Look out for the big warning sign

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According to Benjamin Franklin, “in this world nothing can be said to be certain, except death and taxes”, although, as is often the case with the most famous quotes, he may well have lifted the phrase from earlier writers. In politics, there is another apparent certainty: any politician who utters a phrase along the lines of “I want to be honest with you” is erecting a great big warning sign covered in flashing lights saying that (s)he is about to utter a major, galactic level, lie. In his budget on Wednesday, Rishi Sunak proved himself no exception. And what a whopper it was.

This particular big lie is, of course, the one about the need to increase taxes and/or cut spending in order to pay for the costs of the pandemic. In practice, the costs of dealing with the pandemic (and they are truly enormous, even if the money spent has been inadequate and misdirected in several respects) have been met by the creation of new money rather than by new borrowing. In accounting terms, it looks like borrowing since the government has sold more bonds to raise the money. But those bonds have been bought by the ‘independent’ Bank of England which has simply created enough new money, with a few strokes on a keyboard, to buy all those extra bonds. So, to the extent that the government owes this money, it owes it to the Bank of England. It also pays interest on that debt (albeit at a very low rate), and that interest is paid to the Bank of England as well. But who owns the Bank of England? The answer, of course, is the UK government. Whilst one part of the government owes money and pays interest on it, another part of the government is owed the money and receives the interest. The consolidated accounts of the UK government and all its subsidiaries and holdings would therefore show, in effect, that the UK government owes the money to itself and pays the interest to itself. The idea that we ‘must’ rapidly repay this ‘debt’ amounts to claiming that one arm of the government is setting the debt collectors on another arm of the government to transfer money from the left hand to the right. And because the interest on this element of the debt is paid by the government to itself, it doesn’t even matter whether the interest rate goes up or not – because interest payments would still be exactly balanced by interest receipts (although why the government would want to increase the interest rate on fixed interest bonds which it has sold to itself is another little mystery). It’s all part of the wonder of double-entry book-keeping.

The idea that ‘debt’ must be repaid is a seductive one for most of us, because it reflects the reality of the world in which we live. It doesn’t reflect reality, however, for a state which controls, and borrows mostly in, its own fiat currency. Such Governments rarely, if ever, repay their debts, and those to whom the money is owed rarely, if ever, demand repayment. Indeed, most of the time, people are queuing up to lend more by buying government bonds and savings vehicles, not asking for their money back. The UK has had a continuous national debt since 1694 and has never repaid it. Some individual elements of the debt appear to have been repaid, of course. There was something of a milestone in 2006 when the debt from the second world war was finally ‘repaid’, to give just one example. But in 2006, the UK’s total borrowing increased, rather than decreased. Effectively, the UK, as it has done historically, simply took out new loans to pay off the old ones – that isn’t the same as paying off debt. Professor Richard Murphy has calculated that for every pound which the UK has borrowed since the end of the second world war only 1.7p has actually been paid off. And it isn’t a problem.

Where is the demand for debt repayment coming from? Are pension funds demanding to cash in their bonds? Are the overseas countries with holdings in sterling to facilitate trade with the UK demanding their money back? Are holders of Premium Bonds and other NS&I savings products demanding to cash them in? The answer is ‘none of the above’. The demand that debt be repaid comes solely from an ideological standpoint which demands a small state and hates public spending even more than it hates taxes. The demand for repayment is coming from the debtor, not the creditors. If the public sector did manage to eliminate the budget deficit and run a regular surplus which was used to reduce the national debt, it would mean that the private sector had to build up a corresponding debt, because (that wondrous double-entry book-keeping system once again), a surplus in one sector must always be balanced by a deficit in another. Since ‘debt’ is simply another word for ‘money’, there are only two ways of getting rid of it – by cancelling money or by transferring the debt to someone else. Neither of those are what the economy currently needs.

That brings us to a second important lie in what the Chancellor said. He claimed that he was protecting people from the economic effects of the pandemic, yet his demand that the UK ‘repay’ the non-existent ‘debt’ arising from QE, through a combination of tax increases and spending cuts in a few years’ time, isn’t protecting people from the impact at all. It’s merely deferring the impact and spreading it over a longer period. And, as ever, the approach chosen by a Tory Chancellor is to make sure that the impact falls most heavily on those who can least afford it. Attacking the pay of popular public sector employees in the process looks tone-deaf to most of us, but 'Richi' Sunak and his ilk didn’t get to be as 'richi' as they are by promoting fairness.