Yesterday’s decision by the Chancellor to
extend the furlough scheme was ultimately inevitable – the only alternative was
to accept that most of the 7.5 million people being supported by it are,
effectively, unemployed and that the companies employing them are, effectively,
insolvent. There was a statement that companies would be expected to contribute
to the costs from August onwards, caveated by something along the lines of ‘when
businesses are open again’, a caveat which gives him enough wiggle room to simply
carry the scheme forward until the end of October if – or perhaps when – it becomes
as obvious to him as it is to others that the English government’s timeline for
re-opening the economy is from the same fantasy world as a pain-free Brexit,
and that the companies concerned will be in no position to make any such
contribution. And even a caveated, almost grudging, extension of a scheme which
is still far from perfect is to be welcomed as better than the alternative.
More worrying are the rumours about his
views on how the government will pay for the costs associated with the pandemic.
The Telegraph this morning (paywall) is reporting
‘exclusively’ that a leaked report talks about an increase in income tax, the
abolition of the pensions triple lock (something the Tories have never liked
anyway), and a two year pay freeze for public sector workers (like the ones
they’ve been hypocritically clapping every Thursday). There is also talk of
other tax rises and cuts to public spending – the Tories may avoid the word ‘austerity’,
but it seems that they just can’t abandon the ideology behind it. When Sunak
talked a few weeks ago about this ‘not being a time for ideology’, it seems
that he merely wanted a postponement, not a change.
Because many people, and the media from which
they get their news, adhere to the crazy notion that government finances are
just like a household which can’t spend money it hasn’t got, there is a danger
that this sort of talk gains traction, and that people will see it as
inevitable that the money borrowed has to be repaid. But this is a complete fallacy
– we need to think a bit more about who owes what to whom, and what the effect
of repaying it is. It’s true, of course, that the government is borrowing vast
sums of money at the moment, both on the bond market and from the Bank of
England. The two need to be considered separately.
·
The Bank of England is owned by the government –
all money ‘borrowed’ from the BoE is money that the government is actually
borrowing from itself. Where does it come from? At it’s simplest, it comes from
a computer – the governor of the bank (acting on the instructions of the bank’s
owners) deposits a few hundred billions in the government’s account and then
creates a matching asset in its own accounts. The money is, in short, created
out of thin air, into which it will disappear again if it is ever ‘repaid’. Any
‘interest’ paid becomes a ‘profit’ of the BoE which gets paid to its owners –
the government. The government is paying the interest to itself in effect. It
can borrow as much as it wants or needs in this way, limited only by any
inflationary effect if there is ever ‘too much’ money in circulation, although
nobody knows how much is ‘too much’.
·
Money borrowed on the bond markets is mostly
borrowed from the UK financial sector – much of it from pension funds. From
their perspective, what the government sees as a ‘debt’ to be repaid looks like
a valuable (and extremely safe) ‘asset’, which is why they are so willing to ‘invest’
the money which they manage. Their ‘investment’ is government ‘borrowing’. Nominally,
all those debts need to be repaid at some point, but those to whom they are
repaid are likely to want to simply re-invest (i.e. lend the money back to the
government).
So, we (through the government) are
borrowing money from ourselves (through our pension funds or the BoE) and in
due course we will repay it to ourselves and then lend it back to ourselves in
an ever-continuing circle. Does it matter? Well there’s a sting in the tail
here – ‘we’ are not all equal in this process. The ‘we’ to whom the money is
owed tend to be the more well-off – those with the larger pension funds,
especially. But the ‘we’ who will do the repaying under the sort of proposals
being considered by the Treasury are the low paid (who depend disproportionately
on public sector services), the poorest pensioners (those for whom the state
pension is their only or main source of income), and public sector workers. Austerity,
in short, is a process by which the wealth of the wealthy is preserved by transferring
resources from the least well-off. The PM may not want to use the word but
that, like most of what he does and says, is about presentation not substance.
Anyone who thinks that the virus has driven out Tory ideology hasn’t been
paying attention.
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3 comments:
I think you forgot about the effect borrowing has on the exchange rate. The more we borrow, notional or otherwise, the more the pound plummets and the poorer we get.
It's rather more complicated than you seem to think.
No, I didn’t ‘forget’ about the potential impact of borrowing on the exchange rate. This threat is, of course, the traditional response of those who want to protect wealth so that they can browbeat people into accepting the economic orthodoxy which achieves the effect that they want. I’d accept, however, that I do sometimes simplify a little in order to keep a post shortish and concentrate on the point that I’m trying to make at the time.
Your statement that ” The more we borrow, …, the more the pound plummets and the poorer we get” is, on the other hand, an absolute classic piece of over-simplification. The first thing to note is that any effect on the exchange rate from government borrowing can only come from the actions of overseas ‘investors’ who trade in government debt. This chart is from 2017 but is still broadly accurate and beautiful in the simplicity of its presentation. Only around 27% of UK government debt is held overseas – the rest is held within the UK, and trading in UK government debt within the UK does not directly impact the exchange rate. The second thing to note is that government debt is not the only thing to affect the exchange rate – there are a range of other factors such as the balance of trade, the rate of inflation and so on, to say nothing of currency speculation. And finally, and most pertinently at present, in the current situation you cannot consider what the UK does on debt in isolation (and your assertion relies on doing precisely that). At a time when other states are facing similar problems and adopting variations on the theme of increasing debt in order to get through the pandemic crisis, UK government debt, even at a greatly expanded level, still looks an attractive proposition, even to overseas ‘investors’. And that is likely to remain true as long as the economy is working below capacity and extra government borrowing does not cause inflation – and there’s no indication at all of that at present.
Whilst the idea that we can’t borrow because the pound will plummet is an easy one for defenders of wealth to trot out, I think you’ll find that, to coin a phrase, ‘It's rather more complicated than you seem to think’.
Fair comment there John. Indeed it would be very surprising if the G7, G20, EU, IMF or any other international combination of letters don't get their heads together and agree that the massive increase in credit/money in circulation is an acceptable force majeur and the status quo prevails. That too would go a long way to alleviate the fears of those who see their wealth depleting. After all this as much about wealthy decision makers making decisions about wealth as it is about states' "ability to pay"
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