#3
“Who’s afraid of the Big Bad National Debt?” The reality of Deficits and
Debt.
We hear TV
news, the papers, and politicians bleating on about “the National Debt” and
“The Budget Deficit” a lot, don’t we? And, as we all know what it’s like to
have debts to pay, we worry about it. We think, “how is the country going to
pay for.....?” “Our children will be burdened with debt for ever...” Well, it’s
time we looked at the reality.
In my first
and second pieces in this blog, we realised that taxes don’t fund government
spending, it’s actually the reverse. Governments (if they have their own
currency, like the UK) decide how much money the country needs, and then
provide it by spending it into existence. They then take some back in the form
of taxation, for various reasons. Virtually all other economic activity flows
from this government money creation. And this process is often referred to as
the “Budget Deficit”.
So, what
actually is the “Budget Deficit”? Well, first of all, let’s realise that
“deficit” and “debt” of governments, are frequently used confusingly as meaning
the same thing. Let’s start with
“Deficit”.
The “Deficit” is actually the total amount
of money injected into the economy each year by the government of the day, less
the total tax collected, plus the “Debt”. It’s not a real thing, like my or your car
loan, or mortgage. It’s an accounting device. At the end of the government’s
financial year, it disappears, and is replaced by the next year’s budget, not
“carried over”. If a government chooses to run a “budget surplus”, this means
taking more money out of the economy than it puts in, which will almost always
cause a recession or slump. Yet, many
politicians talk about it as if it’s a beneficial thing, like us paying off a
loan. It’s actually very destructive. (I will talk about this more in the next
article, on “austerity policy”.) In the words of economist Ellis Winningham, “budget surplus is the act of the UK
government reducing the number of British pounds available for people to save
and to spend.”
What about
the “Debt”? Governments can, and do, “borrow” money, in
the form of Government Bonds, also known as “Gilts”. Organisations, and in some
cases people, “lend” money to the government, in return for a guaranteed
repayment, and modest interest. But this is nowadays really a case of the
government providing a safe place for spare cash to be placed, because, in the
words of an Australian blog, “Monetary sovereign governments do not need
to borrow, and when you understand the monetary system fully, you understand
that they do not borrow in a meaningful way at all (as long as they never
borrow foreign currency).You can't meaningfully borrow the tokens you yourself
create. You certainly don't need to do so.”
So, how much do we need to worry about the National
Debt? Not much, actually. In the words
of Richard Murphy of taxresearch.org. “a government that only borrows in its own
currency cannot, as a result of this understanding, ever default on its own
debt because it can always issue the instruction to its central bank that the
payment of that debt be settled.” I realise this all sounds a bit shocking,
because we have all been conditioned to think government finance is like our
own finances. But, think about it- if you were allowed to print as much money
as you liked, would you worry about paying off debts? The UK government is not
only entitled to create money, but has to. And does not allow anyone else to.
Why might a government want to let people/voters think that
the UK budget is like our own household budget? Because it may well suit their political agenda. We will look at this in more
detail next time, when examining “austerity” policies.
I will wrap up this bit by giving us two contrasting
statements to consider. Firstly, from
former Chancellor George Osborne:
“If we
don't get a grip on government spending, there will be no growth”. George
Osborne Read more at: https://www.brainyquote.com/quotes/george_osborne_464526
Actually, it's the opposite. Look at this:
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