Wednesday 13 May 2020

Austerity and ideology haven't gone away

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.


Anonymous said...

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.

John Dixon said...

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’.

dafis said...

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"