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.
Posts
