Thursday, 22 October 2020

Cutting pensions to repay imaginary debt?


The media have been busy this week pointing to what they describe in terms such as ‘record levels of borrowing’, following the announcement that the UK Treasury deficit hit £36bn for the month of September, and is now estimated to be around £300bn for the year. The figures for the deficit (£36bn and £300bn) are right enough, but the straight line from those to an increase in borrowing is utter tosh. In fact, the UK has borrowed precisely nothing extra this year, not a single penny. It’s even more stark than that – the total UK debt so far this year has actually reduced by £50bn, as Prof Richard Murphy points out here. All the additional expenditure has been financed not by borrowing but by the creation of new money, otherwise known as Quantitative Easing. The idea that this money – created by the Bank of England, a wholly owned subsidiary of the government, and acting on government instruction – is somehow ‘owed’ by the government to the BoE is a convenient book-keeping fiction. This part of the debt is wholly notional because the government, in effect, owes it to itself.

It follows that the stories of doom about needing huge tax rises going forward to ‘pay for’ the response to the pandemic are also nonsense. The government has already ‘paid for’ that response; any decision that tax rises will be necessary (tax adjustments for other purposes such as incentivising some actions and deterring others are a separate matter) at some future date depends not on the costs of the pandemic but primarily on whether the government needs to act to control any inflation which might result – an outcome which looks to be several years in the future at present. So why are these think tanks and pressure groups calling for action to cut spending and/or increase taxation, including once again the old perennial about abolishing the triple lock on pensions?

The answer is not about economics at all; it’s about ideology. Cutting pensions, cutting benefits, and cutting spending are about putting the burden onto the neediest in society, in order to protect the personal wealth of the richest few. They’re about dividing the many against each other by focusing the debate on which services should be cut, which benefits should be cut, and whose pensions should be cut (those with large occupational or personal pensions certainly won’t be greatly affected by the abolition of the triple lock) rather than debating the level of inequality and the means by which wealth has been siphoned away from the many to the few. They’re about trying to create an intergenerational divide by arguing that the interests of the young and the old clash in order to prevent people noticing that the real clash of interests is between the few and the many.

The problem is that it works; that’s why they keep saying it. The idea that a government must balance its books is so seductively ‘obvious’ that people are easily led to believe it; the think tanks promote it, the media support it, and politicians are cowed by it. But one thing that life has taught me is that that which is ‘obvious’ isn’t always true and that which is true isn’t always obvious. In this case, the obvious is most definitely not true; most government run deficits most of the time and debt is rarely repaid. Indeed, the consequences were the government ever to repay all ‘debt’ would be economically disastrous. A widespread recognition of those simple truths would turn debate about government finances in a wholly different direction. That, of course, is something those behind these, often mysteriously funded, think tanks want to avoid at all costs. People need to ask themselves why that would be.


dafis said...

The Deficit Myth by Stephanie Kelton sheds a lot of light on this subject. Haven't finished it yet but it spells out and debunks the fallacies trotted out by our MSM and much of the political class

John Dixon said...

Indeed, but few politicians seem to have read it and even fewer to have understood it.