Rachael Reeves made the inevitable claim, yesterday, that she had inherited the worst financial position that any new Chancellor has faced since 1945.
Her claim was that she had discovered this over the weekend, having made enquiry of Treasury officials. She has, apparently, asked them to document just how bad things are. My suggestion to her is that we did not need the hyperbole: if you have her view of the world then there is literally no one who would disagree with her on this issue, and what she said is not news.
The real question is, is she right? Are we actually in the worst financial position that any new Chancellor has faced? I am not convinced. Nor am I persuaded the Treasury officials, using Treasury data, interpreted with a conventional mindset, will help her greatly to understand the true situation that we are in.
Let me offer some basic facts. According to the Office for Budget Responsibility, gross domestic product (GDP) will be about £2,827 billion this year, although we know about 10% of that is completely made up as it is the notional rents paid by owner-occupiers of properties in the UK on the right to live in their own homes, and these rents are, of course, never paid. Real income is, therefore, about £2,540 billion.
The national debt is expected to be £2,855 billion by the end of this year. This is, again, made up. Around £728 billion of this figure is at present made up of the value of government bonds owned by the Bank of England, none of which need to be sold, and all of which could be held to redemption, at which point they would cease to exist. This debt simply does not exist as a consequence. The actual national debt is, therefore, a little over £2,100 billion as a consequence.
Another £230 billion of this supposed debt is also National Savings, and no one is seeking repayment of that.
In fact, no one is seeking repayment of any of this debt, which has an average maturity of approximately 14 years hence. There is, then, no problem with this particular issue.
Nor is there a problem with debt servicing. The cost of this is now tumbling because inflation has fallen, and therefore, the cost of the UK's index-linked bonds has decreased dramatically. The exceptional costs of the last couple of years have been entirely down this issue, and there is no sign that it is going to recur at present. What is more, none of this excess interest is owed on average for more than 15 years because the average redemption period for index-linked bonds is a little longer than that for the portfolio as a whole, and the recently accrued excess costs are only paid on redemption.
In addition, as I have long noted, the cost of the central bank reserve accounts could be dramatically reduced by tiering the rates of interest paid on them. It is possible that up to £20 billion a year, at least, could be saved in this way.
So, are the national finances really in such a terrible state? The answer is, glaringly obviously, that they are not. Even if GDP is stated net of made-up numbers, and only actual bond debt is taken into account, the debt-to-GDP ratio in the UK is not more than 75%. Compare it with conventional GDP and it is well under 70%. This is not an issue of concern.
Further, debt servicing costs are under control and could be even better controlled. There is, then, a considerable margin for action by the Chancellor implicit in those figures.
And there is no repayment pressure. Cancel the Bank of England's quantitative tightening (QT) policy, as should happen, and markets will actually be looking to push interest rates on gilts down still further, as would be desirable.
Stack all this up and present these facts (which they are) as an explanation of her thought processes, and Rachel Reeves could suggest that simply by revolutionising Treasury thinking, she has taken control of an organisation that thought itself out of control and demonstrated to it that, firstly, it is not, and secondly, that she is in charge now and will view the world through her own lens.
And for those thinking she cannot impose her will on things like QT, since the Treasury is underwriting the massive losses that represent straightforward gifts of value to the private sector on this programme, she most certainly can.
That would be the radical response to the financial state we're in. All of it would simply require a statement of the facts as they actually are. That would really not be difficult.
In summary, she should talk about real GDP.
Then she should talk about the real national debt, net of the part the government owns.
And she should end the QT programme whilst making clear that National Savings, and maybe bank notes as well (another £80 billion) do not need to be included in national debt figures.
And then, she should talk about managing actual interest costs and when they are payable.
In that case, you would have a Chancellor in charge of the narrative and not being run by it.
If that was done, then it would be clear that debt is not the issue of concern and that the Treasury is instead free to fund the programmes the country needs, not least by boosting the use of National Savings.
Unfortunately, I can't see any of this being mentioned in the report Treasury officials will give to the Chancellor. As a result, I fear this opportunity will be lost. But I thought I should mention that it exists, because it does.
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So what did Clement Attlee’s Labour government achieve from 1945 when Britain was broke?
1. The founding of the welfare state including the NHS.
2. The nationalisation of the railways.
3. The start of a program that built 4.5-million homes of which 80% were affordable housing.
That is what is a achievable. Today Britain is bigger which should mean better economies of scale, and technology means workers can do more.
But this is a Labour Party in name only. It should be very obvious a coup has taken place and it’s been captured by the rich (even trade union funding is now a minor contribution). People should stop having hopes it will be like Clement Attlee’s Labour Party if they wish to remain sane.
I have yet to find someone who can explain to me why the Attlee government could achieve things that are now deemed impossible.
Both parties built loads of houses in the 50s and 60s. The Tories managed around 300,000 per annum (though as Full Fact points historical figures may be unreliable). And if you take new builds as a proportion of the population at the time it’s even more impressive.
https://fullfact.org/economy/rishi-sunak-house-building-pmq/
One obvious use of National Savings would be to try and mop up some of the money that to date has been going into speculative investments eg AirBnB, Buy to let, Vintage Cars etc.
At the expence of banging on about it how about some sort of ‘National Savings’ pension plan?
Agreed
The Treasury will tell her things are really bad. And now she has had a chance to “look at the books” and realises things are “even worse” than she anticipated she will have to make “tough decisions” and unleash a further round of “punishment beatings”, aka austerity and as usual it will be the 99%, and especially those at the bottom end who will bear the brunt so that the 1% can create the wealth which will “lift all boats” and “trickle down” to those at the bottom and everyone will be better off ever after.
I think we’ve been here before, said Alice.
Interesting analysis as usual, Richard (though you might want to give it another read… date/bombs!).
Here’s a question: WHY do politicians insist on pushing this “the economy is terrible and debt is out of control” narrative? What’s in it for them?
They want to shrink the size of government
I get that for Tories, for whom this is an ideological (if unrealistic) issue, but the size of the government is of little concern to most people, so why would Starmer/Reeves want to hobble themselves like this?
Labour’s best hope of success is to create a feelgood factor – but proclaiming doom and gloom from the outset (especially with the “summer” I am looking at out of my window!) is not going to promote any of that.
I know this is a much wider issue than national debt, so I’m not expecting you to have all the answers, but it’s a question we all need to ponder!
In a word, dogma
They believe that they need to do so to get growth – and government, they think, kills growth
They don’t
But they are true believers
“Her claim was that she had discovered this over the weekend, having made enquiry of Treasury officials. ”
Reeves has a great future in stand-up comedy. Why would anybody believe her. To do so would require that she had NO idea of the situation prior to the weekend, that there had been no meetings with any gov officials, that she had no clue how bad things were.
Either too stupid to be Chancellor, or a congenital liar. Those are the two possibilities. Or, performative/expectation management for the “benefit” of the poorly informed/gullible. I am confident that the media will swallow it, unquestioningly.
It would be revealing if Richard could interview her on a podcast. I can’t see it happening, but it’s an interesting thought.
Perhaps Richard could interview ANY politician on their understanding of economics.
It might generate some similar responses to Biden’s advisor, Jared Bernstein:
https://www.youtube.com/watch?v=1Fj0zRmEWYc
I think as long as the format is respectful, even educational, it could be worthwhile.
That would be amusing
Well, that clears up any confusion on the subject.
Been listening to the podcasts. Great work. Just a suggestion but what about a more conversational podcast with another economist ? …Kate Raworth ? Much needed… ‘The best economics’ ? ..you could invite leading politicians on too.
Whether it’s treasury spending or big housing numbers we seem stuck in a suffocating orthodoxy.
It will happen – but too much to do on existing work as yet, I think
‘she should end the QT programme’ – I agree.
I was thinking about this during the election campaign and concluded that she should call a moratorium on it asking the BoE to publish analysis on its impact so far on economic growth, inflation, mortgage rates etc before authorising (or hopefully not) its continuation.
Partly to show BoE who is boss, but mainly to show the BoE that they really won’t be allowed to introduce policies without a justification being outlined to the British public.
Agreed
Where does Modern Monetary Theory come in all of this?
Into a great deal of what I write
Richard – do you not have any direct way of Confronting Reeves with this analysis? I think it’s your civil duty to get in front of her and explain how she could be the country’s most transformational Chancellor EVER! Surely that would appeal to her political ego!
No, in a word
But I know the Treasury read this blog
You should at least put your points direct to the Treasury – in an open letter maybe.
That will be no more effective than this
This thread and comments really illustrate my view that much of Economics is more like a religion to be believed in than a science where facts can be used to test theories.
If “we” stop believing in the system will the world fall apart? I think not.