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.

Seriously.

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.

Conclusion

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.