In the latest IMF Finance and Development journal (March 2023), there is an interesting article…
Calling the British PAC, IFS – it is time we all moved on from the debt and deficit hysteria
The BBC in Britain carried a story yesterday (July 25, 2021) – UK will be paying for Covid for decades, say MPs – that began with the assertion that “Taxpayers will bear the costs of Covid ‘for decades'”. I guess there is some truth in that statement – families will remember their loved ones that died from the virus and those who are stricken with Long COVID will probably endure the negative effects for the rest of their lives. In that sense, if they are also ‘taxpayers’ they will be ‘paying’ the ‘costs’ of the pandemic. But, of course, that is not what the BBC article was wanting its readers to absorb. The intent was to lie to British citizens that somehow their tax burdens would have to rise to offset the deficits that the British government has run dealing with the collapsing economy. I know the BBC was just reporting on a document released by the House of Commons Committee of Public Accounts – COVID 19: Cost Tracker Update (released July 25, 2021). But the role of the public broadcaster is not to act as a press releasing agency for such politicised organisations, which, given the absence of any alternative voice in the article, is exactly what it did. The demise of critical scrutiny in economics commentary by national broadcasters everywhere is a major problem and makes them indistinguishable from scandalous media organisations run by private sector owners.
The Public Accounts Committee’s Report began with this classic mainstream narrative:
… the government’s response to the pandemic has exposed the taxpayer to significant financial risk for the foreseeable future, with the estimated lifetime cost of the government’s measures reaching an eye-watering £372 billion in May 2021, with £172 billion reported spent. In making decisions and initiating measures at a much greater pace than during normal times, the Government took on a greater level of risk by relaxing some of the rules around spending decisions.
Exactly, what are these risks?
The PAC Report claimed that a “particular” case where the taxpayer was at ‘risk’ was:
… the case in the estimated £92 billion of loans guaranteed by government as of May 2021, £26 billion of which we were alarmed to learn are now expected to be lost as a result of bad loans to businesses although the exact scale of loss is not going to be known for some time.
These high-paid characters actually spend time thinking and discussing this sort of stuff.
Apparently, the National Audit Office’s – COVID-19 cost tracker – has determined that these business loans (across a number of different schemes) will require a £25 billion write-off.
They are calling that a ‘cost’.
I call that a number in some account.
It is not a ‘cost’.
A cost is only sensibly measured in terms of real resources that are occupied or damaged in an event.
The situation is that the Government extended loans to keep firms functioning in the lockdown period.
Which may or may not have been an effective use of public funds but that is a separate issue.
Determining that question is a legitimate role of auditors to ensure there is accountability and minimal waste.
But that is not the point here.
The Treasury told the PAC that it was:
… the Bounce Back Loan Scheme, which accounts for £22.8 billion of the forecast total write-off costs of £26 billion.
They told the PAC that the Scheme was designed to fast track loans to struggling firms, because existing loan support was not moving fast enough to provide effective support.
Clearly, the repayment of these outstanding amounts will depend on the strength of the economy, and the terms of the loans (long repayment periods etc) mean that the chances of most of the cash coming back are high.
But that is beside the point also.
The fact that some of the firms have not been able to be sustained and have gone or will go broke just means that the number in the government accounts goes from X to zero.
In terms of the Government though, that doesn’t impinge on their capacity to do anything they want in terms of fiscal options.
The only worry I have is for the workers that lose their jobs and the disturbances to other firms through linkages in the supply chain as a result of these firms going broke.
Those impacts are the ‘costs’ of the bankruptcies not the fact that X has gone to zero in the public accounts.
Making decisions on the basis of that faulty logic then is likely to lead to further poor decisions, if the decisions to loan the funds to the struggling businesses was poor in the first place.
The damage from austerity type strategies designed to ‘save the taxpayer’ has been devastating and built on totally spurious grounds.
Ask yourself what would happen when the government auditor tells the accountants that the number is now zero rather than X.
Would anybody lose their job?
Would production cease?
Would exports fall?
Would the government declare that it too was bankrupt?
No, No, No, and No.
Nothing of importance would happen and there would be no bill sent to the taxpayers of Britain to stump up the £26 billion.
Would there be any concern if the loans were actually grants (never to be repaid)?
Governments hand out grants all the time and the only concern is whether they effectively advance the purpose of the intervention.
The Xs on the governments books are not the relevant focus here.
Effective, functional and purposeful are the categories that should be the focus.
The PAC claim that “taxpayers are liable for the £26 billion”.
No individual taxpayer is liable in that way at all.
No bill will be sent to any taxpayer demanding any portion of the £26 billion back.
The claim is, of course, that the £26 billion is manifesting as increased debt that has to be paid back and serviced during the maturation period.
That is true, given the British government unnecessarily issues debt to match its spending in excess of taxation.
But no taxpayer pays the debt back.
And, I thought it was salient that neither the PAC nor the next discussion below mentions the fact that the Bank of England has purchased a significant portion of the debt issued since the pandemic began.
The government buying its own debt, paying itself interest and then paying the debt back and then paying itself the benefits from holding its own debt.
Of the three major holders of outstanding British government gilts (insurance and pension funds, overseas investors and the central bank), the Bank of England is now the largest holder.
It now holds well in excess of 30 per cent of all outstanding debt.
It has “bought £895 billion worth of bonds through QE. Most of that sum (£875 billion) has been used to buy UK government bonds. A much smaller part (£20 billion) has been used to buy UK corporate bonds.” (Source)
So, it could just write off 0.03 per cent of its holdings today and the £26 billion disappears in an accounting sense.
Would anyone notice anything if that happened?
Not a soul!
I wrote about that in this recent blog post – British House of Lords having conniptions about QE – a sedative and a lie down is indicated (July , 2021).
It’s time we all moved on.
Same message from so-called independent think tanks
I have noted this point before but it bears repeating.
There is a host of private sector ‘think tanks’ who claim they are ‘independent’ from the political process, which is their badge to convince the public that their advice and statements can be trusted to be clear of any ideological or political slant.
The problem, of course, is that they are not independent at all, even if they are not funded by any lobby group or have direct connections to government.
The fact that all these organisations have accepted and propagate the mainstream macroeconomic fictions about the fiscal capacity of government and the consequences of fiscal deficits makes them all interdependent.
They really are propaganda agencies that perpetuate the fictional world created by the mainstream of my profession.
So when the Institute for Fiscal Studies releases its latest report – What does the changing economic outlook mean for the Spending Review? (July 21, 2021) – they are not releasing any new knowledge, but rather just updating their previous propaganda and the message should be disregarded.
We have short memories.
These ‘think tanks’ regularly repeat themselves and have done over a long period of time.
They have trigger events – a deficit or a public debt ratio rising – which then induces a range of emotive statments about “taxpayer risk” and the like and prophesise the ‘second coming’ disaster.
They are almost always wrong (when right it is a case of the stopped clock syndrome) yet they are never held accountable for their errors and our short memories do not lead us (the media, etc) to just ridicule them and dismiss their output as being irrelevant.
We ridicule QAnon types, yet give platforms to similar non-knowledge, when it is published by the likes of the Institute of Fiscal Studies.
The particular myth that the IFS update perpetuates is captured in this statement:
The near-term improvement and permanent cost will be reflected in the government’s fiscal position. The current budget deficit – the difference between what the government spends on day-to-day activities and what it raises in revenues – is, under our forecast, improved by £30 billion for 2021−22, relative to the forecast back in March. However, rising debt interest spending and the fading-out of the temporary boost to growth do not open up any additional headroom by the middle of the decade.
Points to note:
1. The use of terms “improvement” or ‘deterioration’ when applied to a commentary on the currency-issuing government’s fiscal position is like talking about a yellow logarithm.
In Chapter 48 of Volume III Capital, Karl Marx noted that the “‘price of labour’ is just as irrational as a yellow logarithm.” We don’t need to go into his argument.
The point is that using terms that have no correspondence with the concept is inapplicable and has no meaning.
Is a shift from a fiscal deficit of 4 per cent of GDP to 3 per cent of GDP an ‘improvement’?
How would you make that assessment?
You would have to go back to first principles and consider the purpose of fiscal policy.
That purpose is not to record any specific fiscal outcome (a number as a percent of GDP).
If unemployment had have risen, and sales dropped as you shifted from 4 to 3, then that would not be an ‘improvement’.
We would say that fiscal policy was creating a deteriorating situation given our focus should always be on the purpose and the reality relative to that purpose.
It might be a shift from 4 to 6 was an improvement because unemployment fell, household saving desires were better supported and national output and income was rising.
As I have said often – it is about CONTEXT.
And the raw number does not provide any unambigous signal about the context.
2. The idea that a particular fiscal position at any point in time conditions the capacity of a currency-issuing government to run a different fiscal position into the future is false at the most elemental level.
There is only one sense that there is path-dependence in fiscal positions.
If a strong position of fiscal support in the face of a non-government sector spending downturn restores growth in national income and output, and, provides the basis for a return of confidence in the non-government sector, then the need for fiscal support into the next period will clearly be less.
But to think that a high (relative) deficit now, undermines the capacity of the government to run an even larger deficit tomorrow is false.
The reason the mainstream make that assertion is because of a relatively high deficit now, means that public debt is likely to have risen.
They then extrapolate that outcome, which is just a reflection of the unnecessary practice of matching deficits with debt-issuance (a hangover from the gold standard era), to claims that rising debt ratios will cause the private bond markets to push yields up on future bond issues and render government spending ‘too expensive’.
They weaponise that falsehood with terminal claims that eventually the bond markets will turn their backs on future government debt issuance and the government will become insolvent.
These sorts of claims have been made repeatedly for decades and they have never come to fruition where the government was truly sovereign in its own currency.
They have been exposed quite starkly since the GFC as deficits have risen, bond yields have fallen into negative territory, and still, bid-to-cover ratios (the queue for government debt relative to supply) remain high.
A currency-issuing government is not dependent in any way on the private bond markets – the relationship is the reverse – and can choose whatever spending levels it considers appropriate irrespective of what those levels have been in the past.
The British government is not constrained in any intrinsic way but may succumb to its own idiocy by trying to reassert fiscal rules that defy the relevance of context.
Accordingly, the IFS spokesperson told the media:
The chancellor has almost no additional wiggle room for permanent spending giveaways if he is to remain on course to deliver budget balance
The ‘if’ is the relevant word.
Of course, if a government says it cannot spend if some goal that prohibits it from spending is maintained then it cannot spend.
But the point is whether that goal is relevant to the purpose.
My estimates of the current position in Britain tell me that it will be impossible for the British government to record a fiscal balance any time into the foreseeable future without causing massive damage to the living standards of the population.
It is not a relevant goal and trying to attain it, however difficult an adjustment that would be, would be the epitome of irresponsible government.
The goal of the Government should be to get as many firms through the crisis, strengthen the NHS, drive unemployment down, and fast track the decarbonisation of the economy, while supporting the exposed firms through the Brexit adjustment process.
All of that adds up to larger deficits probably into the future, which the Government is entirely capable of sustaining.
We are going to continue to make bad decisions while this sort of macroeconomic fiction remains dominant.
My Alternative Olympic Games Medal Tally
Since the 2000 Olympics, I have compiled an alternative set of Olympic tallies to take into account size of population, economy and income per head.
This provides a rather different slant on the medal hauls of the big rich countries who use their dominance as a statement of the veracity of their ideological positions.
You can follow the latest counts (which are updated each day) – HERE.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.
This Post Has 16 Comments
I saw the BBC article and used their contact form to give them feedback, asking why they uncritically report without providing readers with basic facts, for example, that the Bank of England could just buy the outstanding public debt bonds and cancel them. I ended with this excerpt from Billy Blog:
Banque de France should write off its holdings of State debt
“The article proposes that the Banque de France cancels its holding of French government debt (the €370 billion), which could also lead other national central banks in the Eurosystem following suit with respect to their own government debt holdings. He argues that the cancellation (write off) would have no negative social impacts and could help Eurozone governments fund the transition to a low-carbon future.”
I received this response:
BBC Audience Services – Comment Case number CAS-6859047-M9W6G2
Thank you for taking the time to send us your comments. We appreciate all the feedback we receive as it plays an important role in helping to shape our decisions.
This is an automated message (sorry that we can’t reply individually) to let you know that we’ve read your comments and will report them overnight to staff across the BBC for them to read too (after removing any personal details). This includes our programme makers, commissioning editors and senior management.
Thanks again for contacting the BBC.
BBC Audience Services.
Thank you, I really appreciate the clarity and info which is so important, keep writing!
The PAC and IFS campaigns need to be seen as convenient cover to allow the U.K. govt to prosecute its ongoing war against the public sector.
Highly selective, post-Covid “austerity”, in addition to declining performance due to years of underfunding, will allow this particularly egregious, “Britannia Unhinged”, govt to complete its mission to fully privatise the NHS, further erode locally provided and funded public services, and reduce state education, for what they consider the “lumpenproletariat” who cannot afford private schools, to mere “training” for ever-more-precarious, low paid, gig-economy employment.
Public money will continue to be spent in vast quantities, but, like in any tinpot dictatorship, directly funnelled to enrich private sector recipients with political connections to the ruling party, regardless of how much or how little this spending will benefit the public in any way (eg faulty PPE, failing Test&Trace, new Royal Yachts…etc).
No point complaining to Pravda – sorry, the BBC – because complaints are parcelled off to an outsourced organisation run by Capita, and will have no effect whatsoever on news editorial policy, run for the last decade by various members of the Tory Party (which also now includes its Chairman).
Thanks for this excellent demolition job, Bill.
It’s depressing to be a citizen of a country with representatives so completely incapable of either having any clue about money or desire to fulfill their scrutiny role, and of course to have a media and assorted other expert bodies as just government mouthpieces. Remind me again why we criticise the Chinese system (as well as their modern copycat imperialism/inhumanity)?
Then again, this is a state that happily dispenses with its name and a section of its population because it feels that Team GB sounds more catchy than the U.K.
Off topic. I wrote this, and I’d like to share this with you-all. Comments are appreciated.
When the world was on the gold standard it made sense to worry about “money” because it was something real, i.e. gold.
However, the world went off the gold standard back in 1971, and it will only get back into the gold standard after a major crisis like the meteor strike that killed the dinosaurs. This is because, there is not enough gold in the world. Also because, the (functionally) fixed amount of gold in the world didn’t allow the “money supply” to grow. Well, it could if promissory notes issued by banks were included. However, such notes were not backed by gold and so in a bank panic, many of them became worthless when the issuing bank went out of business. This was a huge flaw in the economic system back then.
Today, “money” is totally a human imaginary creation. You can see this more clearly if you imagine a cash-less system, where everyone has a debit card and all “money” is just numbers in the computers that keep track of everyone’s money. IMO, such a system makes it clear that money is imaginary.
Decades ago I suggested that money be seen as “Status Points”. I said this because gold was the universal status symbol across most cultures, and all advanced cultures. Humans are social Primates and so humans are very conscious of status.
If you see that money is status points, then you may be able to see that such points can be created out of thin air. For example, the winner of a Nobel Prize gains status, and this status cost nobody any of their preexisting status. It was created out of thin air. In the same way, a Gov. can create status points without taking them from someone.
In our current system the Gov. of most nations is the issuer of the status points called money, for example US dollars. In the case of the EU & EZ the issuer is the European Central Bank, aka ECB. When the US deficit spends, it is net creating more dollars. If it also sells bonds of equal value, all of the deficit spending goes into buying the bonds (indirectly, at least, but at the macro level it’s true). Because it is saved such deficit spending doesn’t cause inflation.
. . . Because the Gov. issues the status points, it doesn’t need status points from the people before it can create more status points. This is just like points on the scoreboard at a sporting event. The person changing the scoreboard doesn’t need points (from someone) to change the scoreboard when a team scores 1 or more points.
. . . Because of that, the so-called national debt is not a debt at all. It is status points that previous Govs. have gifted to the people to keep and use later, i.e. it is much of their savings. In fact if you graph US net savings and US Gov. deficit spending, they track exactly. As one goes up the other goes down. The Gov. deficit *is* the private sectors surplus. This is simply the result of the accounting process, although there is some leakage, like the trade deficit.
The Gov. must collect some tax revenues because this is what gives fiat money its value. Also, because otherwise there will be massive inflation. This is because the status points are being used to buy real things, and unlike status points, real things are always finite. When the Gov. buys something like a jet fighter, it uses some status points that it creates, the corp. that makes planes accepts them because it will need to pay taxes and it can use them to pay its workers because they need them to pay their taxes. The workers can also use them to buy food because the owner of the food store needs them to pay their taxes. This is true of everyone, so everyone accepts the Gov. issued status points as if they were gold coins. This will work *totally* fine for everyone in all ways, until the US ceases to exist, when every one of the status points will become without value. This includes those in Gov. bonds, in paper dollar bulls, and in bank accounts. This is likely decades or centuries away, though.
Meanwhile back at the ranch
Gertjan Vlieghe bank of England policy maker says negative rates and increase pension age to help boost growth in the Telegraph.
The Tories are desperate to either cut pensions or increase retirement age. When the opposite should be happening.
MMT’rs should be all over that. It is complete and utter drivel.
@Steve_American: “The Gov. must collect some tax revenues … Also, because otherwise there will be massive inflation.”
Is that true? I hope not. I finally think I’ve ‘got’ what is meant by ‘provisioning the government’ and considered that taxation had only a small role to play in curbing inflation. I’m trying to write something about the other purposes of taxes (including, of course, making the rich less rich – if you can catch them).
What I meant was if the Gov. collected NO taxes at all, there would be high inflation.
In 2019 before covid US spending was $4.4. If there was no revenue, all that would be deficit spending. That is about 4 times the actual deficit spending. Imagine that year after year. IMO, that wouuld cause high inflationn.
Steve, surely that would only be the case if there were idle resources and no increase in production. Demand creates production?
So, nobody likes my framing that money is “Status Points”.
Steve, interesting analogy – “the status point”.
But when you said in the last sentence: “This is likely decades or centuries away, though”.
What do you base this conclusion on?
The US is the strongest society in terms of economy, education, military, R&D, and etc. This goes for “the status point”, you mentioned whenever she wants to bestow it to anybody (reserve currency, education, job titles, positions).
And at the moment, no one comes close to this position. Not even China, where she will take over the largest economy – the US., in term of the nominal GDP in around 7 years from now (according to many analysts).
However, that is only just one aspects of many that social Primates value in and across cultures, e.g., attractiveness, wealth, bonding/cultural diversity, cognitive evolution/learning agility, defense mechanism so on, that the US. has.
Thus, as things stand, the more likely assumption is that the US is in a strong position and will be around longest.
Further, the US. deficit spent during the WWII more than now, there was no inflation because of the productive capacity and the resources were available then (and now, as Carol observed).
In sum, I would not worry about inflation in the US. at all!
But I would worry about the relationship between the two biggest neighbors in town (the US. and China).
Both are “printing money” just as fast, which is ok. But how these two countries coexist peacefully so others can live and prosper in the same ecology is more crucial.
This is the biggest challenge going forward in the 21st century.
With Biden in charge, I think we have more time and opportunity to create the best strategies.
That sentence was about the US ceasing to exist as a nation.
I base it my view of the world.
So, what would it take to make the US cease to exist?
These are some of what I think it would take —-
1] A 6 mile diam. asteriod hitting the earth in Kansas.
2] The US splintering into 3 nations. The Repub center of the nation with the solid south; the Dem west coast with some others, like AZ and NV; and the Dem north east coast.
3] The US losing a war to some nation that invades and crushes it. Like the North did to the Confederacy in 1865.
I was not talking about the US losing its reserve currenty status. I think this is also many decades away, though. But, if this happens, the US Status Points, aka dollars, would not become without value. Their value may fall, and maybe a lot, but not to zero.
“What I meant was if the Gov. collected NO taxes at all, there would be high inflation.”
That depends on the rate of savings. Japan being the classic counterpoint.
If there is sufficient saving, then there is a much lower need to tax, to the point where you may not need to tax at all.
Tax is there firstly to release the resources and only secondly to drive the denomination.
Mainstream economics puts out a lot of crap, but it does give up some nuggets of truth. One such nugget is that the real cost of anything is what you have to give up to get it. Strangely enough, this applies to individuals and monetary sovereigns alike.
Larry, nothing of importance would happen if the BoE bought the outstanding British Government bonds and canceled them. It would just be a replacement of the private sector’s stock of Government debt in the form of bonds with an equivalent amount of Government debt in the form of GBP. The only functional effect of bond issuance is draining of GBP out of the banking system for interest rate forcing purposes.