I believe has happened here.
It technically adds to debt
But interest need not be paid on it
In the sense of an accounting liability?
It becomes part of central bank reserves
The budget deficit is commonly seen as a failure, whereas in reality it is a success! A budget deficit, without simultaneous high inflation, is only possible if savers wish to purchase govt securities ie gilts. They purchase them, confident in the knowledge the gilts are totally safe.
The big purchasers are currently the central banks of the big exporters who are not only financing the govts budget “deficit” they are financing our trade “deficit” too. Would they do that if they considered the UK to be a failed state?
The word ‘deficit’ of course brings negative connotations. But a deficit in money terms is a ‘surplus’ in real things. In other words our trade with the rest of the world is in surplus to the extent that we receive more goods and services for supplying fewer goods and services. Our government is in the happy position of being able to create more goods and services from its spending than it requisitions from the economy in taxation.
There’s no inflation, so what’s the problem? We can safely spend a bit more and tax a bit less to hit our 2% target!
Neil Wilson has put it very well by reminding us that in the current context of The UK economy’s performance if any desired level of savings is to be achieved by the domestic private sector a “balanced budget” is one where the government has to run a “deficit”.
Such out-of-the-box framing reveals the lamentable failure of all the politicians at Westminster to actually study how their country’s monetary system really works.
http://www.3spoken.co.uk/2015/09/corbynomics-and-current-budget-balance.html
“Such out-of-the-box framing reveals the lamentable failure of all the politicians at Westminster to actually study how their country’s monetary system really works”
The “politicians” at Westminster have all the professional advisers they need to produce real-world understanding of how things work in this real world.
They insist on the “household budget” theory of economics, because people understand that spending £1000 when you have only £100 makes little sense [in a household].
Never attribute a politicians actions to ignorance.
As I said, they have **ALL** the advice they need, from people who have a career in giving impartial GOOD advice.
The fact is: Our professional politicians are not OUR paid employees, they are the rewarded servants of others with far more money than they can ever spend.
Agree with this but the real problem JC+JM seem to be trying to address at the moment is not to frighten the horses yet get across that they are different, which requires subtlety and probably being economical with the truth – given the fact that there is not only a right wing government but also a right wing press. Even the BBC bangs on about a failure of leadership at the Labour Party conference, completely failing to comprehend that one man’s lack of leadership is another man’s democracy. Changing the message will have to be gradualist as otherwise the media , politicians’ courtiers as Tony Benn used to say, won’t get it – never mind the electorate when they’re listening.
Yes, but as they say, you never get a second chance to make a first impression.
I’m wondering whether coming straight out with the “bombshell’ that budget deficits are not the bogeyman that everyone has been duped into believing that they are – and waiting till the dust settles after the inevitable apoplectic explosion from the rightwing press, bankers and politicians – doggedly fight Labour’s corner on MMT territory, and pushing that message as constantly and as firmly as the right have pushed the household analogy and the “no money left, clearing up Labour’s mess’ narrative.
In other words, get the flack over and done with, and plant this ‘radical’ new idea into the heads of the public, plugging it remorselessly at every given opportunity.
The early weeks of this new leadership have allowed record media exposure to any of their fresh ideas, which, over time will be overshadowed as other events transpire.
In my opinion, this was an opportunity missed – Corbyn and McDonnell should have come out fighting, rather than capitulating e.g. on Osborne’s Fiscal Charter.
They may as well have been hung for a sheep as for a lamb.
Did you hear what McDonnell said?
He dismissed the fiscal charter out of hand
Richard,
under the Fiscal Compact all EU governments are required to introduce balanced-budget rules. The UK did not sign the Fiscal Compact – you may recall that Cameron famously walked out and was subsequently panned in the press for damaging EU relations – but it is nonetheless under pressure to follow suit. In my view this is the background to the proposed Fiscal Charter. The UK is far exceeding Maastricht limits both on deficit and debt, and although it has only said it will “endeavour” to comply, from the Eurpoean Commission’s POV having the second-largest economy in the EU openly defy the rules doesn’t exactly help it whip the Eurozone members into line, especially as the UK is growing and has low unemployment whereas they are stuck in a high-unemployment, no-growth trap. Just as the crucifixion of Greece back in July was all about France, Italy and Spain, so is this.
That’s interesting. Its a good observation and as a Euro-observer I feel a little embarrassed that it hadn’t already occurred to me as such. Viewed from this (EU) perspective, the Fiscal Charter is little more than window dressing. Not so much a sop to the Tories but a token gesture of Euro-compliance. For his part, McDonnell’s commitment is qualified, tenuous and even more distant than that of Cameron. Good.
Beyond that, what can you say. The GFC has exposed the Maastricht rules for delusional, neoliberal, fair-weather rubbish that they are. And they’ve all been broken anyway. Britain’s defiance stands well as good leadership. Labour’s position shows even greater leadership as well as good policy.
Agreed
EU compliance with a requirement as meaningless as George Osborne’s Fiscal Charter will soon become toekn, at best, everywhere
People – most especially people who are politicians – will realise how harmful it is to well-being
Surely the UK is ‘prospering’ (relative at least to the Eurozone) precisely *because* it hasn’t complied with any fiscal charter or compact.
You’d have thought the European Commission would be wanting to emulate the UK, rather than the other way around!
And, in due course, it may be worth McDonnell wondering a little pointedly why we shouldn’t take a leaf out of Abraham Lincoln’s book (true he was then horrified at the 20-30% interest required for loans to fight the civil war) who decided to print about 400 million dollars worth of Greenbacks. The following comment later appeared in the (London) Times
“If that mischievous financial policy, which had its origin in the North American Republic, should become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of the civilized governments of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed, or it will destroy every monarchy on the globe.”
http://thewakeupchannel.weebly.com/has-the-national-debt-ever-been-paid-off.html
Nice one.
A wonderful and exciting prospect – and if it weren’t for certain prominent Tory members weighing them down at the front end, pigs might fly!
“We will have had another recession by 2020.”
I’d be willing to wager my 5 year budget of e-cigarettes and punting at even money that we don’t have another recession before May 2020. Naturally the definition is stacked in my favour, as two consecutive -ve quarters define a recession, so even zero or anaemic growth periods are on my side, as are the fact that the working age population in the UK is still growing, and borrowing and energy costs are likely to remain low.
The late Screaming Lord Sutch used to love wagers with William Hill on off-beat propositions like this.
I’m not sure how many e-cigarettes you consume but either way your two wild-card concerns would be a puffed-up, panicky financial sector (correction due) and exposure to the cracked and fragile Eurozone. Low energy costs won’t make any difference, they could even add a deflationary threat that encourages de-leveraging.